The Sobrato Organization is kick-starting high-rise development plans on a prime downtown San Jose parking lot, a significant — if still early — show of confidence for the area from one of the region’s most closely watched real estate firms.
The Cupertino-based developer turned in preliminary plans Friday for a 23-story, 399-unit apartment tower at 150 S. Second St., next to the downtown Safeway Market store and The 88 condo tower. The preliminary concept — from Miami-based architecture firm Arquitectonica — comes four years after Sobrato acquired the 1.33-acre lot, known as Block 3, from the city’s now-defunct redevelopment agency.
It's the latest entrant to the downtown district's high-rise pipeline, which is now bursting with proposals. While it's too soon to tell if the project will get built during the current economic cycle, but Rob Hollister, Sobrato's president of real estate, sounded cautiously optimistic in an interview last week.
“With the trend that downtown is on — and the success that (other developers are) seeing — I think it will make sense to build it by the time we have the project permitted and ready to go,” Hollister said. "It's early, and these high-rise residential projects are very expensive. We need to see if the rents we've been seeing turn out to be sustainable. But (if they do,) then our intent is to build the thing."
The land is one of three key downtown parking lots Sobrato snapped up from the city in 2010 and 2011 as San Jose sought funds to buy land for a ballpark near Diridon Station. But until now, Sobrato has taken no formal steps to develop them.
Since Sobrato acquired the land, downtown's high-rise pipeline has taken off. One apartment tower — Essex Property Trust's 312-unit One South Market — has reached completion and is mostly leased. The 347-unit Centerra, from Simeon and union pension fund AFL-CIO Building Investment Trust, is almost done and has started pre-leasing. Silvery Towers, a 643-unit condo development from a Chinese-backed firm called Full Power Properties, is under construction. And at least four other tower projects are in the planning pipeline downtown. ( Click here for a great interactive map from downtown blogger Mark Haney.)
Sobrato's planning submittal "is a good sign that San Jose is realizing that it needs more of everything — and it’s happening," said Mike Kim, chief investment officer for Simeon, which is planning another high rise: the 180-unit Post Street Tower with Kinship Capital.
Kim said leases are landing at Centerra at about $3.60 per square foot, and that's for the lower levels, without amenities decks finished. He expects that number to rise as the upper floors are completed and opened up to rent. "We fully believe we'll be at $3.80 per foot top to bottom" when the project is finished, he said.
The planning submittal, while only a first step, is notable because Sobrato is considered a market bellwether, and other developers often pay attention to — and follow — its moves. It has not escaped observers that the development firm has largely sat on the sidelines with its downtown sites during the current boom.
Sobrato's caution may reflect both its long-term outlook and prior experience downtown. The firm, which has no outside investors and is able to build with cash, can afford to wait until the market is right. And memories may still be fresh of 488 Almaden, a 381,000-square-foot office tower Sobrato completed in 2002. That building, known as Sobrato Tower, sat empty until PwC leased the property in 2010. (Sobrato, through its charitable nonprofit, sold the building to BEA Systems for $135 million in 2007; today it's owned by Oracle Corp., which acquired BEA the next year.) Sobrato's portfolio downtown also includes Villa Torino, a mid-rise apartment building on Julian Street it built in the late-1990s.
A sleek look
While Sobrato has not publicly submitted plans for the site until now, in fact the firm has been working on a plan behind the scenes for some time. The selection of Arquitectonica, known for its modernist style, is a fairly high-profile move and would be the first tower for the firm in Silicon Valley. (It is also working on a major project for the Irvine Company in Cupertino.)
Arquitectonica's design features an L-shaped tower that rises in a series of elevations from a roughly five-story podium level. Its most striking element, however, is its skin: sections of precast panels seem to float on top of a glass curtain wall that wraps around the building. The whole thing is dotted with large balconies that wrap around corners, and amenity decks on the fifth and 17th floors.
"Our point of view was, this is not a disposable building," Hollister said. "This building will be there for 100 years and the Sobrato family will own it for the next 100 years. We wanted something that we’d be proud of for for that time."
The midblock location, between Second and Third streets, is considered a crucial location spot with its adjacency to the San Jose Rep theater and proximity to the Paseo de San Antonio. Hollister says the podium level "is intended to create a more active urban edge down there, so we have space for a restaurant and some other shops."
Having that kind of activity on what's currently a parking lot could make a big difference downtown, said Scott Knies, executive director of the San Jose Downtown Association. "Don’t underestimate how powerful having another building there, with the right type of restaurant spilling into that plaza, could be," he said. "From what I’ve seen, it’s got a lot of promise. I’m hopeful this momentum continues and they green light the project when they get down to it."
Indeed, while rents are doing well downtown, developers are cautiously eyeing construction cost increases and fees, both of which are rising. But Kim said there is reason to expect continued demand for residential downtown. North San Jose is taking off, with thousands of new jobs expected from Samsung, Apple and others. But that area is closed off to more residential (see related story, here). "For them, the ideal location is going to be downtown San Jose," Kim said.
Sobrato's other sites
Sobrato has two other parking lots it owns, known as Block 2 and Block 8. Block 8 is a 1.5-acre site fronting at Market and San Carlos Street across from the Westin San Jose. Block 2 is a 1-acre lot between First and Second streets, fronting West San Fernando. (The sites were named in the days of the San Jose Redevelopment Agency and are somewhat arbitrary today, but are still used.)
Hollister said Block 8 is likely an office site because of its large size. "We're starting to fool around with it, but we don't think the market is quite ready," he said, adding that residential will lead the way. "You’ll see employers locate there when they see employees want to be there," he said.
Block 2, he said, is also a great site, and would likely fill in after Block 3. "We thought it was better to start (with Block 3), but honestly it could have gone either way between the two," he said.
Working through the Block 3 approvals should take a couple of months, but getting the construction drawings to the finish line will take longer. It's at that point that Sobrato will do a "budget check" to determine whether or not to go vertical.
Meanwhile, other projects are likely to be getting started as well. That doesn't faze Hollister. "Ultimately, we feel all of this residential builds on each other," he said. "Yes, we compete but frankly we have an interest in creating more mass down there."