East Bay Oakland office market becoming sluggish
Job growth in the East Bay Oakland market has begun slowing as the region reaches full employment, but a consistent housing shortage in the East Bay and the Bay Area at large has been a limiting factor in labor force growth, according to Cushman & Wakefield.
A recent influx of apartment development in Oakland is helping to alleviate the shortage in the East Bay, with nearly 6,000 units of modern apartment space currently under construction, which will help attract new talent to the region. With recent large office tenant migrations to the region, these projects are expected to attract a much-needed new generation of skilled workers to the region and spur future labor force growth.
The East Bay, encompassing Alameda and Contra Costa counties, recorded positive growth with 18,600 jobs (+1.6 percent) added to the region year-over-year, bringing employment to just over 1.18 million. With minimal labor force growth and the employment increase, the unemployment rate declined 50 basis points (bps) year-over-year and now stands at 3.1 percent.
The vacancy rise seen in the first half of 2018 continued into the third quarter in the East Bay Oakland office market. Vacancy stood at 10.5 percent, having increased 140 bps from the previous quarter and 170 bps year-over-year. Net absorption totaled a negative 177,944 square feet in the third quarter, and a negative 423,443 square feet so far in 2018, and was driven by a handful of forecasted vacancies in smaller spaces finally hitting the market. For the second consecutive quarter, the Emeryville submarket saw the greatest vacancy increase, ticking up to 18 percent from 12.7 percent in the previous quarter.
Leasing activity continued at the lethargic pace set in the first two quarters of 2018, with gross absorption totaling 476,749 square feet in the third quarter, for a total of 1.36 million square feet so far this year. A summer slowdown in touring activity is partly responsible here, as well as a general lack of large class A listings of which there has been consistent demand over the last several quarters. Despite the slowdown, several trends are set to change the narrative in the next year. With declining employment growth opportunities in San Francisco, an increased volume of San Francisco–based tenant requirements are active in the Oakland CBD. New apartment construction and retail amenities in the CBD have the potential to “pull” skilled workers downtown, which will spur organic office-using tenant growth and general interest in the market.
There is more than 1.3 million square feet of speculative class A product under construction, of which 980,000 square feet will deliver in 2019, which will help satisfy demand for modern, top-of-the-market space.
Rents continued to climb in the third quarter and currently stand at $3.60 per-square-foot on a monthly full-service basis, having increased 10.1 percent year-over-year.
