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Behind The Deal: What Drove Goldman Sachs’ Decision To Buy In Oakland

Joseph Sumberg has witnessed a significant shift in Oakland’s office market. New offices are changing the downtown skyline and thousands of multifamily units are in the pipeline, many of which are right along the Bay Area Rapid Transit line. These dynamics made buying another asset in Oakland a no-brainer for the co-head of Goldman Sachs Asset Management Private Real Estate.

Behind The Deal: What Drove Goldman Sachs’ Decision To Buy In Oakland
Goldman Sachs Asset Management Private Real Estate co-head Joe Sumberg

“From our initial plan to enter in 2015 to today, we’ve really seen a very aggressive transformation within the Oakland market,” Sumberg said.“It is a real 24/7 environment. The ingredients have always been there for Oakland, but in this cycle they’re all coming together to create something transformative.”

In early July, GSAM PRE in a JV with HP Investors closed a deal for 1300 Broadway, a 58K SF historic office building in Downtown Oakland. The purchase price was $26.5M ($457/SF), according to the San Francisco Business Times.

While not the biggest office deal of the year for the Greater Oakland office market — the current record-holder is CBRE Global Investors$171M buy of an Emeryville tower — it signals a definitive shift in institutional investor attitude.

Oakland’s office market has become so competitive, investors such as GSAM PRE are looking more aggressively into boutique and small office assets. GSAM PRE lucked out in that this latest purchase was off-market and didn’t have to go through a competitive bidding process, he said.

Sumberg doesn’t mind going after these smaller assets with more character — he prefers it and sees these offices as unique from the new supply being added throughout Oakland, the Bay Area and the nation. In prime markets, buildings with character are critical, he said.

“We are actively targeting well-located, differentiated assets in fundamentally strong markets that we believe will be attractive to tenants, and we believe this investment is just that,” Sumberg said.

New Development Attracting More Interest

Behind The Deal: What Drove Goldman Sachs’ Decision To Buy In Oakland
1300 Broadway in Oakland

Oakland's office market will become more competitive among investors and tenants as more opportunities are created to live and work in the area. CIM Group is selling about $1B in assets in Downtown Oakland, creating five buying opportunities.

Oakland’s urban core has one of the tightest office markets in the country, especially as more tenants move to Oakland to escape rising rents elsewhere in the Bay Area.  

Corporate tenants occupying about 2.3M SF have moved from San Francisco to Oakland in the last few years, he said. Oakland office rents have grown 20% in the last 24 months and 70% to 80% since 2010.

Oakland also has a large multifamily pipeline with 7,500 units under various stages of development/planning with over 5,500 units under construction, representing about 45% of the current multifamily inventory, Sumberg said.

Within three blocks of 1300 Broadway, there are 850 housing units under construction.

“The multifamily component within Oakland uptown and downtown is really transforming Oakland into a live-work-play environment where millennials want to be,” Sumberg said.

The Benefits Of Boutique

When GSAM PRE renovates 1300 Broadway, it will take a similar approach to what it did with its first Oakland office buy, in another JV with HPI. At the I. Magnin building at 2001 Broadway, the JV upgraded the lobby and the tenant space into an open-office floor plan.

It also focused on keeping the building as authentic to Oakland as possible, which is why it brought in a local muralist and put art within the lobby, Sumberg said. People want a more local experience, he said.

He said multiple tenants spent a lot of capital at the I. Magnin building to build out their spaces to better attract talent.

With the unemployment rate so low in the Bay Area, employers are willing to pay a bit more to rent space that can attract the type of talent they want. And that sometimes means an office in a boutique, historic building.

At 1300 Broadway, the new owners will inherit plenty of history. The building was built in 1904 and is considered Oakland’s first skyscraper. It is across the street from Oakland’s iconic Tribune Tower.

Behind The Deal: What Drove Goldman Sachs’ Decision To Buy In Oakland
A mural painted by Jet Martinez at the I. Magnin Building at 2001 Broadway, Oakland

Renovations will include the addition of bike storage, modernizing the lobby and improving the office space and common areas. The building also offers side-core layouts and high ceilings.

He said a lot of companies are preferring smaller floor plates since a company’s brand and character can be lost in a larger 20K SF floor plate. At 1300 Broadway, the average floor plate is 4,800 SF, which Sumberg said is in demand within the marketplace.

The owners will follow a environmental, social and governance strategy to find ways to decrease energy costs and the building’s carbon footprint, add recycling into the building and work with local organizations to improve the community. He said over time, this strategy also can lead to higher rents.

The JV engaged CBRE Senior Vice Presidents Trent Holsman and Scott Greenwood to lease the building’s office space.

The acquisition marks GSAM PRE’s 24th office investment, bringing it to 4.4M SF of office assets across the country. This is HPI’s 11th acquisition in Downtown Oakland over the past 36 months and 48th purchase since the firm’s inception in 2010.

This latest acquisition certainly won’t be either of the company’s last in the Oakland office market.

“Oakland has fundamentally changed from what it has experienced in past cycles and we’re very bullish,” Sumberg said.