The East Bay had been leading the Bay Area in housing development for years, consistently outpacing San Jose and San Francisco. New projects are typically aimed at higher-income renters, but the new inventory is a welcome addition in a region with significant affordability challenges. Still, demand for housing in the Bay Area remains strong, particularly in the East Bay, which led all metros in population growth in recent years. This growth aside, the East Bay still offers more affordability than other Bay Area regions.
Demand for apartments in the East Bay posted a record in 2021, although that level has moderated in 2022, with a net of 2,900 units having been absorbed over the past 12 months. This compares to the long-term average of 1,700 units. The vacancy rate is tracking at 7.2% – the five-year average is 6.5% – and new inventory from 22Q3 has applied pressure to the rate.
Multifamily construction activity has been elevated for several years, with over 18,000 units added on a net basis over the past five years. There are currently about 5,200 units in the pipeline, compared to the five-year average of 8,300 units. The current pipeline will expand the metro’s inventory by 2.8%.
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In the past decade, the East Bay office market has emerged as an attractive alternative to its more costly neighbor San Francisco. In particular, Oakland is emerging as a desirable city in which to live, work, and play and has garnered some increased traction by tech firms.
Market vacancy in the East Bay, currently 13.1%, is down slightly from a recent peak of 13.3% in 21Q3 but remains well above a recent low of 8.4% seen in 19Q4. Leasing activity declined drastically at the onset of the pandemic but has slowly increased since, and recent activity has been in line with pre-pandemic activity. This has allowed the vacancy to stabilize in recent quarters despite tenant move-outs as more firms adopt hybrid and remote work strategies.
Despite relatively healthy fundamentals over the past decade, developers have been measured in adding new office inventory to the East Bay market. In recent years, local builders focused on projects in San Francisco and San Jose, where demand and rent growth have been more robust. As a result, the East Bay has only added around 4.5 million SF of new office space since 2010. Even adding in the few projects currently under construction, the East Bay has increased its total inventory by just over 4% over the past decade. Considering East Bay’s minimal historic inventory growth, the recent concentration of development projects in Downtown Oakland has created a relative construction boom in the submarket.
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With a lack of open land and strong local zoning regulations, new industrial construction rarely reaches a large enough scale to significantly move the market in the East Bay. The picture in 2022Q4 is no different, with only 5.8 million SF of industrial space under construction across the entire market equating to roughly 2.1% of market inventory. Industrial landlords do not need to worry about any significant ramp-up in competition from new supply anytime soon.
Considering that available industrial space is near the lowest levels ever recorded in the East Bay, it is impressive that the total industrial SF leased has tallied 15.8 million SF here over the past 12 months, on par with the average annual leasing of the previous five years. Third-party distributors have been key contributors to the market’s recent strength, as CEVA, Transpak, and PacPride Distribution have all signed 100,000- to 225,000 SF leases in the East Bay since the start of June 2022.
Most industrial owners do not need to worry about overbuilding or significant competition from oncoming new supply over the next several quarters. There is 5.8 million SF currently under construction as of 2022Q4, representing 2.1% of the market’s inventory, but about half of what is currently underway is already leased or owned by tenants including Tesla, Amazon, PacPride Distribution, and FedEx. The remaining inventory of unleased projects currently under construction is also spread fairly evenly along the I-880/I-580 corridors, in areas such as Fremont, Hayward, and Richmond, meaning that no individual submarkets are being faced with an overwhelming tally of new supply.
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While many markets across the U.S. have struggled to adapt to the adverse effects of online shopping, market fundamentals in the East Bay were comparatively stable. Investment activity stalled in the immediate aftermath of the pandemic but is beginning to pick up steam again in 2022, but the number of transactions taking place is still limited. Additionally, a number of the larger deals driving volume have been trades involving the redevelopment of existing assets.
The retail vacancy rate is edging lower in 2022 around the East Bay but remains above pre-pandemic levels. Vacancy in 2021 saw a significant increase with Mall move-outs and the ramifications of the pandemic still playing out across the market. As retailers have reopened after surviving multiple quarters of periodic lockdowns, vacancy trends have started to improve, but there are still significant challenges in the region.
Supply additions have been measured in the East Bay Metro, and the lack of construction is a silver lining that has kept market vacancy under control for the past few periods. Gyms and supermarkets are the largest projects under construction around the East Bay currently. The biggest is Lifetime Athletic’s new, 75,000 SF health club located in downtown Walnut Creek in the Broadway Plaza shopping center. The stand-alone building is another addition to the super-regional mall, which underwent a significant renovation in 2016 and added a freestanding Zara store adjacent to the under-construction Lifetime Athletic building.
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