JLL: Could Oakland’s Office Rents Head Even Higher?

JLL Oakland East Bay Bay Area Skyline Review

JLL Oakland East Bay Bay Area Skyline ReviewJLL’s 2016 Skyline reveals that tenants demand more bang for their buck as trophy rental rates continue to command a premium

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OAKLAND, June 22, 2016 – Rents for the office buildings that make up Oakland’s Skyline have jumped into record territory in 2016 — to an average of $51.46 per square foot, almost 35 percent higher than where they stood in the first quarter of 2015. And rents for trophies (those ultra-premium office towers within the Skyline) are even pricier with some buildings commanding $57 per square foot. Nationally, JLL’s 2016 Skyline shows that rent growth may be moderating in some geographies, especially in high-growth markets that have recorded consistent rent appreciation over the last several years.

“Tightening conditions in Oakland mean that tenants won’t see rent relief for a few more quarters, but we do anticipate rents in the Skyline will begin to moderate over time,” said Amber Schiada, V.P. and Director of Research, JLL. “We expect annualized Skyline rent growth nationwide this year to rise by just half the rate of 2015, which is welcome news to tenants in markets such as Oakland, where Skyline rents are up by more than 68 percent since 2010. Even so, a slower rate of rent growth will likely only result in a levelling off in Oakland’s office market which, although historically high, remains a relative bargain compared to San Francisco, ” she added.

No new construction…yet
Despite historically high rents, office construction in Oakland is still just behind the starting line. Several projects are poised to break ground, but may be delayed until a large tenant, or two or three, shows strong interest. A continued rise in rental rates, albeit at a slower pace than 2015, may tempt more tenants to cross the Bay into Oakland to take advantage of lower occupancy costs, proximity to East Bay housing markets, increasing amenities, and easy access to transportation.

Oakland bucks national investment trend
Oakland bucked at least one national trend in 2015: investment activity surged in Oakland’s Skyline buildings, with over $350 million in transactions, the highest level since 2005. Overall investment volumes into the Skyline fell nationally in 2015, due to strong demand and liquidity for Skyline assets earlier in the economic cycle as well as the generational nature of many acquisitions since the Global Financial Crisis. The scarcity of opportunities meant only 9.5 percent of the Skyline across North America traded in 2015. In Oakland, more than 25 percent of the 15-building Skyline set traded last year alone and in the last five quarters sales volume among Skyline buildings topped $550 million.

A big factor in Oakland’s appeal among investors relates to the market’s underlying fundamentals. Direct vacancy in Skyline buildings is just 7.8 percent and falling. With no new construction coming out of the ground yet, the existing Oakland Skyline set appears to be positioned to repeat the solid level of positive absorption seen in 2015. But landlords need to make sure that their buildings continue to address tenants’ prime concerns and issues.

“A growing number of tenants are no longer willing to focus only on traditional office space in well-located trophy assets—they want their space and their building to reflect the image of their company,” said Sam Swan, Managing Director, JLL. “Rooftops decks, comfortable common areas, and other amenities which promote employee wellness are huge factors that will increase an asset’s value and owners need to be willing to make this investment in these common areas,” he added.

About the Skyline Review
Investors and tenants alike can access JLL’s Skyline via a digital platform. The fully interactive website will feature JLL’s proprietary market insights regarding office supply, demand, rents, leverage and investment into 52 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios. In addition, the site will offer videos and infographics. All information will also be available via mobile access.

About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $58.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

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