San Jose Okays Tax Exemptions to Lure Downtown Office Tenants

San Jose city officials are willing for forego nearly $1M a year in tax and parking revenue, it that’s what it takes to fill up empty downtown office space.

The City Council has unanimously approved a leasing incentive program, effective on Jan. 1, that includes a two-year business tax exemption for new owner-operators and tenants that lease at least 2,500 SF of downtown office space for a minimum of four years.

The program also includes two free parking spots per 1,000 SF for the first two years, The Mercury News reported.

The city’s Office of Economic Development and Cultural Affairs estimates that the new incentives will save a 6,500 SF tenant that utilizes 13 parking permits $3,600 in business taxes and $31,200 in parking fees. A large tenant utilizing a 100K SF space and 200 parking permits could save $81,300 in taxes and $480,000 in parking costs over the lease term.

San Jose has capped the free parking for new businesses at 500 spaces, which if all the spots are utilized translates into $1.2M in lost revenue for the city. However, four parking garages included in the program sat at 40% occupancy last year, the report said.

San Jose officials said the long-term benefits from drawing more workers downtown and locking in businesses with four-year leases will outweigh the lost tax and parking revenue.

“Having a bustling downtown during the week is key to supporting our local shops and restaurants and personal life. If we have daytime foot traffic, the small businesses will come,” Omar Torres, a council member, said at this week’s meeting.

“The companies are bringing back their employees to the office and now is a perfect time to bring more office tenants into our downtown. This incentive will help long-established businesses stay but also thrive during the weekday, not just in the evenings or weekends,” Torres added.

According to a University of Toronto study that tracked activity using cell phone data, downtown San Jose’s night and weekend foot traffic has rebounded during the past two years, reaching pre-pandemic levels-a rebound the study said was the eighth largest in the nation.

San Jose has built up robust arts and cultural offerings downtown, an “experience economy” that contributes an estimated $292M in economic activity.

The missing piece to a full recovery is daytime activity from a downtown office sector that is struggling with high vacancy rates. The vacancy rate in downtown San Jose at the end of Q2 2024 exceeded 31%, according to CoStar data. City officials estimate that San Jose has more than 3M SF of vacant downtown office space.

San Jose’s effort to fully revive its downtown is centered on turning the area into a live, work and play destination. The housing component of that effort has been stymied by soaring development costs in the past two years.

Earlier this year, the city extended its Downtown High Rise program, temporarily waiving construction taxes and some building fees to spur development. Production of apartments in the downtown pipeline-the city has approved plans for 14 residential towers-has slowed, with the largest downtown mixed-use project on an indefinite pause.

In April of last year, Google slammed the brakes on Downtown West, an 80-acre transit-oriented development that has been approved to build 7.3M SF of offices, 4,000 homes and 500K SF of shops and restaurants, as well as a community center and 15 acres of parks.

While the bulk of the project has been paused, Google announcing in August it is focusing on the development of retail “placemaking” in the footprint of the massive project site. The tech giant is partnering with Jamestown to develop a lively street scene in the area near the Diridon train station site, an experience-oriented strategy Google calls Creekside Socials.

“We have entered into a multi-year lease with Jamestown to expand the Creekside program by transforming sections of Barack Obama Boulevard and South Montgomery Street into a vibrant area with retail experiences,” Google said, in a statement.

Over the past year, Jamestown and Google have hosted more than 60 community events as part of the Creekside Socials program, bringing food vendors, artists and non-profits to the downtown neighborhood, attracting an estimated 3,500 visitors.

In early 2025, the partners said they plan to add a series of new food and beverage outlets, health/wellness and other retail concepts at the Downtown West site.