Industrial Market Report

In the third quarter of 2025, San Jose's industrial market remains under pressure due to weak demand. Although the market saw positive net absorption in 2024, this was largely due to tenants taking occupancy of pre-leased new spaces, such as Amazon's 1 million SF distribution center in Hollister. In 2025, net absorption is trending negatively, with cyclical low levels of leasing outweighed by tenant move-outs.

Low leasing stems from tenants' reluctance to pursue expansion plans amidst lackluster consumer markets, soft employment figures, and uncertainties regarding the impact of tariffs.

The past year has seen a slowdown in leasing activity, particularly for larger spaces. Very few leases exceeding 100,000 SF have been made, aside from a couple of notable exceptions, such as PsiQuantum's lease of 128,000 SF of advanced manufacturing space at 275 S Hillview Dr. in Milpitas in December 2024.

The vacancy rate currently stands at 8.7%, representing an increase of approximately 90 basis points over the past year and remaining above the historical average. Within San Jose, the flex inventory experiences an even higher vacancy rate of 11.7%, which contrasts with the logistics market, which has some supply constraints and has a lower aggregate vacancy rate of 6.3%.

Although development activity has decreased over the last year, there is still a healthy amount of industrial space under construction, totaling 4.8 million SF. This figure represents 2.4% of the market's current inventory, surpassing the national average of 1.6%. A diverse range of new projects is in progress, including advanced manufacturing facilities in South San Jose, distribution spaces in the southern region near Gilroy and Morgan Hill, and data centers in Santa Clara.

Due to strong demand and limited supply, industrial rents in San Jose are among the highest in the nation, trailing only San Francisco. However, the rent growth rate is currently one of the lowest in the country, averaging -0.7% over the past 12 months. In the logistics sector, year-over-year rent growth is below the national trend at -0.1%, while the flex sector is experiencing a negative annual growth rate of -1.3%.

Looking ahead, demand is expected to rise as the economy improves and tenants pursue expansion. With several new construction projects slated for completion in the latter half of 2025, the overall vacancy rate is likely to increase, although the effects will vary by location. Supply-constrained submarkets are expected to remain much tighter, facilitating higher rent growth.