Has The Office Market Reached A Peak?
The economy started this year strong as GDP grew at an annualized rate of 2.8 percent in the first quarter of 2018, while the unemployment rate remained at a record low 4.1 percent. Lower corporate and individual tax rates helped to boost consumer income this quarter, which in turn brought about higher consumer spending. Additionally, corporate demand for capital equipment is the highest it has been in twenty years. These factors along with the current environment of deregulation contribute to the continued optimism throughout the country.
The “Tech” sector is the primary driver of job growth in the Bay Area. The East Bay’s proximity to Silicon Valley has pushed migration from the west to the east and has accounted for 57 percent of the growth in the local population since 2011. The median cost of housing is up 9 percent from its’ pre-housing crisis peak in the East Bay and unemployment is at a record low of 3.3 percent.
Cranes are now a common site in Downtown Oakland, with over 6,800 new apartment units under construction as developers seek to relieve the pressure on regional housing shortages. Sites near transit are diminishing as the race to solve this regional challenge continues.
During the first quarter of 2018 overall full service (“FS”) asking rents increased 1.4 percent to $3.54 per square foot. Class B, C, and flex FS asking rents rose 3.2 percent to $3.22 this quarter, while Class A declined 1.4 percent to $4.26 per square foot. While quarter to quarter growth rents have slowed recently, we do not believe this is indicative of where the market is heading. We attribute the slowdown in rent growth simply to a general lack of supply, especially for large blocks of space. With just under one million square feet of Class A office property under construction or renovation in Downtown Oakland, we anticipate rates to continue to climb as demand for office space in the region is driven by new inventory, new housing stock, quality of life and the ability for “tech” users to grow in the region.p>
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