While renters should continue to look to the relatively affordable East Bay and its desirable suburban cities to meet their housing needs, a wave of deliveries in the latter half of 2022 has applied upward pressure to vacancies, which are trending at 7.8%.
Demand for apartments in the East Bay is moderating in the near term, with a net of 1,100 units having been absorbed over the past 12 months.The vacancy rate is tracking at 7.8%, versus the five-year average of 6.3%, as new inventory from late 2022 has applied pressure to the rate.The effects of supply pressure are being felt acutely in certain submarkets, like Downtown Oakland, which is experiencing a significant amount of the metro’s construction activity.
Most submarkets in the East Bay have experienced at least some development activity, but Downtown Oakland has been the focal point in recent years. Over 6,500 units were completed in the submarket from 2015 through 2021, increasing the submarket inventory by nearly 50%. In addition, Downtown Oakland has experienced an increase in companies establishing a footprint in office buildings in the area. As a result, Oakland is emerging as a friendlier live/work/play environment. Some renters are beginning to make their way back as a result.
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The East Bay office market has been adversely impacted over the past several years.. Vacancy rose considerably in 2020 and 2021, as leasing activity cooled and numerous tenant move outs resulted in occupancy losses. Tenant activity has improved in 2022 and is more in line with pre-pandemic activity that has somewhat offset continued tenant move outs. Market vacancy of 13.2%, represents the highest level seen since 2012, but increases have slowed over the past year, up 1.4%.
Market vacancy in the East Bay, currently 13.2%, is down slightly from a recent peak of 13.2% in 21Q3 but remains well above the most recent low of 8.2% 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.
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. Several office buildings initiated construction after securing large prelease tenants. The recently completed 600,000-SF, 24-floor Shorenstein tower, 601 City Center, secured Blue Shield as an anchor tenant in 17Q1.
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With a lack of open land and strict local zoning regulations, new industrial construction rarely reaches a large enough scale to significantly move the market in the East Bay. There is roughly 5.3 million SF due to complete in 2023, the highest total since 1998 leaving the market exposed to oversupply risk in the coming quarters. At 4.4%, the vacancy rate is low and has fallen by -0.4% over the past year.
Considering the low levels of vacancy in the East Bay, it is impressive that total industrial SF leased has tallied 10.9 million SF in 2022. Third-party distributors have been key contributors to the market’s recent strength, as PCC Logistics, Dependable Highway Express, and RK Logistics Group signed leases of 250,000 SF or more.
Hilly topography, population density, and lack of open land make large scale industrial construction challenging in the East Bay, where total growth in the stock of industrial properties has totaled less than 3% over the past five years. Nevertheless, the 5.9 million SF under construction is one of the highest levels of construction since the late 1990s.
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After spiking in 2020 with the economic shutdown, the retail vacancy rate has held floating between 5% and 5.5% for the past two years. Currently, the vacancy rate rests at 5.3% and has ticked up by 0.1% over the past year. As retailers have reopened after surviving multiple quarters of periodic lockdowns, vacancy trends have started to improve, but there are still challenges in the region. In addition, the East Bay is anticipated to pace the Bay Area in population growth over the next five years, which should bolster consumer spending.
East Bay retail vacancy had climbed significantly since the middle of 2018, with the effects of the pandemic exacerbating the already negative trend.The flurry of move-outs has since settled and marginal declines in vacancies have set in, with the metro rate currently registering 5.3% in 2023q1. A large portion of positive absorption in 2021 was driven by newly delivered Safeway and Floor and Décor properties. Simultaneously, the existing stock of retail in the East Bay actually shed around 175,000 SF in 2022.
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 years. Some developers were active before the pandemic, with large-scale projects concentrated in affluent suburban areas like Walnut Creek, Dublin, San Ramon, and expanding suburban areas like Brentwood. Additionally, there is only 260,000 SF under construction in the metro, adding 0.2% to inventory.
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