While there is some uncertainty about the pandemic’s full long-term ramifications, including how remote working affects office use and commute patterns, East Bay demand is expected to remain strong as new deliveries taper slightly. There are currently about 5,700 units in the pipeline compared to the long-term average of 5,700 units under development.
Demand for apartments in the East Bay posted a record in 2021, although that level moderated in 2022, with a net of 2,500 units having been absorbed over the past 12 months. This compares to the long-term average of 1,800 units. The vacancy rate is tracking at 7.5% – the five-year average is 6.6% – and new inventory from 22Q3 has applied pressure to the rate. Supply pressure is being felt acutely in certain submarkets, like Downtown Oakland, which is experiencing a significant amount of the metro’s construction activity. Other areas of the metro, particularly suburban communities in the eastern portion of the East Bay, are experiencing vacancy rates near all-time lows and below pre-pandemic levels.
There are currently about 5,700 units in the pipeline, compared to the five-year average of 8,500 units. The current pipeline will expand the metro’s inventory by 3.0%. 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%.
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The degree to which expanded remote and hybrid working arrangements will affect the long-term office market outlook for the East Bay remains unclear. Companies are assessing employee productivity in new working arrangements and analyzing the long-term costs of current office footprints. The current outlook calls for vacancies to start to decline next year, but the outlook is admittedly uncertain.
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 the pre-pandemic activity that has somewhat offset continued tenant move-outs. Market vacancy of 13.0%, represents the highest level seen since 2012, but increases have slowed over the past year, up 1.0%.
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. When looking at active construction, it is becoming clear that developers are taking a pause in bringing new inventory online. There is currently 110,000 SF of construction underway and nearly half of that figure comes from a single building underway in Emeryville.
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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 2023Q1 is no different, with only 6.4 million SF of industrial space under construction across the entire market equating to roughly 2.4% of market inventory. Industrial landlords do not need to worry about any significant ramp-up in competition from new supply anytime soon.
High-tech manufacturers have been leasing in large numbers, including Veev and Lucid Motors. Other renewable energy infrastructure firms such as Bloom Energy, CED Greentech, Enervenue, and Plastikon, a Tesla supplier, have all signed leases for spaces ranging from 60,000 to 165,000 SF since the beginning of 2022. Prospects for continued growth in high-tech manufacturing remain strong here given massive tax incentives included in the inflation reduction act, for U.S.-based production in these sectors.
Most industrial owners do not need to worry about overbuilding or significant competition from oncoming new supply over the next several quarters. There is 6.4 million SF currently under construction as of 2023Q1, representing 2.4% 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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The flurry of move-outs from the pandemic has settled and marginal declines in vacancies have set in, with the metro rate currently registering 5.4% in 2023Q1. This is above the national average of 4.3% but does remain well below the highs of the Great Recession. 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 600,000 SF in 2021.
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. Some developers were active before the pandemic, with large-scale projects concentrated in affluent suburban areas like Walnut Creek, Dublin, and San Ramon, and expanding suburban areas like Brentwood. Additionally, there is only 240,000 SF under construction in the metro, adding 0.2% to inventory.
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