East Bay Tours Are Beginning to Return to Healthy Levels

WALNUT CREEK, CA—As shelter-in-place begins to ease ever so slightly, the suburban East Bay had an increase in total vacancy as sublease space became available in several markets along the I-680 Corridor. Since the onset of COVID-19 and shelter in place, approximately 180,000 square feet of sublease space hit the market, as some companies consolidate and downsize, according to a recent report by JLL.

In total, sublease vacancy is approaching 1 million square feet and represents 21.3% of overall vacancy in the suburbs, most of which was realized pre-COVID and during the last 24 months. Average asking rents were stable compared to last quarter as landlords maintain base rents and offer higher concessions to incentivize tenants. Rents may begin to decline in the near future as landlords compete for those tenants in the market.

Leasing/touring activity was limited in the second quarter, comprised primarily of short-term renewals or exploring downsized footprints. This is still muted but there are hints that deals will move forward in multiple markets, including Alameda and Contra Costa counties.

Office leasing activity across Northern California slowed by more than 70% from the same quarter last year. The shelter in place orders limited both leasing activity and created considerable market uncertainty. However, as shelter in place orders are easing, brokers are beginning to see an increase in tour activity.

“During the last 60 days, the pause button was hit and deal activity was slow,” Tom Maloney, JLL international director and tenant representation lead, West region, tells GlobeSt.com. “But as of last month, significant activity in lease expirations and tour activity is happening, not at pre-COVID levels but still healthy.”

JLL reports there are two or more large requirements in Oakland from San Francisco-based companies. Specifically, a large requirement in Contra Costa County would exceed 100,000 square feet as bioscience companies continue to expand.

And, as Bay Area cities slowly reopen, companies are beginning to strategize re-entry and occupancy plans moving forward while prioritizing employee health and well-being. Options being considered include distributed work models to reduce density in one location, continued remote work for some employees or opening satellite offices in locations closer to employees.

“Clients have questions but there are little answers,” Maloney tells GlobeSt.com. “They are considering short-term extensions for a year or two in light of not being comfortable about five- to 10-year commitments and how it will look then, i.e. no benching and less density. It is tough to make those long-term decisions in a vacuum.”

Whatever the end result, the East Bay is well positioned to benefit from a potential shift from dense urban cores towards suburban office markets along the I-680 Corridor, says the JLL report. These market uncertainties stemming from COVID-19 have had a significant impact, especially on the San Francisco labor and real estate markets.

“There are hints that additional parking allowances and more suburban markets that are closer to a large labor pool are increasingly important. However, there are few transactions to date to prove this general market noise,” Alexander Quinn, JLL Northern California director of research, tells GlobeSt.com. “The next four quarters will inform Bay Area companies’ response to COVID-19 and how companies will adapt in maintaining innovation during pre-vaccine environment.”

As of May 2020, the San Francisco unemployment rate was at 12.6%, up from 2.3% in February. The largest job losses were observed in the leisure and hospitality, trade, transportation, utilities and retail industries. As these companies look to conserve cash, those industries have added 1.35 million square feet and account for 30% of all of sublease availability on the market.

The San Francisco office market had net occupancy losses of 1.4 million square feet in second quarter, attributed to a new influx of sublease vacancies added to the market by the aforementioned industries and previously scheduled tenant move-outs. Vacancy increased 160 basis points from last quarter to 7.9% and sublease vacancy increased 110 basis points from last quarter to 2.5%. These metrics are still down compared to the onset of the dot-com bust, where sublease vacancy was tracked at 6.8% and direct vacancy was tracked at 8.3%, according to the JLL report.

Even as tenants begin moving into vacant spaces from lease pre-commitments signed in years prior, future absorption, leasing activity and expansions in the market may be muted until a vaccine for COVID-19 is found. For now, the full impact on direct market rents remains unclear, as the majority of landlords are holding rents steady. However, rent decreases are being observed in buildings with significant large block availabilities that are scheduled to come vacant later this year.

Maloney says the real estate market due to COVID can be broken down into three phases: shock and chaos, re-entry and how to visualize the future workplace.

“Tech companies have offered this kind of flexibility for years and others can be more agile to attract talent,” he tells GlobeSt.com. “This type of balance of work from home and office environment may result in employees working from home two days and from the office three days a week.”