ECONOMIC OVERVIEW
Job growth slowed during the second quarter of 2014, resulting in a slight uptick in unemployment. According to the California Employment Development Department, the unemployment rate for the East Bay, which includes Alameda and Contra Costa counties, was 5.9% as of June, up from 5.7% in May. This compares favorably to the 7.3% reported for California and 6.3% reported for the nation. Specifically, the unemployment rate was 5.8% in Alameda County. A total of 28,300 new jobs were added to the region year-over-year through June.
TENANTS DRIVING ACTIVITY
The strength of this market can easily be gauged by increasing tenant demand and asking rent growth. Growing tenant demand resulted in steady leasing for the quarter. There are roughly 200,000-300,000 square feet (sf) of leases currently pending in the market and more than 300,000 sf of tenants have moved, or are planning to move shortly, to Oakland’s CBD from San Francisco. This activity could push CBD Class A vacancy down to single digits by year-end or 1Q15 and virtually eliminate the large blocks of available space in the CBD.
The strongest asking rent growth for direct space occurred in Oakland CBD Class A, increasing by 5.2% year-over-year to $2.82 per square foot/month full service. The slight uptick in overall vacancy, from 15.4% last quarter to 15.6% this quarter, was primarily due to new availabilities in CBD Class A product. This vacancy continues to keep overall absorption negative in Oakland CBD as non-CBD absorption moves positive; however absorption is a lagging indicator because space is not absorbed until it is occupied.
INVESTMENT ACTIVITY OPENING UP
The largest transaction in recent years involved the Marina Village portfolio sale in Alameda. Brookfield Office Properties purchased the note after the previous owner, Legacy Properties, defaulted on their loan. Brookfield will invest more money for capital improvements with hopes of reducing the elevated vacancy of the project that is contributing to Alameda’s 24.2% overall vacancy. Major redevelopment plays are being made by local developers as well. For example, 1945 Broadway, the Sears Building, was purchased by Lane Partners with plans to convert it into a retail and creative office hub for Downtown Oakland. Lane intends to capture tech and traditional firms looking to escape rising rents by creating a new big-block of space in the market.
OUTLOOK
Tenants continue to look towards the East Bay as the San Francisco office market accelerates. We are seeing unmatched tour and proposal activity over the past few years, well above historical averages. Significant rent growth is occurring across all office classes with15-year highs being achieved in the top tier of the Class A market. New institutional and non-institutional investors continue their strong interest in getting into this market. As office market fundamentals continue to improve, new office construction remains elusive until sustained low vacancies and higher taking rents are achieved.
