Near the end of 2014 we outlined why Oakland was at a tipping point with respect to demand for office space and growth. As we wrote at the time:
“In San Francisco, the demand for office space is at an all-time high and office rents have increased 15 percent over the past year and nearly doubled since the first quarter of 2010, a spike which has started to drive firms concerned about profitability, versus simply growth, out of the city and following in the footsteps of non-profits for which San Francisco has become too expensive from which to operate.
At the same time, office rents in Oakland have only increased 1 percent over the past year and are currently running at half the cost of being in San Francisco. And with a vacancy rate which is twice as high (14 percent), Oakland is poised to be one of the biggest beneficiaries of the tech clustering around San Francisco, especially considering the number of tech company employees and other professionals who are increasingly calling the East Bay home.”
Since then, average asking rents for office space in Oakland’s Central Business District have rocketed 31 percent to $3.66 per square foot per month, according to Cushman & Wakefield, and the vacancy rate has dropped to 4 percent, in part due to a complete lack of new building which will continue to put upward pressure on rents, but also constrain growth, through the end of the year.
And with demand for roughly a million square feet of space now circling Oakland, which is twice what’s currently available, expect Alameda and the greater East Bay to start tipping as well.
So Oakland’s vacancy rate is now lower than SF? Amazing. Why developers did not see this shift coming shift to Oakland from SF years ago baffles me. I expect a raft of office building projects to be announced for Oakland but they won’t be ready for years yet.
Go Oakland! Go Coliseum City. Yes, the latter is sort of just lurking out there now but if the Warriors SF stadium deal collapses then that could turnaround overnight..
Indeed, what we have here is a total failure of the market to respond. The site at 1100 Broadway (20-story office development) has been entitled for eight years and was recently given an extension to 2017! The site at 601 City Center has been a gaping hole in the ground for many years as well.
Yes and no. While construction costs in San Francisco and Oakland are nearly identical, and astronomically high, achievable rents remain 50 percent higher in San Francisco, even after last year’s big bump. And that has been the real driver behind the lag in new building and development.
Exactly
That’s been the case since at least 1980. Based upon that logic, nothing would ever (nor should ever) get built in Oakland since you can always make more in SF. There is clearly more going on.
You’re discounting the pace at which building costs escalated in this cycle versus the relative rents and the absolute point at which projects pencil at current rents.
Right on PRE -it’s the emptiest argument out there.
It might seem empty, but it’s the most accurate.
Developers weren’t willing to bet on rent escalation in Oakland, without which the projects simply didn’t pencil. And with the relative returns available across the bay, it made it even harder to justify taking the risk.
The volatility argument is a great argument. While this post make it sounds like building is a no brainer today, a few years later in a down cycle, some companies are just going to leave town. These cycle happened repeatedly in the past.
What you’re saying and what I’m saying are equivalent. I’m saying that the market has not provided the correct signals, and you are also saying that.
Dave, there is no “shift” to Oakland. Some are merely finding they have to settle for Oakland.
Sounds like you haven’t been to Oakland lately.
the violent crime rate doesnt appear to be coming down and is still tops for california and top 5 for the country
Orland, perhaps for some but I think the real story is some of the half-million commuters from the East Bay are tired of BART and the BB commute. Now that Oakland’s prospects are better, they’re willing to give it a try. Besides, toxic fog -yikes 🙂
Exactly. The BB and BART are near capacity now. No alternative is in site (as in second tube) for decades.
Imagine if 100K of those 500K commuters had their jobs shifted to Oakland.
The improvement it would make at a regional level to the at capacity transit system. Not to mention the better life a lot of these commuters would have as in not having to devote so much of their weekday to long commutes.
Dave is absolutely correct here.
I might go even further. There should be more dispersal of the tech industry. imagine the quality of life for the average joe in an eastern, slightly down on its luck city. Which is better, an ugly $500,000 tract home in Union City, or a classic Victorian for 1/5 the price in, say, Cincinnati?
Matt, where did you get the idea there are anywhere near 500,000 commuters from the East Bay that use BART and the BB? The peak westbound capacity of what is known as the “Bridge Corridor” (BART tube + BB ) is 40-50k people per hour. And it only handles that many for 3-4 hours every workday AM.
Even if you take all the commuters from Alameda and Contra Costa counties to San Francisco + San Mateo + Santa Clara counties by all routes, it is much less than 500k.
About 3 of every 4 residents of Alameda + Contra Costa counties with a job works in either Alameda or Contra Costa counties. Many jobs are already in the east bay, though not as many as in the SF-SJ area, and they don’t pay as well on average.
Prop. M limit has not reached yet. Once we hit Prop. M limit and assume the economy keep its current growth, Oakland will see new office construction.
But I think we should see new residential construction before new offices. People are more willing to move to Oakland than businesses.
Oakland is the transportation and geographic hub of the Bay Area.
There will always be downtowns here. In SF, SJ, Fremont maybe and Oakland. But in 50 years Oakland will be THE downtown for the Bay Area. I may not be here to see it, you may not. It will happen. As sure as HSR will ultimately come to Oakland and not SF.
Prop M and the fact there is no more areas zoned for major office development in SF will end its viability as an office center. That rivalry will go to Oakland/SJ.
BTW, 1 million feet of space circling Oakland and HP Lennar can’t find tenants for its 3 million feet.
The writing is on the wall and obvious but not so obvious it seems.
as new jersey is the transportation hub for manhattan? what are you even trying to say?
no-one has shipped to manhattan in 65 years, yet manhattan remains “the downtown” of the greater NY MSA. LA shipping goes to Long Beach, yet Long Beach is hardly a retail or cultural center Corporate centers throughout northern New Jersey have not shuttered Wall Street.
cheer if you must – but an occasional coherent thought while cheering would be a nice change.
Riiiiiiiight.
“end its viability as an office center”. You are aware, are you not, that your argument is predicated on SF commercial real estate being fully rented out. Which is pretty much the exact opposite of not being viable.
You are right that this should have happened years ago in Oakland. But it didn’t. I submit that Oakland’s government may be even more of a disaster than SF’s government. Possibly.
150 years ago the transcontinental railroad made Oakland the transportation center of the Bay Area. But San Francisco still managed to remain competitive. Time will tell how your 50-year prediction turns out.
As sure as HSR will ultimately come to
OaklandEmeryville and not SF.Point taken!
A good argument could be made that Shorenstein or SKS should’ve started an entitled office building last year (or even before), but the editor is right that the building rents don’t support the building costs, so it would still be a tremendous risk. (Shorenstein has all the steel stockpiled, I believe, for their site). However, what we’re REALLY seeing is renovation activity going gangbusters. There is lots and lots of under-utilized space in downtown Oakland, and as semi-occupied class B gets flipped to class A (at a fraction of the cost of new construction), we’re already seeing major changes in downtown Oakland.
we are in the building above the image in this post. we have a 7 year lease (currently 1.5 years in) and since moving in, not only has the vacancy in this building gone from 45% to 2%, the rents have increased more than $1/sq ft (almost 30%!!). our building was sold about 3 months ago and the new owners hinted towards changing the building from class B to class A. wondering how much further that will impact pricing and our future rent (after the 7 years expires)
The argument that rents are higher in SF so builders build here instead of say Oakland does not make sense.
Rents are lower on the Peninsula, north of SV, and in the East Bay. Dublin for instance. Yet offices are being built in these areas with lower rents and basically the same construction costs as SF.
In any case is not Prop M used up for a good number of years to come. So many projects pre=allocated allotments that won’t be built for years. Like HP, Mission Rock, Transbay Center, 5M, the Warriors site.
Doubt large new office projects will cease to be built in the Bay Area just because such projects can’t be built in SF any more given Prop M.
Dave, use some data. Name one new office building that has been built ground up or is underway this cycle where the expected rents are less than Oakland? This is basic math. Undoubtedly developers are more reactive than speculative, meaning they don’t frequently build an office building and then “hope” rents increase enough so that the development suddenly makes economic sense. The unfortunate reality of the development business is that there is inherent entitlement and construction delays between the moment demands justify a particular development (i.e., rents are high enough to make a project viable) and the delivery of the completed development to meet that demand. That’s where we are now.
I’m not referring to places with rents less than Oakland, but places with rents between those of Oakland and SF. I assume the rents on the 680 corridor are more than Oakland’s and an office building was recently built in Dublin with Challenge moving into it.
There is a cost difference between building downtown highrise development and suburban office development, so all other things being equal the suburban locations will pencil out faster. That said, I haven’t really noticed the 580/680 corridor, Marin/Sonoma, or any other suburban locations going gangbusters in this expansion. It’s been highly concentrated in SF/Pen/SV.
Marin/Sonoma is pretty much out of the equation due to very restrictive zoning. Doubt there will ever be major office development there. Santa Rosa maybe but its too far north and hemmed in by areas zoned for agricultural (vineyard) type development.
SV has seen office construction and the south Peninsula.
San Mateo county itself I don’t know. Is it not restrictive on its zoning? I drive down El Camino to SV every couple months and the area between SSF and Burlingame has seen very, very little development of offices. Despite being near BART and El Camino a wide boulevard surrounded by 1 and 2 story commercial buildings.
I think there may be some SM development off 101 near 92 but I rarely pass that way.
There is office development in downtown Redwood City, San Mateo Bay Meadows and SSF Oyster Point off the top of my head. I know they have had little trouble leasing the space in all these locations
Around the Hayward park Caltrain station in San Mateo there is a big development that just broke ground and some smaller ones as well
All of these though are in the under 10 story category so I am not sure comparable to office development in downtown Oakland?
there are a number of 8-12 story buildings going up in SSF, as biotech is booming
@zig – SM along 101 is a different matter. Bay Meadows is part of the 92/101 area I believe has seen development.
Oyster Point of course too, but last time I was there, a year ago, it seemed about built out.
I’ve herald OP is pretty much leased out so not surprising that any SM newish development does well.
Begs the questions of that stretch between SSF and Burlingame along El Camino. No new development these past years or very little.
Back to OP, it does well yet HP Lennar is having trouble lining up clients for its several million feet of proposed office space. That I don’t get.
In Oakland class A rents are more than 20% higher versus the Tri-Valley and more than 24% higher versus Walnut Creek. San Jose proper is less than a 3% premium over Oakland. Interesting almost every other Silicon Valley city fetches more rent per square foot than San Jose (MV’s and PA’s rents are more than 138% higher than SJ’s), yet people still build in San Jose, hmm.
Oakland is missing out on growth despite a very low vacancy rate and high rents because of San Francisco developers and lenders wanting to protect and fill their SF projects. Simple as that. You throw in a little racism with a sprinkle of red-lining and you have the recipe for Oakland’s lack of office construction.
Oakland “market rents are lower than construction costs,” according to a 2015 report by SPUR (pdf at namelink):
“Construction costs reflect the combined costs of land, labor and materials. While land in Oakland is slightly cheaper than in other parts of the region, prices for labor and materials are comparable. Therefore, high-rise office construction in Oakland costs almost the same as in San Francisco, even though rents are as much as 77 percent less in Oakland. Adding to the challenge, strong demand in downtown San Francisco drives up labor costs across the Bay Area, thereby raising the minimum rent bar even higher for new construction in Oakland.”
Rents have increased in Oakland since that report. Maybe Oakland’s share of new office construction depends on the ROI. Maybe as simple as that, Occam’s razor.
This was also an inaccurate statement: as demonstrated graphically in the report (p.28), it should have said “SF rents are up to 77% HIGHER than Oakland”…which is not quite the same as Oakland is 77% less. Hopefully SPUR can upgrade their skills in fractions by the next report.