Multifamily
Deal flow and investment outside of a few market-moving transactions have slowed thus far in 2023, but the trend is likely not solely due to fundamentals, and certain deals are still closing. Debt costs remain elevated in the face of tight monetary policy from the Federal Reserve, as a battle against historically high inflation continues.
Vacancy
The market vacancy rate currently stands at 7.4%. Access to larger cross-bay markets is now more feasible. Most multifamily units making their way to the market in the East Bay are located near BART stations in submarkets like Downtown Oakland, Walnut Creek/Pleasant Hill, and Fremont/Newark. BART commute times to San Francisco’s Financial District from new high-rise developments in Downtown Oakland measure just 15 minutes. That is competitive with public transit commute times from most residential areas in the City of San Francisco. BART’s continued extension into Silicon Valley should continue to increase demand for transit-oriented developments in the southern portion of the metro.
Construction
Over 19,000 units have been added on a net basis over the past five years in the East Bay, equating to a percentage change of 11.0%. Another 4,100 units are underway as of the fourth quarter of 2023. The current pipeline will expand the metro’s inventory by 2.1%, pushing the market closer to the 200,000-unit mark.
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Office
The East Bay office market has been hit hard over the past several years. The vacancy rate has risen dramatically over the past three years as leasing activity cooled and numerous tenant moveouts resulted in substantial occupancy losses. The increases have pushed the vacancy rate to 14.0%, the highest point since the previous peak set in 11Q1.
Leasing
Market vacancy in the East Bay, currently 14.0%, the highest point since 11Q1. Sourcing tenants has become extremely difficult, and net absorption has fallen to -2.4 million, with negative activity concentrated in 4 & 5 Star properties. Oakland has not been immune to the downsizing and relocating that is prevalent across the nation. Tenants are taking the opportunity to reevaluate their space requirements. As a result, many occupiers are giving back between one-third and one-half of their space and relocating within the market. Additionally, the demand from tech tenants spilling over from San Francisco has completely dried up, leaving few options to fill the void.
Construction
Despite relatively healthy fundamentals over the past decade, developers have been measured in adding new office inventory to the East Bay market. In the years prior to the pandemic, builders preferred 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. As expected, there is only 54,000 SF under construction.
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Industrial
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 2023Q4 is a little different, with 4.4 million SF of industrial space under construction across the entire market equating to roughly 1.6% of market inventory. There is roughly 2.9 million SF due to complete through 2023, the highest total since 2020, leaving the market exposed to oversupply risk in the coming quarters.
Leasing
Considering the low vacancy rate in the East Bay, it is impressive that the total industrial SF leased tallied 12.3 million SF in 2022, and activity through the first three quarters of 2023 reached only 4.9 million SF. Activity in early 2023 has been notably smaller as leases have struggled to push past 200,000 SF in size. Only three leases have surpassed that threshold through the end of September 2023. Tesla is responsible for one of them subleasing 209,000 SF at 48401 Fremont Blvd in Fremont and then another 149,000 SF at 22290 Hathaway Dr in Hayward. Also, RK Logistics took 210,000 SF at 47020 Kato Rd in Fremont. Retailers are still active in the market but are focused on smaller spaces, as exemplified by Home Depot leasing 154,000 SF at 731 Cutting Blvd W in Richmond.
Construction
The 4.4 million SF under construction is one of the highest levels of construction since 2019. As occupier demand wanes, there is an increased market oversupply risk. Current levels equate to 1.6% of the market’s inventory. Unfortunately, about two-thirds of what is currently underway is available for lease, increasing the upward pressure on the vacancy rate. 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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Retail
After spiking in 2020 with the economic shutdown, the retail vacancy rate has floated between 5% and 5.5% for the past two years. Currently, the vacancy rate rests at 5.2% and has been flat over the past year, but well above the national figure of 4.1%. New leasing activity has struggled to return to pre-pandemic figures and remains, reaching only 80% of the 2019 total in the past three years. The flat vacancy rate is a result of slight negative demand, as net absorption fell to 570,000 SF over the past year. However, that figure is deflated by a number of large closings within the market’s malls, specifically 49,000 SF at the Somerville Town Center in Antioch and 50,000 SF at the power center Pinole Vista Crossing.
Leasing
Overall, moveouts in the market’s big box spaces have led to natural net absorption figures of 570,000 SF. Leasing activity has not kept pace, focusing on the market’s smaller spaces. Through the first half of the year, only four leases of 20,000 SF or more have signed, compared to a dozen in 2022. Large-scale vacancies in 2023 have centered around malls, bringing significant amounts of new space to the market. The leasing that has continued has come from discount retailers and grocers.
Construction
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. Currently, there are only 320,000 SF under construction in the metro, adding just 0.3% to inventory. 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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*Source: CoStar
