Despite leading the region in population growth in recent years, the East Bay still offers more affordability than its cross bay rivals of San Francisco and San Jose. For these reasons, structural demand in the form of well-paid renters fleeing east across the bay is solidifying. New projects are thus generally aimed at higher-income renters, concentrated in and around BART rail stations for accessibility to regional job nodes.
As of the second quarter of 2023, a net of 1,000 units have been absorbed on a trailing 12-month basis. For reference, the prior decade average was 1,700 units, with a peak of 7,000 units. Vacancies are tracking at 7.6%, versus the five-year average of 6.3%, as new inventory applies upward pressure in the face of slowed leasing.
Over 19,000 units have been added on a net basis over the past five years in the East Bay, with another 5,800 units currently under construction. Downtown Oakland has been the focal point of development in recent years and this trend continues. Downtown Oakland has experienced some companies establishing larger office footprints over the years. As a result, it has emerged as a friendlier live/work/play environment. Fremont/Newark has also seen plenty of construction activity, gaining momentum as tech tenants from the South Bay move in and the development of Silicon Valley’s BART extension progresses.
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The vacancy rate has risen considerably over the past three years as leasing activity cooled and numerous tenant moveouts resulted in occupancy losses. 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 13.4%, the highest point since 11Q3, 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. There is currently 130,000 SF of construction underway, and nearly half of that figure comes from a single building underway in Emeryville.
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With significant construction coming online, the market’s outlook hinges on prospects for tenant demand. 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 grow. Additionally, the Port of Oakland saw a slowdown in volume during 2022 that continued into early 2023. This is likely a long-term effect of the supply chain issues from the peak of the pandemic. Firms have adapted and have begun using different points of entry into the country, with the Port of Oakland suffering as a result.
At 4.5%, the vacancy rate is low and has fallen by -0.2% over the past year. 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.
The 4.9 million SF under construction is one of the highest levels of construction since 2019. As the economy slows and occupier demand wanes, there is an increased market oversupply risk. The balance of construction activity is mostly for smaller buildings. Of the 20 buildings currently underway in the market, 15 of them are less than 200,000 SF. Additionally, the properties under development are almost exclusively located proximate to the market’s waterways, indicating that large-scale distribution centers are located further east in either the Stockton or Modesto markets.
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Investment activity stalled in the aftermath of the pandemic but began to pick up again in 2022 but slowed significantly in 23Q1. Deceleration is evident and will likely continue throughout 2023 as interest rates continue to rise, limiting buying power of potential investors, eroding property values, and expanding cap rates. Pricing exploration is expected for at least the first half of the year as owners and potential investors work to find new footing.
East Bay retail vacancy has climbed significantly since the middle of 2018, with the effects of the pandemic exacerbating the already negative trend. Currently, the vacancy rate rests at 5.2% and has been flat over the past year. Large-scale vacancies in 2023 have centered around malls, bringing significant amounts of new space to the market.
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. Currently, there is only 250,000 SF under construction in the metro, adding 0.2% to inventory.
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