Oakland's Hot Office Market To Burn Out?

Tenants are chomping at the bit to get into Oakland’s office market, but a lack of supply could be a problem. Developers, investors, contractors and designers gathered in Oakland’s I-Magnin building at 2001 Broadway during Bisnow’s Oakland’s Future of Office event yesterday to find out what’s in store.

CBRE first VP Grant Jones, above with Trammell Crow SVP development management Tom Jodry and GEI VP Bill Rettberg, told the 200-person crowd Oakland’s office market is “extremely tight.” Class-A vacancy rates are 2.6%, while overall vacancy rates are below 4%. Oakland office rents have also skyrocketed.

“Oakland has had the highest year-over-year rent growth of any downtown in the entire world, not just in the Bay Area,” he said.

A lot of the people who signed leases back in 2011 and 2012 are getting “sticker shock” during renewals with rents going up 50% or more, and in some cases doubling, Grant said.

Unlike previous cycles where people turned to the Tri-Valley and 680 corridor for rent relief, people are turning toward Oakland because they want to be in an urban area and want to be near BART, Grant said. “That’s why Oakland is thriving.”

Rents still aren’t as high as those in San Francisco, but the long-held $30/SF rent gap is shrinking. It was down to a gap of about $20/SF during the second quarter, and Grant expects it to be even more compressed during the third quarter.

Grant said what makes Oakland different from San Francisco is the diverse tenant demand compared to S.F.'s tech-dependent market. Oakland has a mix of business services, tech, education, financial services and others. He said there’s about 1.6M SF of demand as well.

“It’s a very healthy market,” he said.

The downside of the market is there are no cranes in the air, Grant said. There are a few sites in City Center with entitlements and property is slated for development, but people are waiting on one big tenant to justify the build.

“Residential development is rampant, but there is zero office development,” he said. “Everybody is geared up and ready to go, but rents can’t justify the construction cost.”

Grant said the market is “running out of options. We need stuff built.”