WESTERN SNAPSHOT, AUGUST 2007

East San Francisco Bay Office Market

The East Bay Interstate 80/Interstate 880 office market, primarily comprising the cities of Alameda, Berkeley, Emeryville, Oakland, Richmond and San Leandro, consists of a total of nearly 27 million square feet.

Throughout the market, office vacancy continues to tighten, with vacancy in Emeryville dropping to 4 percent and the Berkeley submarket’s vacancy rate falling to 8.3 percent. During the past year, East Bay vacancy has dropped from 13.3 to 10 percent, the lowest rate the market has seen since 2001. Additionally, vacancies rates across all classes have fallen in the past year —Class A buildings from 11.6 to 8.6 percent, Class B from 17.2 to 13.6 percent and Class C from 9.4 to 7.2 percent.

While office vacancies are decreasing, rental rates are seeing marked increases. In the past year, Class A rents for the Emeryville submarket have increased almost 25 percent, while Class A rents in the Oakland central business district have increased nearly 12 percent. Overall, East Bay office rents have shown significant jumps and remained strong across all office types, with asking rates for Class A space currently at $2.70 per square foot, Class B space at $2.13 per square foot and Class C space at $1.91 per square foot.

There is a considerable amount of development activity, spurred by a number of local, regional and national developers that view the East Bay as an attractive market largely because it wasn’t subjected to the rampant speculation that many other markets experienced. As a result, developers have begun to purchase development sites or assemble various sites to bring through the entitlement process.

Despite the East Bay’s diminishing supply of office space and lack of new office product, the most recent wave of market development focused largely on high-density residential properties. This trend can be attributed to a number of factors, including the large push for residential development by Oakland’s former mayor Jerry Brown, the demand for new housing stock throughout the East Bay and cooperative interest rates.

Despite that focus, a number of office developers have projects planned. In Oakland, Brandywine Realty Trust is constructing 215,000 square feet of new Class A office space, and Shorenstein Development is in the planning/entitlement process for an approximately 500,000-square-foot Class A office development. Lastly, SKS recently acquired a centrally located Oakland site that is entitled for a 230,000-square-foot Class A, LEED-certified building with plans to add approximately 60,000 more square feet of office space.

Even with this development activity, the lean product inventory has triggered a push for many owners to redevelop former industrial properties into office space. One of the more successful redevelopment projects has been EmeryTech, a 220,000-square-foot industrial project in Emeryville with 157,000 square feet converted to office space that will be ready for occupancy in fourth quarter 2007. The project’s owner is now considering converting the remaining industrial/warehouse space to office and/or laboratory space to meet growing demand.

On East Bay’s investment front, a number of office acquisitions in the past year have demonstrated the strength of the market. One of the most notable deals saw a three-building, 327,750-square-foot property in Emeryville close escrow in June 2007 at $122.5 million or $374 per square foot. Other sales of note include 155 Grand Avenue in Oakland, a 200,996-square-foot office building that closed escrow in May 2007 at $72 million or $358 per square foot; and a portfolio that included 2100 Powell Street, a 344,433-square-foot building that sold for $144.9 million or $421 per square foot and 1900, 2000 and 2200 Powell Street, a group of three Emeryville office buildings totaling 827,387 square feet, that sold in December 2006 for $249.1 million or $301 per square foot.

Given the lack of quality office space that is currently available, the prices that have been paid by recent buyers for office product and the current market demand, it is anticipated that the overall rental rates will continue to increase for the foreseeable future while vacancy rates will continue to decrease until some sort of “relief valve” is realized throughout the East Bay market.

Sid Ewing is a senior vice president in CB Richard Ellis’ Oakland office.


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