Class-A Office Demand Shrinks in the East Bay

Historically, the East Bay has served as a spillover market for class-A office users looking for quality at a discount compared to neighboring San Francisco and San Jose. Now that the pandemic has adjusted office pricing and availability in major metros, tech companies and other class-A office users are no longer fleeing to the East Bay. A new market report from Marcus & Millichap says that class-A office will likely be slower to recover than class-B and class-C office space as a result.

Prior to the pandemic, office prices in the East Bay and Oakland were 70% less than the surrounding major metros, but the increased availability in those markets will likely close that pricing gap. However, class-B and C demand will remain stable from companies outside of the tech industry. As a result, Marcus & Millichap expects the office vacancy will increase only 80 basis points this year, thanks to demand for lower-quality office space. On the other hand, the report expects office rents to fall 3.7%, driven by decreased demand for higher priced space.

San Francisco’s office market is in a state of flux. The city sublease market accounts for half of the total market vacancy, according to a report from Cushman & Wakefield. It is second only to Manhattan in recording the largest square footage growth in sublease space last year, increasing a staggering 587% in 2020 compared to 2019. The supply now represents 51.8% of the overall office vacancy rate in the market. Despite the supply, sublease demand has been low. Robert Sammons from Cushman & Wakefield told GlobeSt.com in a recent interview, “Pre-pandemic there were 6.5 million square feet of tenants actively searching for space then technically falling to just over 3 million square feet, although even those searches were on pause. The figure has since recovered, now standing at a moderately robust 4.5 million square feet with active tours underway.” This dynamic has not only enhanced availability in an otherwise tight office market, but it has also put downward pressure on rents, giving the East Bay hot competition for class-A office space.

Overall, the report expects a slow office recover, but did note some bright spots already emerging. The local economy has already entered a recovery, and remote workers will likely drive housing demand, since commutes will no longer be a concern and the market offers better housing affordability. Housing activity will spur demand for service-based jobs. This year, Marcus & Millichap predicts that 57,000 will be created in the market with payrolls expected to increase 5.3%.