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June 20, 2024
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Projected Tenant Demand in the East Bay Expected to Remain Subdued


This just-released office outlook on the Oakland / East Bay market comes to us from Marcus & Millichap:

Despite expectations for positive office absorption this year for the first time since 2007, vacancy in the East Bay will hover around 20 percent and rents will continue to weaken. New space demand will remain limited as less than 15 percent of the office-using jobs lost through the recession are restored and total office-using payrolls stay near levels reminiscent of 1997. A few large lease signings occurred in recent quarters, but most represented renewals or lateral moves as tenants relocated within the metro to take advantage of large blocks of available space at reduced rents.

Clorox, for example, recently leased more than 300,000 square feet in Pleasanton previously occupied by Washington Mutual. Its relocation of roughly 700 employees from downtown Oakland likely was influenced by attractive lease rates in the South I-680 submarket, where effective rents slipped nearly 27 percent through the downturn.

East Bay office transactions will rise in 2011, but activity will remain subdued compared to pre-recession levels. Many of the assets traded in recent quarters were sold to resolve troubled situations or to address maturing debt or soured partnerships. Most owners able to wait for a turnaround in fundamentals have chosen to do so, a trend likely to persist through 2011 as tenant demand remains weak and high vacancy rates pressure rents.

Cap rates for assets in core submarkets retreated modestly in recent months, though, reflecting strengthening buyer demand, particularly among local, private investors. Initial returns for properties in secondary/tertiary locations will average in the mid-8 percent to 9 percent range this year, though higher-quality assets can change hands below 7 percent. Medical office properties proximate to a hospital campus remain in particularly high demand, with a few deals recently closing at cap rates around 6 percent.

2011 Market Outlook

• 2011 NOPI Rank: 29, Down 7 Places. Still-declining rents in the East Bay’s office sector dragged down the market seven places in the NOPI.

• Employment Forecast: Following three years of contraction, payrolls will rise by 13,400 positions, or 1.4 percent, in 2011. The total includes 4,300 office-using jobs.

• Construction Forecast: Developers will deliver just 40,000 square feet of competitive office space this year, a 76 percent reduction from 2010.

• Vacancy Forecast: The vacancy rate will decline 40 basis points in 2011 to 20 percent. Despite the improvement, vacancy remains 780 basis points above pre-recession levels.

• Rent Forecast: Asking rates will slip 0.5 percent to $25.52 per square foot while effective rents dip 0.4 percent to $19.87 per square foot. On a positive note, some owners report a strong enough uptick in interest from potential tenants to hold the line on concessions.

• Investment Forecast: As larger distressed assets change hands at discounted prices in the years ahead, new owners may be able to offer space at highly competitive rents. Property values in hard-hit pockets could erode further as a result, even as metrowide occupancy rates begin to firm.

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