• Mon. Jun 24th, 2024

Office Conversion Plans Gain Steam With Latest Silicon Valley Proposal


Apr 7, 2023
San Francisco developer DivcoWest acquired the office building at 2 West Santa Clara St. in downtown San Jose, California, in 2017. (CoStar)


High-profile developer DivcoWest invested millions of dollars into repositioning a Silicon Valley tower into creative office space geared toward the region’s ecosystem of tech tenants. Now, however, the San Francisco-based landlord is once again looking to change gears.

DivcoWest has filed a proposal that could convert the office tower at 2 West Santa Clara St. in downtown San Jose, California, into apartments or a hotel. In a preliminary filing with the San Jose Planning Department, the developer revealed plans to look into such alternative uses such as coliving, hospitality or multifamily units in one of the clearest signs yet of reduced demand for offices across the San Francisco Bay Area.

To be clear, any conversion for the San Jose property is still far from certain. The preliminary filing is a way to gauge city officials’ and local residents’ opinions while also providing the time DivcoWest will need to ensure the proposal’s economic feasibility.

However, if the project clears public opinion and pencils out financially, it would join a lengthening string of similar proposals aimed at repurposing office space that is no longer needed or wanted.

Across the country, cities including New York, Chicago and Washington, D.C., are discussing ways to accommodate the conversion of surplus office space no longer populated by workers. Empty downtown offices have drawn concern from elected leaders in those cities about declining business from restaurants and stores that provide desperately needed tax revenue.

While city officials have been discussing ways to encourage alternative uses for office space, it can take a while before talk turns into action. For example, some office buildings are less adaptable to residential use than others, and such a conversion away from offices can represent a big bet by an owner that remote work will remain as common as it is these days.

San Francisco officials late last month proposed an ordinance that provides more flexibility in how traditional office properties could be overhauled into potential housing or retail, the latest in a series of strategies the city has adopted in order to reposition the city as it shifts further away from its pre-pandemic focus catering to the tech industry.

Silicon Valley’s office market hasn’t been hit as hard as San Francisco’s, which has struggled to rebuild the momentum it had before 2020 when high-end office space exceeded $100 per square foot and space was in such high demand, companies often leased developments before they had been approved.

When the pandemic struck and companies evacuated their offices allowing employees to work remotely, Silicon Valley’s roster of some of the largest tech companies in the world propped up the office market with blockbuster leases and acquisitions — all made to keep up with the record growth spurts they reported in the first couple of years of the global health crisis.

Now, however, the story is different. Those same tech giants — Meta, Google parent company Alphabet, Roku, Amazon, and Netflix, among others — are making cuts to their real estate portfolios by shutting office locations, subleasing unwanted space, terminating prelease agreements and walking away from future investments.

DivcoWest’s West Santa Clara Street property is nearly 90% vacant, according to CoStar data. Leasing activity in and around downtown San Jose has fallen by another 2% over the past year, and new deals have been nearly nonexistent, with only one non-renewal for more than 30,000 square feet signed over the past two years.

Yet with housing shortages across the country putting a premium on apartments and rent growth, multifamily uses have taken center stage in markets such as the Bay Area, New York and Seattle.

Between 2016 and 2022, about 260 offices across the country were converted to other uses, according to a report from the real estate firm CBRE. That figure is on track to climb this year as office landlords — especially those for older properties with fewer amenities — contend with demand that remains well short of a full recovery.

Apartments have been the most common reuse for outdated office buildings. Since 2016, more than 90 office properties have been converted to housing across the United States’ largest metropolitan areas, according to CBRE. Those projects have collectively changed the space into more than 14,000 rental units.

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