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. Debt costs continue to rise in the face of tight monetary policy from the Federal Reserve, as a battle against historically high inflation continues.
Vacancy
The East Bay leads all Bay Area markets in population growth, having added over 250,000 residents since 2010 and outpacing national averages. An increasingly desirable, yet relatively affordable market for housing has enticed developers to bet on new apartment communities overcoming the current near-term challenges with a long-term ability to attract residents. Those seeking high-end housing at rental rates that compare favorably to San Jose and San Francisco will boost prospects for investors and landlords. In the third quarter, vacancy in the market stands at 7.1%.
Construction
Over 18,000 units have been added on a net basis over the past five years in the East Bay, equating to a percentage change of 10.6%. Another 4,700 units are underway as of the third quarter of 2023. The current pipeline will expand the metro’s inventory by 2.5%, pushing the market closer to the 200,000-unit mark. Occupancies of 92.9% could see downward pressure for some time with these new projects.
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Office
The East Bay office market has been hit hard over the past several years. Prolonged periods of negative demand have put downward pressure on lease rates, which have fallen by 1.4% over the past year and -2.5% over the past three years. Property owners are increasingly concerned with maintaining occupancy and are willing to offer discounts as well as concessions to achieve it. Rents are down the most in 4 & 5 Star properties, falling by -4.6% over the past year.
Leasing
Market vacancy in the East Bay is currently 13.7%, the highest point since 11Q1. Sourcing tenants has become extremely difficult, and net absorption has fallen to -2.1 million but 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.
Construction
As expected, there is only 54,000 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. Both of the buildings will complete fully occupied, not impacting the market’s vacancy or availability rates. Office construction will be rare for some time, except for the occasional build-to-suit property. The East Bay market has never been known for large-scale speculative construction, and the vacancy rate of 13.7% is far too high to justify adding inventory to the market.
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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 2023Q3 is a little different, with 4.7 million SF of industrial space under construction across the entire market equating to roughly 1.7% of market inventory. There is roughly 2.9 million SF due to complete in 2023, the highest total since 2020, leaving the market exposed to oversupply risk in the coming quarters.
Leasing
Activity in early 2023 has been notably smaller as leases have struggled to push past 200,000 SF in size. Only two leases have surpassed that threshold through the end of August 2023. Tesla subleased 209,000 SF at 48401 Fremont Blvd in Fremont and RK Logistics took 210,000 SF at 47020 Kato Rd in Fremont. 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.
Construction
The 4.7 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. Current levels equate to 1.7% of the market’s inventory, unfortunately, about 60% of what is currently underway is available for lease. The balance of construction activity is mostly for smaller buildings. 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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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 5.5% and has been flat over the past year. 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 210,000 SF over the past year. 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 240,000 SF going on across the market.
Leasing
East Bay retail vacancy has climbed significantly since the middle of 2018, with lingering effects of the pandemic exacerbating the already negative trend. Underperforming national retailers had announced store closures in the years leading up to the pandemic, and in 2022 more national tenants such as Bed Bath & Beyond, Tuesday Morning, and Party City, among others, contributed to occupancy losses. Overall, move-outs in the market’s big box spaces have led to natural net absorption figures of -210,000 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 been 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.
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 240,000 SF under construction in the metro, adding 0.2% to inventory. Gyms and supermarkets are currently the largest projects under construction around the East Bay including Lifetime Athletic in Walnut Creek and Plaza Gale Ranch Phase IV in San Ramon.
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*Source: CoStar
