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The East Bay Continues to See Spillover from the San Francisco Market

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By Matt Geist

With San Francisco office rents 50% to 100% more expensive versus the East Bay office markets, the East Bay office market rally continues its upward trend into the 3rd quarter of 2019 as San Francisco tenants “spillover” into Alameda and Contra Costa counties. While overall East Bay rent growth has slowed since 2016, its trajectory remains upwardly positive with tenant occupancies registering above their historical norms. East Bay capital markets activity continues to be strong with office buildings selling at record price levels, ranking the East Bay’s valuations among the highest in the nation. Oakland is particularly emerging as a very desirable location for companies looking to accommodate the “live, work, and play” lifestyle and environment for their team members.

In nearby San Francisco, rents have more than doubled since 2010 and tenants are facing extreme rent hikes upon lease rollover. As a result, Oakland and those East Bay submarkets—with solid transportation infrastructure like BART accessibility and affordable parking—have benefited from an in-migration of tenants moving across the Bay. Specifically, several sizable San Francisco tenants have signed large leases and have even purchased buildings to move to Oakland, including Square taking 350,000 SF in Uptown Station, Delta Dental inking 82,000 SF in 1333 Broadway and Blue Shield taking 225,000 SF in 601 City Center, not to mention Credit Karma’s 106,000 SF lease at 1100 Broadway next to the 12th Street BART Station.

Overall, East Bay office vacancies are relatively steady since the beginning of 2016, hovering between 8% and 9%. More specifically, vacancies currently register 8.5%, below the market’s 10-year historical average. The East Bay’s office market last sustained a vacancy rate below 9% in the late 1990s, leading up to the dotcom recession.

The decrease in vacancy is likely rooted in the region’s diverse office supply, with its advantageous ability to accommodate a variety of business needs, including large blocks of space in submarkets like Oakland, Pleasanton and Bishop Ranch; plus, its biotech hub in Emeryville.

For instance, led by Emeryville’s Zymergen, the biotech recently completed a $400 million Series C. And, this year alone, Zymergen will almost double its footprint in Emeryville, leasing over 160,000 SF across several buildings, including the newly completed Emery Station West. Emery Station West was able to attract other biotech companies including Novartis (62,000 SF), Zogenix (45,000 SF) and Dynavax (75,000 SF), bolstering the collection of life sciences tenants operating in the submarket.

With increased rents on the horizon, BART—as a corporate occupier of space—is looking for a more permanent solution that will solve their future real estate obligations. The local transit agency has occupied leased space of 369,587 SF at 300 Lakeside Drive in Oakland for almost two decades. The Agency is currently paying $40 per square foot, where market-rate rents are clearing $60 per square foot and that least option is set to expire in 2021. The solution? Purchasing 2150 Webster in Oakland for an estimated $146 million or $598 per square foot. As one staff member explained, “Purchasing 2150 Webster Provides the lowest cost option over time. In addition, BART would own the building after the debt service period expire.” BART’s potential purchase represents an interesting way to hedge what’s become a newly volatile Downtown Oakland office market.

Third Quarter Transactions of Note:

– Swinerton Incorporated – relocation – 38,524 SF at 2001 Clayton
– Brown and Caldwell – renewal – 37,480 SF at Civic Executive Center
– Internet Brands – relocation – 31,989 SF at Bernal Corporate Park

Interested in reviewing market statistics? View them on the attached report provided via CoStar.

Matt Geist is a vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyersn. Contact Matt at 1-844-662-6635 or matt@hughesmarino.com to learn more.

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