Following record demand in 2021 that helped offset the negative effects experienced from the onset of the pandemic, leasing began to wane sharply by mid-2022. 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 7.7%.
Demand for apartments in the East Bay is moderating in the near term, with a net of 1,700 units having been absorbed over the past 12 months. This compares to the prior decade average of 1,700 units but is well below the recent 2021 peak of 7,100 units. The vacancy rate is tracking at 7.7%, versus the five-year average of 6.4%, as new inventory from late 2022 has applied pressure to the rate.
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.
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New office development in the East Bay has been moderate over the past decade, especially compared to San Francisco and San Jose. 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 prior to breaking ground. The current development pipeline is also modest. Recent sales activity has been in line with levels in the years prior to the pandemic and was driven by a few high-profile.
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, 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.
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Leasing activity remained strong throughout 2022 but most of the largest deals were signed in the first half of the year. A general slowdown in leasing activity is expected as increases in interest rates and fear surrounding a slowing economy grows. 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, the market price of $310/SF is likely at a high point as both pricing erosion and cap rate expansion are expected in the new year.
Considering the low levels of vacancy in the East Bay, it is impressive that the 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. 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.
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 5.4 million SF under construction is one of the highest levels of construction since the late 1990s.
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Retailers in the East Bay have benefited from the region’s substantial economic expansion since the Great Recession Annual retail rent growth is continuing to improve in 2022, off the lows seen in 2020, and average rental rates are above pre-pandemic levels. East Bay rent growth averaged nearly 3.4% year-over-year gains for the past decade but has failed to meet those levels recently, up 1.3% over the past year.
While new annual leasing activity is registering around 80% of pre-pandemic levels, making it challenging to recoup occupancy losses, especially quickly, there have been a few outsized deals that were completed recently. In 22Q3, Lucky Store expanded its regional footprint with a 61,000 SF lease at Park Lane Plaza in the Martinez/Pacheco/Hercules submarket. Additionally, Dick’s Warehouse signed a 40,000 SF lease in August at Fremont Hub Shopping Center in Fremont.
Supply additions have been measured in the East BayMetro, 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.
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