WESTERN SNAPSHOT, APRIL 2009

East Bay-Oakland Industrial Market

Gleason

In 2008, the industrial market in the East Bay Interstate 80/880 corridor slowed down from its active pace in 2007. Running from Richmond in the north to Union City/Newark in the south, the market saw its overall vacancy rate increase from 6 to 8 percent, which still denotes a healthy market. The highest vacancy rate was found in the Richmond market and the lowest in Oakland.

By the end of the year, leasing activity was slowing along the I-80/880 corridor, with companies waiting on the sidelines to see what is going to happen in the economy. Rental rates in most East Bay industrial submarkets decreased slightly as vacancies increased, but there were no dramatic drops in rates. Rates are averaging about $0.51 per square foot per month on a triple net basis across the whole market.

In 2009, the East Bay industrial market should benefit from two other markets in Northern California. In the past few years, there has been a plethora of big box warehouses in the 500,000-square-foot range or larger being built in the Central Valley along interstates 5 and 205. Many large tenants, particularly retailers, have leased these big boxes. With the drop in consumer consumption in the past year, many retailers have been reevaluating their need for large distribution centers and focusing on smaller DCs under 200,000 square feet closer to their customer base to save on fuel and real estate costs.

The second area that should benefit the East Bay industrial market during this economic downturn are the higher priced industrial markets around the Bay Area, particularly in San Francisco and San Mateo counties. The cost differential of doing business there versus being along the I-80/880 corridor is compelling; expect to see tenants in those locations looking to the East Bay for new space in 2009.

Like most of Northern California and the nation, the investment market in the East Bay is at a standstill except for small owner/users (less than 40,000 square feet) that will be able to benefit from the new stimulus package through SBA loans and other forms of financing. Getting the banks to lend on large development projects has been difficult for most developers, and won’t change in the foreseeable future.

While many other real estate sectors like retail are suffering badly, most industrial markets including the East Bay are seeing smaller increases in vacancies and decreases in rental rates. However, leasing activity must increase in 2009 to keep those rates at their present levels. Anticipate landlords being aggressive to keep existing tenants and solicit new tenants in the coming year.

Brian Gleason is a senior vice president in UGL Equis’ San Francisco office.

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