An office building in downtown San Jose, California, traded hands for more than $100 million less than what it sold for in 2019, underscoring the Silicon Valley city’s struggle to regain momentum lost in the COVID-19 pandemic.
An organization with ties to Shoe Palace CEO George Mersho paid $34.2 million for a two-building office property, according to documents filed with Santa Clara County. The price works out to about $105 per square foot, marking a 77% discount from the $141.3 million the 325,000-square-foot center traded for prior to the pandemic, according to public records and CoStar data.
The property, called Market Square Tower, includes a 10-story tower at 111 N. Market St and a 12-story tower at 111 W. Saint John St. The complex is about 26% vacant and was last renovated in 2020.
A supply and demand imbalance in San Jose has led the city's vacancy rate to hit 15% in the first quarter, up from the year-ago rate of 12.1% and ahead of the national average of 13.8%, CoStar data shows. Downtown San Jose's office vacancy rate is closer to 26%.
Google is adding to leasing headwinds in the city. Over the past two years, the technology giant completed over 2 million square feet of owned office space with over 1.5 million square feet of additional space under construction. As a result, the company has returned around 2.7 million square feet of its previously leased space to the market.
In the year ahead, additional downsizing is expected as tenant leases expire, causing vacancy to rise above the previous high of 17% set during the dotcom bust in 2003, according to CoStar data.
Office sales have stalled in San Jose as a result of worsening market fundamentals, with the $785 million in sales volume over the past 12 months marking a notable drop from the $3.2 billion five-year average.
Market Square Tower is the second Downtown San Jose office property to trade at a large discount in recent months. An 11-story office totaling 163,000 square feet at 303 Almaden sold for $23.7 million in December, a 70% discount from its 2017 price tag, according to previous reporting by CoStar News.
“It’s a reflection of both an oversupply of office space and the negative impact that high interest rates have had on real estate values,” said Nigel Hughes, senior director of market analytics at CoStar Group.