San Jose gives greenlight to scaled down El Paseo redevelopment

As the city struggles to add more housing, San Jose has approved the scaled-down redevelopment of the El Paseo de Saratoga, which the developer says will make the project more feasible.

The latest iteration of Sand Hill Property Co.’s project will create 772 residential units, including 39 at 100% area median income, in addition to building a senior assisted living and memory care facility.

While the city approved plans in 2022 for 994 units, including 150 that qualified as affordable housing, representatives from Sand Hill said the project needed to pivot in response to the recession caused by the pandemic, inflation, a spike in labor and material costs, high-interest rates and the collapse of the office market.

“The impacts of the interest rates and the capital markets seizing up is something that is starting to ease,” land-use consultant Erik Schoennauer said. “(With) the Fed slowing interest rates, it takes a long time for that to hit the marketplace when it comes to real estate development, but we think it trends in the right direction and with these changes, it shifts the value proposition. Subsidizing the affordable housing units within the development is a cost to the project, so not building all of those units helps the pro forma.”

Sand Hill has planned to redevelop the signature project on about a third of the 30-acre shopping center at 1312 El Paso and 1777 Saratoga Ave. since it purchased the site for $146.6 million in 2019.

The developer had initially envisioned constructing four buildings ranging from 9 to 12 stories, containing a mix of both residential and commercial uses.

However, those plans changed last year when Sand Hill scrapped the residential component on one of the buildings and instead sought approval for a single-story structure anchored by a Whole Foods Market to meet its contractual obligations. Sand Hill intends to begin construction of the market next year.

The remaining changes approved Tuesday now call for a 12-story building with 398 units and 14,139 square feet of commercial space, a 10-story building with 374 units and 17,447 square feet of commercial space, and a 7-story, 230,305 square-foot residential care facility.

“There’s strong demand for senior assisted living and there’s also financing available for that real estate asset type because it has good fundamentals in economics,” Schoennauer said.

Steve Lynch, director of planning and entitlements at Sand Hill, said the developer would not have invested millions of dollars in the project and extensive time commitments if it was not committed to bringing the project forward in the coming years.

“As dire as 2024 was and as 2025 is not looking as positive, it also puts this project in a good spot to be one of the few multi-family projects coming out of the ground that is probably opening in ‘26 and ‘27, so it does put us in a good position as well,” Lynch said.

One of the most significant changes to the project is the loss of more than a hundred affordable housing units.

As part of the city’s inclusionary housing ordinance, developers must provide at least 15% affordable housing or pay an in-lieu fee. Sand Hill will instead pay more than $13 million, which will go to the city’s coffers to help fund other affordable housing projects.

While the loss of the affordable housing units was disappointing, former Vice Mayor Chappie Jones said he was reminded that “5% of something is better than 100% of nothing.”

Market conditions also have mired San Jose’s multi-family development pipeline in a slump, with no new buildings starting construction in 2024. On Tuesday, city officials also introduced a temporary incentive program to help kickstart getting shovels in the ground.