Oakland Office Market Outperforms San Francisco

The Oakland and East Bay office markets are proving to be more resilient than nearby San Francisco, according to new research from Marcus & Millichap.

The reason for the trend is kind of a perfect storm of smaller events. Before the pandemic, many companies priced out of the San Francisco market moved to the East Bay, but many of them, according to the report, were not able to transition to a remote-work model during the pandemic. As a result, those businesses stayed in-office, curtailing the vacancy issues that created a significant challenge for office owners in San Francisco.

Marcus & Millichap research shows the employment market will grow 5% this year, with 54,000 new jobs created. While this does help to support stability in the office sector, it is important to note that the job count is still off by 60,000 from the end of 2019, before the pandemic hit.

A limited new construction pipeline is also helping fuel a stronger office market. New construction is down by 55,000 square feet and no new product will deliver through the end of the year. Next year, new deliveries are mostly build-to-suits or speculative projects that have already secured leasing commitments. Despite the limited construction, however, the vacancy rate still stands at 16.1%, largely due to class-A move outs during the pandemic that drove a 210 basis point increase in vacancy during the pandemic.

The high vacancy has also put downward pressure on rents. Rates are down 3.6% to 37.68 per square foot this year. This is largely due to class-A space, which is competing with falling prices throughout the Bay Area, creating a steeper discount for space in that category. This was a trend that manifested earlier this year after a total stall in the office market in 2020. Tech companies and other class-A office users no longer needed to flee to the East Bay for reduced pricing, instead taking advantage of discounts in the San Francisco CBD. As a result, class-A office will likely be slower to recover than class-B and class-C office space in the Oakland area.

However, more recently, there has been more demand from tech users returning to the Downtown Oakland area. In September, social media company Twitter has signed a 66,000-square-foot lease for four full floors at 1330 Broadway in Downtown Oakland, California. The lease marks Twitters expansion into Oakland and illustrates the strong demand for office space from tech companies.