Starkovich

If San Francisco represents the face of the Bay Area, then the Interstate 80/880 Corridor, located along the eastern edge of San Francisco Bay, is its spinal cord. The corridor stretches from Richmond in the north to Fremont in the south with Oakland marking the dividing line between the two interstates. The I-80/880 Corridor is a significant transportation hub for the entire Bay Area. The Port of Oakland is the major player in the container shipping industry, handling 90 percent of the general cargo transported throughout San Francisco Bay. Oakland International Airport, currently undergoing a $1.4 billion expansion, is the second largest airport in the Bay Area, averaging 227 departures daily. The current expansion of the airport will accommodate more than 10 million passengers and double the cargo handling by 2005. Public transportation is easily accessible using Bay Area Rapid Transit, which has five endpoints leading into the area. Improving centralized distribution and commuting networks enhance the opportunities afforded to businesses located in the East Bay I-80/880 Corridor.

Despite its strategic location, the East Bay industrial sector has struggled in this economy like the rest of the Bay Area markets, although to a lesser degree. Non-technology related business or old economy types such as warehousing and distribution, freight and parcel transportation and professional services drive most of the market. User building sales activity has remained consistent, but sale prices are off 15 to 20 percent from the highs of the last 2 years. Buildings under 25,000 square feet are still achieving the best price per square foot, which in some cases exceeds $100 per square foot. Historically low interest rates coupled with a limited supply of sales opportunities will likely maintain respectable sales activity through 2003.

Summary

The East Bay warehouse market finished the second quarter of 2003 with a 10.2 percent vacancy rate, slightly less than the previous quarter. In the first quarter, warehouse vacancy posted its first double-digit number in almost 10 years with a 10.3 percent figure. The bulk of this vacancy can be attributed to large block space (greater than or equal to 100,000 square feet), which accounts for roughly 45 percent of total available square feet on the market. Vacancy has remained in the 9 to 10 percent range for the past seven quarters and is expected to finish in similar territory by year’s end. Competition between sublease and direct space is diminishing as direct space accounts for 71 percent of the total available space or 6.4 million square feet. Sublease space has decreased by 1 million square feet since 2002, transitioning to direct availabilities or being leased up in short-term deals. Asking rates should level off or increase slightly in the near future as vacancy decreases, sublease availabilities burn off and the stock market strengthens.

Since the economic slowdown that began in late 2000, no commercial product has weathered the storm like the East Bay manufacturing submarket. Vacancy for this segment of the East Bay industrial sector has remained in the 1 to 6 percent range since 1994. For the second quarter of 2003, vacancy increased by less than 3 percent from the first quarter and rose by 13 percent from a year ago. This is compared to a nearly three-fold increase from first quarter 2001 to second quarter 2002. The vacancy rate in the second quarter of 2003 was directly impacted by 247,216 square feet of sublease space coming on the market while direct space decreased by 80,929 square feet. Several cities, including Hayward, Union City and Fremont, posted lower vacancies for the same timeframe. Fremont led the way with an 18 percent reduction in vacancy from the first quarter.

With its dependency on technology companies, the East Bay research and development submarket has been hit the hardest in terms of all area industrial products. Vacancy remained relatively flat in the second quarter, finishing up 0.2 percentage points from its 21.7 percent figure in the first quarter of 2003. For the same period in 2002, vacancy increased from 14.8 to 16.8 percent with the trend flattening out at the end of the year. This trend in vacancy suggests that the East Bay research and development submarket has hit a ceiling at just under 22 percent. Fremont accounts for nearly 60 percent of the total building base and two-thirds of the total availability for the East Bay area. Vacancy in this city was 24.6 percent with available space averaging 13.1 months on the market. For the first time since 1996, the asking lease rate for research and development facilities in Fremont fell below the $1 mark to end at 99 cents per square foot for a triple net lease (NNN).

The East Bay industrial sector has seen dramatic changes in market conditions since the economic downturn of 2001. Since that time, tenants have gained greater leverage in lease deal negotiations, using the uneven supply and demand to their advantage. Factors such as plummeting average asking rates, the dramatic increase in vacancy, competition between sublease space and direct availability, the record total of available space and high negative net absorption make this a buyer’s market.

Cities with vastly different industrial building product, market conditions and tenant makeup comprise the I-80/880 Corridor.

Richmond Submarket

With no real defined commercial market, Richmond has seen interest shift to its open, vacant land and the potential it has for accommodating office, industrial park or residential space. However, the bulk of available land in the submarket is located near refineries and/or faces high entitlement costs. The industrial market in Richmond is mostly composed of older, less-functional space that has trouble competing with the Class A buildings found in Hayward and Union City. The office/flex market of Marina Bay/S. Richmond has become the heart of Richmond’s commercial enterprise. Warehouse vacancy has fluctuated between 10 and 12 percent for the past eight quarters. Average asking rates have fallen to 39 cents NNN but at a slower pace compared to other East Bay cities. The market for manufacturing space has remained relatively balanced, however, with vacancy rates of less than 8 percent countering any downward pressure on lease rates.

Emeryville/Berkeley Submarket

Like Richmond, the Berkeley/ Emeryville area has no real presence in the industrial market. Office complexes, which were greatly affected by the technology decline of 2001, make up the majority of this area’s commercial facilities. For the second quarter of 2003, warehouse vacancy was at 1.4 and 6.9 percent for Berkeley and Emeryville, respectively. The low figures are due in part to the lack of product. Asking rates, which range from 54 cents to 58 cents NNN, have been higher than any other cities in the East Bay market. The manufacturing market has seen vacancies on par with its historical lows — Berkeley recorded a vacancy rate of 2.7 percent and an average asking rate of 79 cents NNN while Emeryville registered a vacancy rate of 2.6 percent and an average asking rate of 66 cents NNN.

Oakland Submarket

“A Tale of Two Cities” best describes Oakland’s industrial market, divided between West Oakland and Oakland Coliseum/Airport. With the exception of the railroad station property and the Oakland Army Base, West Oakland’s industrial product consists of small parcels of land and owner/user occupancy. Oakland Coliseum/Airport contains some institutional industrial space, larger parcels of real estate and larger facilities. The warehouse market there eclipsed the 8 percent vacancy mark in the second quarter of 2003, while the average asking rate increased slightly to 36 cents NNN. The market for manufacturing space has remained stable with a 4.1 percent vacancy rate and 43 cents NNN average asking rate.

San Leandro Submarket

In addition to institutional ownership of some of the bulk warehouse space, local credit companies have been the strength in the owner/user market of San Leandro. The warehouse market experienced a drop to 8.3 percent vacancy while the average asking rate increased to 34 cents NNN. The manufacturing sector has experienced the opposite with an increase in vacancy and decrease in lease rates. San Leandro’s research and development market has been relatively stable since the economic downturn, posting healthy vacancies and asking rates. The second quarter of 2003 produced vacancy and lease rate figures of 4.3 percent and 91 cents NNN, respectively.

Hayward/Union City Submarket

The industrial market for Hayward/Union City is heavily weighted on high quality, institutional bulk warehouse product. With vacancy ranging from 9 to 16 percent and sublease space competing with direct space, it will take roughly 1 year of normal net absorption for the market to reach a healthy vacancy rate. Currently, vacancy rates stand at 9.1 percent for both Hayward and Union City while the average asking rates are 32 cents NNN in Hayward and 36 cents NNN in Union City. Sublease space, accounting for 60 percent of the vacancy in Hayward, strongly discounts the average asking rate. Manufacturing has been a solid market there with roughly 1 year of supply currently vacant. Hayward had a 6.6 percent vacancy rate in the second quarter with Union City lower at 5 percent vacancy. Average asking rates reported trends similar to the warehouse market with Hayward recording 44 percent NNN and Union City posting higher rates at 52 cents NNN. Research and development activity has remained slow in the recovery process due in part to its close proximity to the competing markets of Fremont and Silicon Valley. Vacancy reached an all-time high of 19.1 percent while posting an average asking rate of 81 cents NNN, which is on level with pre-2000 figures.

Newark/Fremont Submarket

This market borders Silicon Valley and shares many of the characteristics of its high-profile neighbor. Research and development makes up the bulk of the building base for this area with some office and industrial space included. The technology sector’s slump has hit this market hardest of all with vacancy reaching 28 percent in Newark and 24.6 percent in Fremont. The average asking rates for research and development space in Newark and Fremont were 95 and 99 cents NNN, respectively. The recovery outlook for this market remains dismal; it will require a continuous positive growth in the tech sector for the situation to improve. Warehouse and manufacturing have also been hit hard. Newark’s warehouse market reached 13.9 percent in vacancy after posting three consecutive quarters at less than 8 percent. Fremont’s figures decreased to 17.3 percent vacancy and an average asking rate of 45 cents NNN. The market for manufacturing space in Newark was tough with virtually no space absorbed in second quarter 2003 and vacancy reaching 12.6 percent. Fremont fared better with vacancy remaining at 9.6 percent and the average asking rate stabilizing at 63 cents NNN.

Livermore Submarket

Similar to the Newark and Fremont markets, Livermore has been hit hard by the slumping economy due to the large amount of construction added to its industrial sector. Average time on the market has reached a staggering 20 months for warehouse space, which indicates a slow recovery. While leasing activity has slowed, owners/users have been buying small buildings. For the second quarter of 2003, vacancy for warehouse and manufacturing spaces reached 15.7 and 14.8 percent, respectively. The average asking rate was 36 cents NNN for warehouse product and 68 cents NNN for manufacturing space. Vacancy in research and development has remained between 22 and 25 percent for the past six quarters while the average asking rate continued to slide downward to $1.07 NNN.

— Jeff Starkovich is managing partner with BT Commercial — Oakland.

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