Multifamily
Most areas of the region had reclaimed pre-pandemic rent levels, but year-over-year growth of-1.1% has stalled after a recent five-year peak of 5.4%. Submarkets in more-densely populated urban areas like Downtown Oakland, for example, have yet to reclaim pre-pandemic rental rates. At a macro level, some of this is the result of residents tightening budgets to battle historically high inflation, which has resulted in some hesitancy to sign new leases. Oakland’s core has also taken the lion’s share of units during this construction cycle. Lower cost submarkets that have witnessed minimal competing supply—such as Pittsburg/Antioch and Hayward/Castro Valley/Union City—are leading the way in annual rent growth. More expensive submarkets like Walnut Creek/San Ramon also turned in positive growth despite supply expansions, as renters look for highly rated schools and accessible transit.
Vacancy
As of the first quarter of 2024, 3,300 units have been absorbed on a trailing 12-month basis. For reference, the prior decade average was 1,800 units, with a cycle peak of 6,900 units in 2021. Vacancies are thus trending to 7.0%, reflecting a one-year change of -0.4%. The previous five-year average vacancy mark equates to 6.7%. A dwindling supply pipeline and slowing apartment starts could allow downside pressure on vacancies to form if leasing breaks out to the upside.
The effects of supply pressure are being felt most acutely in bayside submarkets like Downtown Oakland and Berkeley. Other areas of the metro, particularly certain suburban communities in the eastern portion of the East Bay, are experiencing lower vacancy rates when compared with their urban counterparts. Access to good quality schools and services, along with 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.
Construction
Over 18,000 units have been completed in the past five years in the East Bay, equating to an inventory expansion of 10.4%. Another 4,300 units are underway as of the first quarter of 2024. The current pipeline will expand the metro’s inventory by 2.2%, pushing the market closer to 200,000 total units. Downtown Oakland remains the focal point of most construction, but there are projects underway in Concord, San Ramon, Hayward, and Fremont.
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Office
The East Bay office market is struggling to adapt to the new realities of the office market. The market has been unable to find new footing after the shock of 2020. Tenants looked to the region to grow near San Francisco at a lower cost. As occupier demand dried up across the bay, excess space in the East Bay was no longer needed, and the market’s tech, professional services, and life sciences have all given back large blocks of new space. Into 2024, tenants continue to adopt a hybrid real estate strategy and have yet to push employees to return to the office full-time.
Leasing
Market vacancy in the East Bay, currently 13.9%, the highest point since 11Q1. Sourcing tenants has become extremely difficult, and net absorption has fallen to -2.0 million, with negative activity concentrated in 4 & 5 Star properties. Oakland has not been not 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. 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 for 50,000 SF. Sublease availability rests at 2.4%, slightly ahead of the national figure of 2.4%. Most of the space currently hitting the market is direct, as the sublease is comparable to levels in early 2021.
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 very little active development with only 35,000 SF under construction. This comprises two buildings, the largest of which is the Fremont Bank building, a 35,000 SF 4 Star property that is expected to complete before the end of 2023.
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Industrial
In 2024Q1, there is 2.5 million SF of industrial space under construction across the entire market equating to roughly 0.9% of market inventory. There is roughly 1.8 million SF is due to complete in 2024, down from the 2.4 million that came online in 2023. With significant construction coming online, the market’s outlook hinges on prospects for tenant demand. Net absorption was negative in 2023, failing to record a positive figure after 23Q1 and reaching -2.9 million SF over the past 12 months. The East Bay has been significantly impacted by the pullback in large distribution users, older buildings, in particular.
Leasing
The East Bay struggled to maintain its tenant base in 2023, posting negative net absorption in the final three quarters of the year. Over the past 12 months, demand fell to -2.9 million SF, with large negative totals in both flex and logistics space of -670,000 and -1.2 million SF, respectively. Most of the market’s move outs were concentrated in the market’s older inventory. Of the 28 new vacancies in the past year, the buildings were an average of 31 years old. Older inventory typically does not meet the clear height and loading standards required by many large logistics and distribution firms.
The East Bay faces considerable headwinds in the near term. The vacancy rate rests at 6.3%, increasing by 2.1% over the past year. Additional increases are anticipated in 2024, with poor demand continuing and another 1.8 million SF coming to market over the course of the year.The East Bay faces considerable headwinds in the near term. The vacancy rate rests at 6.3%, increasing by 2.1% over the past year. Additional increases are anticipated in 2024, with poor demand continuing and another 1.8 million SF coming to market over the course of the year.
Construction
Rising vacancy and fewer tenant requirements has slowed groundbreaking but under-construction totals remain elevated. Construction starts failed to reach 1 million SF in 2023, the lowest total since 2012. No new projects have broken ground since 23Q3, a trend that is expected to continue throughout much of 2024.
The slowing pace of new construction has not dramatically impacted under-construction totals which rest at 2.5 million, constituting a 0.9% increase in market inventory. More than 60% of that inventory will deliver vacant, putting further upward pressure on the vacancy rate, which is expected to rise to almost 7% in the middle of 2024. Geographically, development is located along the Interstate 80 and 880 corridors but concentrated in the Hayward/Castro Valley and Richmond submarkets.
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Retail
After struggling to retain tenants from 2019 to 2022, retail demand increased in 2023, resulting in the only positive net absorption figure in the past five years. Over the past year, demand has risen to 260,000 SF, the highest annual figure since 2017. New leasing activity has struggled to return to pre-pandemic figures and remains low, reaching only 80% of the 2019 total in the past three years. The positive demand figure remains despite a number of large-scale closures in the market, including 49,000 SF at the Somerville Town Center in Antioch and 50,000 SF at the power center Pinole Vista Crossing.
Leasing
The return of tenant interest in 2023 is likely tied to the retention of the market’s population; many left the area during the lockdown and in subsequent periods, but that trend has halted, increasing retailer perception of the market. Over the past year, net absorption reached 260,000 SF, and the availability rate fell to 5.7%.
Center type is playing a large role in sourcing tenancy. Traditional shopping centers are struggling to hold on to tenants. Power centers, for example, have a marketwide availability rate of 10.1%, comparable to those seen in the East Bay’s malls. Similarly, neighborhood centers are seeing an availability rate of 7.0%, while general retail and strip centers are well below 5% across the market. This trend may continue for some time, as many large retailers have announced plans to relocate to properties with superior foot traffic.
Construction
A primary factor in falling availability has been limited development in the East Bay, combined with repurposing of existing retail assets into other uses. The market has lost retail inventory in 2020 and again in 2022, leading to a change of 43,000 SF in inventory over the past five years. The pendulum has swung back the other way over the past year, with 160,000 SF coming to market. Recent deliveries are primarily small, build-to-suit properties.
New construction poses little risk to the East Bay’s availability, as new developments will add just 0.2% to market inventory, 95% of which will deliver occupied. The few projects that will come to market vacant are typically ground-floor retail of a mixed-use development, typically multifamily. The only new shopping center underway in the market is the aforementioned Plaza Gale Ranch.
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*Source: CoStar
