OAKLAND, CA—Both hiring and leasing activity are ramping up in the Oakland office sector, which is improving fundamentals at existing assets. That is according to a recent report from Marcus & Millichap. “Developers are focused entirely on the other Bay Area markets, which is funneling all new space demand in Oakland into current office inventory.”
According to the firm, this trend should give owners an extended run of strengthening operations as underway construction is also absent and the permitting process within the East Bay is among the most challenging in the country. “Space demand is coming from population-serving office users seeking local footprints.”
Thus far in 2014, Morgan Stanley, Del Monte Foods and AIG have signed new leases in the area. However, Marcus & Millichap says that hopes that the major technology companies will move into the area are fading due to the many millions of square feet of office space coming out of the ground in San Francisco and San Jose. Despite that, the firm says that conditions in Oakland are poised to gain ground due to the overall strength of the Bay Area’s economic forecast.
“Investors will become increasingly aggressive in the coming quarters as improvement in many East Bay submarkets has become evident,” says the firm’s recent office report. “After mostly stabilized and value-add class B assets sold two years ago, buyers are moving up and down the property scale to take advantage of the evolving market.”
Class A buildings, which command some of the highest prices in the country across the Bay, the firm says, are now attracting institutions that foresee a run-up in appreciation and need higher-cap rate properties to solidify their portfolios. “Notably, the lower end of the market is also receiving much greater attention from investors in the current climate.”
Class C assets in good locations that can be upgraded are being purchased by local buyers with an eye on repositioning, the report notes. “These deals can change hands at first-year returns of close to 6.5% and have an exit cap rate of greater than 8% in today’s market.”