Lack of Office Space in Oakland is a Major Barrier for More Relocations

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By Neil Gonzales

The big hurdle right now confronting technology firms wanting to do what Uber has done in Oakland is the dearth of modern Class A office space in the East Bay city.

“There really aren’t any markets (in the Bay Area) that have excess space, and Oakland has a similar challenge,” said Jim Ellis, managing principal for San Francisco-based developer Ellis Partners. “There are space constraints in Oakland.”

[contextly_sidebar id=”J1gx2hS5PPgXGdlXfOm6y8YD6OnlAeQ9″]That’s not to say Uber’s presence in Oakland could prove to be the key spark that ignites a wave of new office construction there. Strong market trends and other factors in Oakland are already pointing in that direction.

However, tech and other firms—particularly the large ones—typically target high-quality, contiguous space of at least 100,000 square feet in an urban core, and much of that has already been gobbled up in the downtown Oakland submarkets, including the building Uber has bought in the city’s Uptown neighborhood.

Last week, Uber—the San Francisco-based mobile-app ridesharing services company—announced plans to expand into Oakland with its purchase of the refurbished former Sears building near a BART station. Uber would house up to about 3,000 new employees in the 380,000-square-foot, seven-story building now called Uptown Station at 1955 Broadway.

“Uber coming to Oakland is a big deal,” said Ellis, whose company is redeveloping the city’s waterfront district of Jack London Square. “It’s a big vote of confidence in Oakland as an emerging place to relocate business” because of relatively affordable housing, proximity to transportation and a hip cultural scene that can be found in burgeoning neighborhoods such as Jack London Square and Uptown.

But for now, renovated space—let alone new offices—will be hard to find.

“Class A space and creative space on BART with proximity to walkable amenities will remain in greatest demand,” commercial real estate services firm Cushman & Wakefield said in its Oakland metropolitan office market report for this year’s second quarter. “Correspondingly with current demand levels, much of the space that has been renovated is spoken for.”

Cushman & Wakefield also pointed out in the report that no Class A high-rise projects were under way in the metropolitan area. “Thus, demand relief in the form of new product is not a viable option for most tenants currently seeking urban office space on BART,” the company said.

The sparsity of that kind of space “will be an issue” for large tech firms such as Twitter and Facebook that may be looking to open an office in Oakland, he said.

According to a recent, second quarter of 2015 industry report from Colliers International, downtown Oakland is experiencing 5.4 percent direct vacancy for class A space. This figure represents roughly 556,000 square feet (which includes the roughly 380,000 square feet in the Sears building) of total availability in the East Bay city, plus another 37,000 of sublease space, according to Prokopiou. There is no availability in Oakland for contiguous space that is 100,000+ square feet, Prokopiou said.

Oakland does have several entitled development sites that could add a meaningful amount of office space—both renovated and new—to the market over the next couple of years, Ellis said. “So there’s room for more firms to move into Oakland.”

Those sites include 1100 Broadway where San Francisco-based developer SKS Investments seeks to build a 320,000-square-foot tower and 601 12th St. where San Francisco-based Shorenstein Properties envisions a 600,000-square-foot high rise.

Such sites “probably will be needed if a second big tech company wants to move here,” Prokopiou said.

Meanwhile, smaller firms have a better opportunity to find space at this point. “We’re seeing small tech companies moving into small offices,” Prokopiou said, so as a whole, the industry remains very much interested in Oakland.

“People don’t realize that there’s an Oakland employment base of technical workers,” said Ed Del Beccaro, East Bay and Silicon Valley managing director for the Houston-based real estate services firm Transwestern. Uber’s decision is “a validation of what’s already there—that Oakland is already a tech haven.”

In a report earlier this year for the local nonprofit Jobs and Housing Coalition, Transwestern noted that more than 400 tech firms are already headquartered in Oakland and 8 percent of the residents work in that industry.

“[M]ore and more tech employees and entrepreneurs are living in Oakland than ever and increasingly choosing to build their businesses close to home,” Transwestern said in the report.

“So if Uber can say, ‘We can relocate here because we can find an employment base,’ then other tech companies can follow suit,” Del Beccaro said.

Those companies would further absorb existing office space, helping to drive the vacancy rate—currently at more than 10 percent—to single digits. With blocks of space increasingly being snatched up, Del Beccaro said, office rents will continue to rise.

Rents in the city core have now reached about $50 per square foot on an annual full-service basis compared to “only $34 to $36” two years ago, he said.

With increasing tenant demand and falling vacancy rates, he said, rents could hit $60 by June. That $60 mark is the threshold where Del Beccaro believes the market can support new construction in the downtown area, particularly along such corridors as Telegraph and Grand avenues and Broadway.

Cushman & Wakefield had a similar take in its market report. “With rental rates climbing, demand levels high and net absorption to hit highs not seen in 15 years, conditions are quickly turning to favor new construction,” the firm said.

Uber’s commitment in Oakland will also expedite the delivery of housing units in the downtown area, Ellis said. “There will be a new major employer in downtown that will create even more workforce demand for housing in the area.”

The Bay Area-based nonprofit civic planning organization SPUR argued that finding parcels to develop offices and homes in downtown Oakland shouldn’t be an issue.

In a recent report, SPUR contended that downtown has enough developable land—much of it vacant or used for surface parking—to accommodate up to 13.5 million square feet of new office space and more than 8,000 housing units “without demolishing any existing buildings.”

West Coast Commercial Real Estate News