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, some 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 fourth quarter of 2023, a net of 2,200 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 in 2021. Vacancies are thus trending to 7.3%, reflecting a one-year change of 0.0%. The previous five-year average vacancy mark equates to 6.6%. New inventory is expected to apply further upward pressure to rates in the face of slowed leasing. The effects of supply pressure, however, are being felt more acutely in certain submarkets like Downtown Oakland as this area is experiencing a significant amount of the metro’s construction activity.
4,200 units are underway as of the fourth quarter of 2023. Most construction activity is seen in Downtown Oakland. Signature Development Group of Oakland is leading a multi-year transformation of Brooklyn Basin that includes around 3,100 housing units and 200,000 SF of commercial space on the project’s 65-acre waterfront site. Submarket inventory has already grown by nearly 50% since 2015. BART proximate communities continue to develop with Phase 2 of the extension to Santa Clara through Downtown San Jose and Diridon Station anticipated to initiate service by 2029.
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Recent sales activity has slowed significantly in recent months totaling $210 million from 110 transactions, a farsight from the average over the past five years of $1.7 billion. Office assets are declining in value from elevating vacancy rates, falling rents, and rising interest rates. Value erosion is prevalent in the office sector, and the East Bay has been particularly hard hit with little relief expected in the near to medium term.
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 13.9%, the highest point since the previous peak set in 11Q1. Leases have been noticeably smaller in 2023. Since the start of the year, only five leases have signed for 25,000 SF or more, the largest of which was 50,000 SF. Sublease availability rests at 2.8%, slightly ahead of the national figure of 2.5%. Most of the space currently hitting the market is direct, as the sublease is comparable to levels in early 2021.
Poor demand, high vacancy, and falling rents have led to almost a complete pullback in construction activity. Currently, there are only 54,000 SF underway. The two projects are both build-to-suit and will not affect market availability today. The most recent completion of note was The Key at 12th, a glass tower totaling 320,000 SF, which broke ground in 2018 and was delivered in 20Q4. Ellis Partners and Intercontinental Real Estate purchased the development site in March 2017. University of California’s Office of the President preleased 130,000 SF, and Credit Karma has preleased 160,000 SF. Today, the property remains near full occupancy, with only ground-floor retail available for lease.
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Sales volume has slowed in 2023, but strong activity in the second half of 2022 has helped push activity to $2.5 billion from 220 transactions. Transaction levels are consistent with activity over the past five years, averaging $2.3 billion over the past five years. Higher interest rates have eroded property values across all sectors. Industrial buildings hold their value best, but properties are still losing value.
Given the lackluster net absorption figures, leasing activity has slowed in 2023, and large distribution users have become very difficult to source. Decreased leasing activity is partly due to the declining use of the Port of Oakland, which has seen volume decline by more than 14% since the middle of 2022. This has been a trend for some time as supply chain issues pushed importers to utilize other ports. As a result, the Port of Oakland processed 200,000 TEUs in 2022 than it did in 2018.
In Q4 of 2023, there are 4.5 million SF under construction. This is one of the highest levels of construction since 2019. About two-thirds of what is currently underway is available for lease, increasing the upward pressure on the vacancy rate. The largest unleased property currently under construction is located in Hayward, developed by Renobased Dermody Properties. The 233,000 SF warehouse building is scheduled to complete before the end of 2023. High levels of construction leave the market exposed to oversupply risk in the coming quarters
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Sales volume has reached only $658 million from 250 deals over the past 12 months, compared to $958 million over the past five years. Investment activity in 2022 and levels have remained at comparable levels so far in 2023. Deceleration is evident, and levels are unlikely to increase significantly throughout the rest of 2023 as interest rates continue to rise. Pricing exploration is expected for at least the first half of the year as owners and potential investors work to find new footing.
Vacancy rate has remained flat at 5.2% in Q4 2023. The flat vacancy rate is a result of slight negative demand, as net absorption fell to 470,000 SF over the past year. The leasing that has continued has come from discount retailers and grocers. For example, the largest lease of 2023 was signed in May when Marshalls took 30,000 SF at El Cerrito Plaza in the Richmond/San Pablo submarket. The 99 Cents Only Stores also signed for 28,400 SF at Somersvilel Center in the Antioch/Pittsburg submarket.
Lack of rent growth, increasing interest rates, and persistent high construction costs have made new development difficult to pencil in. As a result, there was relatively little underway with only 160,000 SF going on across the market, accounting for only 0.1% of market inventory. Most of that figure comes from a single project, Plaza Gale Ranch Phase IV is a 125,000 SF neighborhood center in the San Ramon submarket and is scheduled to complete in late 2024. Interestingly, demolitions have outpaced deliveries over the past five years, with totals averaging 52,000 SF during that time.
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