East Bay Office Market Review – 2019December 14, 2019
East Bay Office Market Review – 2019
The East Bay is a large market with cities like Concord, Walnut Creek, Oakland, Richmond, Hayward, Fremont, Pleasanton, and San Ramon to name a few. The year is almost over and the final numbers aren’t in but I recently watched a market video from Costar’s Sr. Market Analyst for San Francisco, Marco Cugia and thought I’d share some of the highlights.
Demand. As a whole, demand has outpaced new development. Costar has tracked 1.1 Million square feet of positive absorption in the first three quarters of the year. The result of the demand is the overall vacancy in the East Bay office market is 8.5%. The video didn’t break this down by city but I can tell you that we are seeing higher vacancies in the 680 Corridor office markets. There were several large blocks of activity that are worth noting.
- Emery Station West (Emeryville) – 175,000 sf absorbed to date and there are rumors that the balance of the 265,000 sf building will be leased by year end.
- Workday HQ (Pleasanton) – Workday moved into its 400,000 sf headquarters this year.
- Kaiser (Dublin) – Kaiser moved into 220,000 sf in Dublin this year.
- 10X Genomics (Pleasanton) – after their IPO, 10X moved into 150,000 sf that it leased in 2018.
- Credit Carma (Oakland) – leased 160,000 sf in Oakland.
- WeWork (San Ramon) – the firm WeWork moved into approximately 85,000sf in Bishop Ranch.
- Blue Shield (Oakland) – Blue Shield moved into 200,000 sf at 601 City Center.
- Asset Mark (Concord) – Asset Mark expanded into 100,000 sf.
Employment Growth. Marco pointed out that employment growth has been steadily trending downward but it is still positive. While the trend has been downward since 2015 the forecast mirrors this trend and the result is demand for office space should decrease as well. However, the vacancy rate is predicted to stay stable for the next 5 years and the reason for this is there is a limited supply of office space.
New Construction. Both migration and vacancy are being watched and Costar noted that with the cost savings in the East Bay, why hasn’t there been more migration of tech companies to the area? One reason could be the lack of new construction. Of the entire East Bay, Oakland is the only significant market with new construction. Four markets were noted as having new construction and Oakland led the pack at 948,000 sf of new construction. The other markets pale in comparison with Berkeley building 45,000 sf, Union City showed 31,000 sf, and Pinole/Hercules/El Sobrante had 12,000 sf of new construction. Because of the lack of new construction, there is a shortage of quality space. The new construction only amounts to 3% of the market and there is only been 3.5M sf of new space that has been added since 2010.
Rent Growth. Rent growth in the East Bay has been trending at over 5% which is one of the stronger growth rates in the country. The average rent in the East Bay is $38/sf/yr or $3.17/sf/mo which ranks the East Bay in the top 10 markets across the country. The rent for the East Bay is well below San Francisco and San Jose. Markets like San Ramon, Dublin, and Pleasanton all showed healthy rent growth for the year. With the exception of San Ramon, both Pleasanton and Dublin are along the BART line which is likely one of the reasons for their growth.
Sales. The sale volume for 2019, thus far, has been below the 2018 volume but in line with the average over the last several years. To date, Costar has tracked approximately $1.5B in sales in 2019 and $2.4B in 2018. With a healthy sales volume, the cap rates are trending below the national average by approximately 70 basis points. The average price in the East Bay is currently trending at around $350 per sq. foot. The forecast shows the trend continuing to head upward but flattening out over the next 5 years. We are also seeing about an 8% price gain year over year.
Trends to Watch. We should be watching the migration of tech companies coming to the East Bay. So far, we’ve only seen traditional companies that have been priced out of the San Francisco markets. The other trend would be to watch assets close to the BART line. If we see migration, it is likely to happen along the BART line which will result in less disruption to the work force of the companies that move.
While there is a lot of talk about the economy cooling off, it doesn’t mean that we can expect a freeze! A cool off won’t likely disrupt the current market conditions but rather give a pause to the trend and maybe create some opportunities for companies looking to relocate to save money. If you or your company are thinking about a possible relocation or wondering how to save money on your overhead, I welcome the opportunity to meet with you and talk about how we can help your firm. I look forward to working with you and your company in 2020.