San Jose Passes New Incentives for More Active Streets Downtown

By Leah Toeniskoetter, SPUR San Jose Director
June 26, 2012
San Jose's San Pedro Square, where restaurants and a farmers' market have created an active street life. Photo by Aya Brackett

Many downtown areas have policies in place that restrict ground-floor storefronts for walk-in businesses such as retail, restaurants and entertainment. The idea is to encourage people to continue exploring (and hopefully shopping) on foot. But in an economic downturn, when retail stores may remain vacant for years, dark storefronts can create dead spaces of their own, further challenging the success of surviving retail tenants. With ground-floor retail vacancy rates hovering between 15 and 20 percent for several years in a row, San Jose has adopted a temporary policy change allowing non-retail uses such as banks and business support services to occupy certain ground floor spaces without a special use permit — an investment of time and money that the city says has deterred several companies from locating downtown. The city also argues that ground-floor space occupied during part of the day is better than ground-floor space vacant all day. In addition, co-working spaces like NextSpace, which are not considered retail uses but do generate a lot of foot traffic throughout the day, are showing us that new forms of business uses can activate the street and should be encouraged to locate where they can enhance the vibrancy of pedestrian areas.

The temporary policy change allows for the elimination of the special use permit requirement for businesses of less than 20,000 square feet on non-corner street frontages that have one of the following uses: business support, financial institutions, financial services, office, business and administrative, day care centers and radio and television studios.

The upside to this action is the opportunity to fill vacant storefronts in the short term. The potential downside is that, once the economy turns around, “non-active” business uses may remain in locations meant for retail. Additionally, there is the potential to drive up rental rates on the ground floor, as business users can currently pay higher rent than a local retailer. For these reasons, the city, together with the San Jose Downtown Association, will track both vacancy and rental rates going forward and review the impact of this change in two years.

Going for height in the rental market

While the city is still feeling the impact of the economic downturn on the commercial side, San Jose, like many cities around the bay, has seen its residential rental market take off. According to a recent Marcus & Millichap Research Services report, San Jose’s rental vacancy is expected to be the lowest of the three major bay cities at 2.7 percent by year’s end (compared to 3 percent in San Francisco and 3.2 percent in Oakland). That said, obtaining financing to build high-rise residential continues to be a challenge in San Jose, especially on the tail end of very slow sales in the newest residential towers downtown. In order to take advantage of this demand for rental units, and also encourage higher residential density in the downtown, the San Jose City Council recently passed a number of temporary incentives to encourage high-rise developments. The following incentives apply to the first 1,000 units of new residential high-rise development of 12 stories or higher that break ground in the Downtown Growth Area by the end of 2013:

1) An expedited, 120-day review process of entitlements for any proposed high-rise development (this applies to high-rise development anywhere in the city)

2) The elimination of a city requirement to install an expensive breathing air replenishment system in high-rise buildings

3) The continuation of a 50 percent reduction in park fees for high-rise residential constructed in the downtown

4) A 50 percent reduction in construction taxes (this is also applicable to any commercial building constructed in the downtown, regardless of height)

5) Deferral of fees owed until the Certificate of Occupancy is issued

6) Waiver of minimum parking requirements with a long-term commitment from the developer to offer free participation in the VTA’s EcoPass program, as well as car-sharing services and enhanced bike parking facilities

Taken together, these two recent actions demonstrate the city’s desire to chip away at a slow commercial market while taking advantage of a strong rental residential market in the downtown. While it is true that the fee reductions will impact the funding parks and transportation improvements, if there’s no development in the near term, these departments won’t receive any funds at all.