WESTERN SNAPSHOT, SEPTEMBER 2005

East Bay (S.F.) Office Market

Westland

Oakland’s 26 downtown office properties reflect a vacancy of only 7 percent, with asking rates in the range of $27 to $34 per square foot. Top-end view space can command as much as $38 per square foot. Smaller tenant-improvement packages and limited landlord concessions are the norm as the market has, much to the relief of building owners, finally reached equilibrium.

By far, the majority of leasing related to this diminished vacancy rate has been the result of internal tenant movement within the city, as opposed to an influx of new business from San Francisco or neighboring Walnut Creek to the east. This has been a “flight to quality” from Class B properties or aging Class A structures. Driving the leasing market has been large tenancies from Kaiser Permanente and Bay Area Rapid Transit District (BART), plus the renewal of American President Lines tenancy at 1111 Broadway. Oakland’s public sector, the traditional driver of multi-tenant office space, has been nonexistent with the notable exception of BART and the University of California-Office of the President.

Kaiser Center, Oakland’s largest multi-tenant office building, recently was purchased by a San Francisco investment company for $219 per square foot. The 800,000-square-foot high-rise traded just 2 years earlier for $100 per square foot when it was 60 percent vacant. The Swig Company felt this older, 98-percent-leased property was a bargain compared to buildings in the city trading in the $300 to $500 per-square-foot range. Prentiss Properties, downtown Oakland’s major landlord along with The Shorenstein Company, just closed on 1333 Broadway for $165 per square foot. Currently on the market at an asking price of $330 per square foot is Lake Merritt Plaza, a highly regarded 515,000-square-foot building that’s 90 percent leased.

Market rent and building prices should continue to harden in Oakland’s central business district (CBD) as only four new Class A office buildings are on the drawing boards. However, it will be 18 months before Prentiss Properties’ 200,000-square-foot 2100 Franklin will be ready for occupancy.

Oakland’s older downtown office properties offer 1.1 million square feet of available space. Tenant opportunities abound in this market sector with its 20 percent vacancy, although better Class B buildings have begun to harden their rents from an average asking of $19 per square foot.

In the future, some of these dated buildings will find themselves courted by residential condominium developers. They’ll see a stronger demand for individuals looking to live downtown in a Manhattan-like lifestyle among Mayor Jerry Brown’s 10,000 new residents in the CBD and Jack London Square. On the leading edge of this trend is the Federal Realty Building on Broadway. This historic but dated gothic structure just traded at $100 per square foot for conversion to an owner-occupied, urban living high-rise property atop the 12th Street BART Station.

Hit especially hard by the tumbling of the NASDAQ, gentrifying Emeryville shows a 20 percent vacancy in its best properties with an average asking price of $22.50 per square foot. However, the 1.2-square-mile city with a daytime population of 20,000 is experiencing significant tenant interest and should end the year with a vacancy around 12 percent. Additionally, its older structures are being converted to owner-user office buildings, live-work lofts and residential condominiums.

Also abutting Oakland is the island city of Alameda. It continues to struggle with a 25 percent vacancy rate (570,000 square feet) in its 63 office and R&D properties, most of which are located in Harbor Bay Business Park adjacent to Oakland International Airport.

Neighboring Berkeley continues to flourish with only 4 percent of its Class A space available. The University of California, associated think tanks and the biopharmaceutical industry are the main drivers in this 4.6 million-square-foot office market overlooking the Bay.

By far, the strongest office market in the East Bay is located east of Oakland in Walnut Creek. Its 29 downtown, BART-oriented office properties show only an 11 percent vacancy with average asking rates of $30 per square foot. Contrast this with neighboring Concord at $22.80 per square foot.

South of Concord, noteworthy sales activity has been reported in the cities of Dublin and Pleasanton. Three Class A properties each approaching 500,000 square feet have recently traded in the $208 to $253 per-square-foot range. Moreover, Kaiser Permanente is just concluding an owner-user purchase of four vacant Oracle/PeopleSoft office towers comprising 363,000 square feet adjacent to the Pleasanton BART station. The transfer of these 12-year old towers is reported to be taking place at $200 per square foot.

Participating in the rebounding office market across the Bay, some San Francisco office brokers foresee a movement of cost-conscious tenants looking once again to Oakland for relief from San Francisco’s high rents. On the other hand, Oakland brokers remain more cautious. All agree that as the economy improves and employment increases all ships will rise with the tide to the benefit of brokers and landlords alike. And there may even be more than the four planned office towers for downtown Oakland. However, more than likely the focus of the East Bay’s largest city will remain on the development of residential condominiums to augment downtown Oakland’s “people base,” which should eventually draw retail back to the inner city.

Larry Westland is the San Francisco East Bay regional manager for TRI Commercial Real Estate/CORFAC International.

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