Leasing has been waning sharply in the East Bay, and a wave of recent deliveries and additional supply expected in the coming quarters could give vacancies a higher ceiling. There are about 5,000 units in the pipeline as of the second quarter of 2023, compared to the long-term average of 5,700 units under development. Therefore, occupancies of 92.4% may continue to see downward pressure.
As of the second quarter of 2023, a net of 970 units have been absorbed and vacancies are tracking at 7.6%. 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. Other areas of the metro, particularly certain suburban communities in the eastern portion of the East Bay, are experiencing much 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.
5,000 units are currently under construction, expanding the metro’s inventory by another 2.7%. Downtown Oakland continues to be a focal point of development. Submarket inventory has already grown by nearly 50% since 2015. Similar to Fremont/Newark; Berkeley, Walnut Creek, Concord, and Pleasanton have seen BART-proximate communities deliver in recent quarters. 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.
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The East Bay office market has been adversely impacted over several years. Companies are assessing employee productivity in new working arrangements and analyzing the long-term costs of current office footprints. Recent sales activity has slowed significantly in recent months totaling $742 million from 170 transactions, well below the average from the past five years of $1.8 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.
Market vacancy in the East Bay is currently 13.7%. Many tech tenants could hamper the market in the coming periods. Both Twitter and Meta have space in the market and announced significant layoffs with more announcements coming regularly. However, the impact of these layoffs on the office market remains to be seen, as many firms were already operating with either a fully remote or hybrid workforce, reducing their footprint requirements. Biotech and life sciences continue to be drivers of current demand.
In recent years, East Bay development has been slow compared to neighboring markets like San Francisco and San Jose. When looking at active construction, it is becoming clear that developers slowed their pace. There is currently 130,000 SF of construction underway. Development levels will stay low for the foreseeable future as availability remains too high to justify adding inventory to the market.
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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 move the market in the East Bay significantly. The picture in 2023Q2 is a little different, and with 5.1 million SF of industrial space under construction across the entire market equating to roughly 1.9% of market inventory. There is roughly 3.9 million SF due to complete in 2023, the highest total since 2002, leaving the market exposed to oversupply risk in the coming quarters. Sales accelerated in 2022, surpassing $3.7 billion, the highest point in the past 25 years. Like leasing, activity was concentrated in the first half of the year as potential buyers closed with better debt pricing than was available later. That trend is likely to continue.
At 4.4%, the vacancy rate is low and has fallen by -0.1% over the past year. Activity in early 2023 has been notably smaller as leases have struggled to push past 200,000 SF in size. The diversity of occupiers bodes well for the market overall. High levels of development put the market at risk of oversupply as occupier demand slows with the overall economy and the Port of Oakland struggles to return to the same volume that it enjoyed prior to the pandemic and subsequent drop off in the number of containers processed.
Total growth in the stock of industrial properties has totaled less than 3% over the past five years. However, the 5.1 million SF under construction is one of the highest levels of construction in recent years. As the economy slows and occupier demand wanes, there is an increased market oversupply risk. Current levels equate to 1.9% of the market’s inventory, fortunately about half of what is currently underway is already leased or owned by tenants. The remaining inventory of unleased projects currently under construction is also spread fairly evenly along the I880/I-580 corridors in areas such as Fremont, Hayward, and Richmond, meaning no individual submarkets are faced with an overwhelming tally of new supply.
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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. The flat vacancy rate is a result of negative absorption and demolitions, as net absorption fell to -220,000 SF over the past year. The effects of the pandemic brought significant operational challenges for many retail tenants leading to slowing leasing activity and negative net absorption.
Large-scale vacancies in 2023 have centered around malls, bringing significant amounts of new space to the market. Availabilities have been flat recently, with the metro rate currently registering 5.5% in 2023Q2, despite negative net absorption over the past year of -220,000 SF. The vacancy rate is above the national average of 4.9% but remains well below the highs set during Great Recession. A large portion of recent positive absorption comes from interactive users like Urban Air Adventure Park.
Currently, there is only 260,000 SF under construction in the metro, adding 0.2% to inventory. Gyms and supermarkets are currently the largest projects under construction around the East Bay. 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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