San Jose, California
“The Capital of Silicon Valley” Still Holds Opportunities for Investors
By Carole VanSickle Ellis
If you live in San Jose, California, then some in the real estate space believe you might need to steel yourself for something most Californians are not very used to: falling home prices. According to Zillow economists, San Jose could see the largest decrease in home prices in the country over the course of 2024, with estimated losses exceeding 6%. The analysts cited high mortgage rates and limited opportunities for new construction as reasons for falling home values.
“Builders have limited opportunities with a severe lack of available land,” the team observed, adding potential sellers may add to the local inventory if interest rates fall because lower interest rates will create more mobility among homeowners.
Of course, with median sales prices still in excess of $1.3 million and up nearly $25,000 year-over-year as of February 2024, the San Jose market is still a rich one from most perspectives. Nevertheless, local investors say the market is full of opportunities for investors willing to put in some effort. Derek Torculas, owner and CEO at California-based NorCal Home Offer, cited accelerated appreciation as one of the biggest draws for investors interested in Golden State investing.
“I find properties that make sense all the time,” he said, adding his company is currently engaged in both fix-and-flip deals and buy-and-hold strategies.
As of early 2024, Torculas’s tactics still hold strong, but stiff competition from other investors continued to drive prices skyward. In fact, according to a Redfin analysis published in August 2023, San Jose topped the list of metro areas with the highest median sales prices for investor-bought homes, tying with San Francisco with a median sales price of $1.8 million.
To Lori Greymont, president and CEO of the San Jose Real Estate Investors (SJREI) Association, ongoing strength in the market simply indicates San Jose will not follow other west-coast markets into a downturn any time soon.
“The San Jose market is like an island,” Greymont said. “While we saw a slow-down in the number of sales over the last year-and-a-half, the price of homes has not only held steady but new and newly renovated homes are turning as quickly now as they did in the past.” Greymont has been buying, selling, and managing both single- and multifamily properties for more than 25 years.
A “Builder’s Remedy” in Jeopardy
Clearly, there is not currently a surplus of housing in the San Jose area, something that local officials have tried to combat using a vast array of city plans designed to bring in affordable housing options without succumbing to what some insist is a dire threat of “overdevelopment.” However, as the battle continues, many developers accuse the city of simply dismissing many solutions to the problem out of hand without presenting viable alternatives.
This conflict stems from a state law in California that permits developers to build projects of nearly any height and size in cities that lack state-certified housing plans. San Jose was one such city until February of this year, resulting in 29 new developments receiving builders-remedy approval between January 2023 and February 2024.
However, now that the city’s plan has been approved, only two-thirds of the approved projects will be permitted to continue, thereby chopping more than 4,000 pre-approved units from the city’s pending housing and creating financing complications for the city and private developers.
“Less density is better than zero density,” said Erik Schoennauer, a local land-use consultant and representative on seven of the rejected builders-remedy projects. “Having plans that can’t be financed means nothing gets built, and the city has a lot of plans that are financially infeasible to build,” he warned.
In response to criticism of this nature, the city announced a streamlining initiative to enable older and underutilized buildings to gain approval for residential upgrades and renovations more quickly. Jerad Ferguson, a San Jose principal planner, told the San Jose Spotlight in February 2023 the infill ordinance will “enable the construction of more affordable housing and allow projects to skip public hearings.”
San Jose also plans to update zoning codes to permit housing development in three local business corridors as early as next spring. Those corridors are 13th Street, Japantown, and Willow Glen. However, critics of this move say the proposed zoning changes threaten historic businesses, so investors in the area should monitor local discussion closely, particularly around the Japantown area. San Jose’s Japantown, which grew from the site where Japanese immigrants originally settled in the Santa Clara Valley, is one of only three historical Japantowns still extant in the United States today.
Hospitality Sector Could Indicate Ongoing Weakness in 2024
The entire state of California has long been considered a premier travel destination, and San Jose enjoys a top position in the ranks of places tourists like to visit. However, post-pandemic, the city’s tourist sector has not entirely recovered, and this could mean long-term problems for both the local hospitality industry and hospitality-related real estate.
Matthew Martinucci, vice president of sales and destination services at nonprofit destination marketing organization Team San Jose, told the Silicon Valley Business Journal in February of this year that he believes San Jose’s reliance on tourist interest from visitors to San Francisco has hurt the city’s post-pandemic recovery. “Much of the international focus for the Bay Area is negative now,” he explained, adding, “San Jose has enough [positive elements] to stand on its own.”
In 2019, San Jose boasted roughly 20.6 million international and domestic trips with an annual cumulative spend of nearly $3 billion. The most recently available numbers today (2022) indicate a loss of nearly 1 million trips (still up 35% over 2021) and an annual cumulative spend down about $1 billion compared to 2019. 2023 numbers have not yet been published, but in September 2023, Silicon Valley Business Journal reporter Devan Patel warned, “The slow post-pandemic recovery in business and international travel is still weighing on the [tourism] sector.”
This weight is making itself known particularly with the “implosion” of hotel deals in the San Jose area. According to a report published by Atlas Hospitality Group, hotel acquisitions fell 48.3% in Northern California in 2023. Atlas includes the Bay Area and San Jose in this category. Several major hotels also fell into foreclosure over the course of last year, and Atlas reported property owners also simply elected to turn over keys and walk away from unrealistic loan payments.
Alan Reay, president of Atlas Hospitality Group, expressed concern the hotel market “could become worse before it gets better.” He explained, “If interest rates come back down, then we will see sales activity pick up and values will stabilize or move up.” However, Reay warned, “If interest rates do not decline, we may start to see more distressed sales, [and] that will create downward pressure on values.”
For Airbnb investors in the San Jose area hoping to represent a superior alternative to hotels for tourists returning to the area, higher taxes on short-term rentals throughout California could affect returns in 2024. State lawmakers are currently considering a new tax on short-term rentals earmarked to fund affordable housing projects. Prior attempts at this have been unsuccessful, but concerns about affordable housing combined with a vacation-rental boom throughout California could cause some lawmakers to view it in a more favorable light.
Airbnb sent out a host alert in response to a pending vote on the legislation, warning the proposed tax could “make vacations more expensive” and “burden everyday Californians who rely on the income from home sharing to afford everyday costs or stay in their home.”
A Golden Market for the Golden State
While much of the Golden State seems headed for uncertain times, investors who can’t get enough California sunshine could benefit from giving San Jose a second look. Greymont warned upward pressure on prices hinges largely on the ongoing loss of inventory and rising costs of capital and construction, both of which serve as reliable bellwethers in most markets.
“We are significantly undersupplied, so I think we will see lower numbers of sales and higher prices in 2024,” she predicted. Investors who can access leads in this challenging market could see another year of growth if they can withstand the competition.
SIDEBAR
By the Numbers
1.9% — Amount that the sales price for homes in San Jose had risen year-over-year as of February 2024
837 — Number of homes for sale in San Jose in January 2024
1,018 — Number of homes for sale in San Jose in February 2024
38.3% — month-over-month positive change in the number of homes sold in San Jose between January and February 2024
22 — Median days on market in San Jose as of February 2024
102.7% — Sales-to-list price ratio in February 2024
-5.4% — Decline in median listing price of homes year-over-year as of February 2024
Data Sources: RocketHomes, Realtor.com
