Multifamily
Leasing has been waning sharply in the East Bay, and a steady clip of additional supply expected in the coming quarters could give vacancies a higher ceiling. There are an additional 5,300 units in the pipeline as of the third quarter of 2023, set to increase inventory by 2.8%. Therefore, occupancies of 92.6% could see downward pressure for some time. Deal flow and investment outside of a few market-moving transactions have slowed thus far in 2023, but the trend is likely not solely due to fundamentals. Debt costs continue to rise in the face of tight monetary policy from the Federal Reserve, as a battle against historically high inflation continues.
Vacancy
A net of 1,200 units have been absorbed and vacancies are trending to 7.4%. The effects of supply pressure, however, are being felt more acutely in certain submarkets like Downtown Oakland. The area is experiencing a significant amount of the metro’s construction activity. Other areas of the metro, particularly certain suburban communities in the eastern portion of the East Bay, are experiencing lower vacancy rates when compared with their urban counterparts. Access to good quality schools and BART stations for easy transportation into the cores and across the bay have enticed many renters to places like Fremont/Newark, Walnut Creek/San Ramon, and Dublin/Pleasanton/Livermore.
Construction
5,300 units are underway as of the third quarter of 2023. The current pipeline will expand the metro’s inventory by 2.8%, pushing the market closer to the 200,000-unit mark. Downtown Oakland continues to be a focal point for development. Communities around BART stations continue to be developed across the East Bay. Some cities have improved zoning regulations allowing for increased density around transit stations. In response, developers have capitalized on desirable areas where residents can benefit from the accessibility and good quality of life. In Walnut Creek, the 91-unit Rise and the 284-unit Hanover Walnut Creek near the Pleasant Hill/Contra Costa Centre station are prime examples.
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Office
In the East Bay, companies are assessing employee productivity in new working arrangements and analyzing the long-term costs of current office footprints. The current outlook remains murky at best as occupiers seek cost-saving options in their real estate portfolios. Recent sales activity has slowed significantly in recent months totaling $479 million from 130 transactions, a far sight from the average over the past five years of $1.7 billion. Office assets are declining in value from elevating vacancy rates and rising interest rates. Value erosion is prevalent in the office sector and is unlikely to slow in the near future.
Leasing
Leasing activity has been slower in 2023. The vacancy rate currently stands at 13.7%. The proportion of tech tenants in the market could hamper fundamentals in the coming periods with significant layoffs happening. Biotech and life sciences continue to be drivers of current demand. In addition to the aforementioned renewal by Amyris Biotechnologies, recent years have seen Eat Just Inc, a San Francisco-based plant-based alternative foods company, targeting Alameda for its new headquarters after leasing 120,000 SF at the Research Park at Marina Village in Alameda in 21Q1. The leases were signed at 300 Wind River Way and 1145 Atlantic Ave. in the 1.4 million-SF waterfront campus, home to over 25 life sciences, research tenants, and traditional office users.
Construction
Despite relatively healthy fundamentals over the past decade, developers have been measured in adding new office inventory to the East Bay market. There is currently about 54,000 SF under construction. The most significant recent deliveries have been concentrated in Downtown Oakland, with two new office towers helping redefine the city’s skyline. Both of the office buildings secured anchor tenants before breaking ground. The current development pipeline is also modest, and starts have only exceeded 100,000 SF four times since the start of 2018.
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Industrial
Sales volume has slowed in 2023, but strong activity in the second half of 2022 has helped push activity to $2.3 billion from 250 transactions. Transaction levels are consistent with activity over the past five years averaging $2.3 billion over the past five years. Higher interest rates have significantly eroded property values across all sectors. Industrial properties are holding their value best, but properties are still losing value.
Leasing
Considering the low vacancy rate in the East Bay, it is impressive that the total industrial SF leased tallied 3.2 million SF in 2022, but activity in the first half of 2023 failed to reach 1.4 million SF. Decreases in leasing activity are in part due to the declining use of the Port of Oakland, which has seen volume decline by more than 14% since the middle of 2022. This has been a trend for some time as supply chain issues pushed importers to utilize other ports. As a result, the Port of Oakland processed 200,000 TEUs in 2022 than it did in 2018.
Construction
There is about 5.0 million SF of industrial space under construction across the entire market equating to roughly 1.8% of market inventory. There is roughly 2.8 million SF due to complete in 2023, the highest total since 2020, leaving the market exposed to oversupply risk in the coming quarters. Luckily, a large portion of these projects are already leased or owned by tenants, including Tesla, Amazon, PacPride Distribution, and FedEx. The largest unleased property currently under construction is located in Oakland, California-based Bridge Point Oakland. The 534,000-SF distribution center is well underway and scheduled to complete along International Blvd Avenue in Oakland in the second half of 2023.
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Retail
Investment activity stalled in the aftermath of the pandemic but began to pick up again in 2022 but slowed significantly in 23Q1. Deceleration is evident and will likely continue throughout 2023 as interest rates continue to rise, limiting buying power of potential investors, eroding property values, and expanding cap rates. Pricing exploration is expected for at least the first half of the year as owners and potential investors work to find new footing.
Leasing
Retail vacancy currently stands at 5.1%. Leasing activity in 2023 has focused on the market’s smaller spaces. Through the first half of the year, only four leases of 20,000 SF or more have been signed, compared to a dozen in 2022. Large-scale vacancies in 2023 have centered around malls, bringing significant amounts of new space to the market. Unsurprisingly, the market’s highest income, suburban areas seeing the most demand. Fremont and Walnut Creek lead the market in tenant demand. Meanwhile, more developed areas like Berkeley and Martinez have struggled to keep pace in a changing marketplace.
Construction
Currently, there is only 250,000 SF under construction in the metro, adding just 0.2% to inventory. With uncertainty surrounding population dynamics and income levels in the East Bay, development levels are unlikely to increase significantly in the near to medium term. Additionally, some construction materials can be difficult to source, affecting completion dates and putting the timing and viability of the project in doubt.
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*Source: CoStar
