Tenants Want To Work In Oakland, But There's Not Enough Supply
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Demand for office space in Oakland has been rising, but no new spec office buildings are being built. Two potentially large leases could move much-needed office projects forward, but panelists at a recent Bisnow event in Oakland do not expect a lot of new construction during the current cycle.
Steve Golubchik, Newmark Cornish & Carey vice chairman and co-head of commercial capital markets – Northern California, moderated an office panel of developers and investors who discussed what brought them to Oakland and what they expect for the future of the office market. They spoke to a crowd of 275 brokers, consultants, designers and developers at the Scottish Rite Center in Oakland last month.
TMG Partners has been a longtime developer in Emeryville and wanted to get into Oakland for years, but found the cycle was not long enough to get institutional capital interested, according to its development director, David Cropper.
Now the market is in its the seventh year of a growth cycle, and TMG jumped into the game and owns 1330 Broadway and 2201 Broadway. The firm leased 9,200 SF to ReadyTech at 2201 Broadway in late February and is actively leasing the renovated 1330 Broadway. TMG prefers buildings with a unique set of bones that are architecturally interesting and have a story to tell, Cropper said.
Rubicon Point Partners managing partner Ani Vartanian Boladian said her firm entered the Oakland market when the political environment started to change and there was more stability in the marketplace. The firm targets projects near mass transit with amenities and services. Boladian said her firm has gone after buildings with more space and light, and ended up buying a project at 1750 Broadway. Rubicon is looking to purchase assets in Oakland and on the periphery of Oakland; the firm is bullish about Oakland.
What Tenants Want In Oakland
When Bentall Kennedy started to consider Oakland, it appeared to be a typical overflow market. It soon became apparent there were unique things in Oakland that made it attractive, Bentall Kennedy vice president of transactions Matt Henning said. The firm made its first downtown Oakland acquisition with its $47M purchase of Latham Square last November.
Tenants like the retail amenities and the art and even the political activism, and developers have been embracing these different qualities, he said. Henning said some national retailers looking for space in Oakland were turned away because they were not cool enough.
Retailers also want to be in Uptown and are more focused on getting into that part of Oakland. Office tenants are looking at both City Center and Uptown, and see them as different areas with City Center closer to BART, Henning said.
Instead of being in one neighborhood or another, tenants want certain aspects. Boladian said the differentiation between City Center and Uptown is minimal since they are only about a five-minute walk from each other.
“Tenants are looking for the best space for them that is near mass transit and is near cool amenities, which City Center and Uptown provide, and the last piece is space that really qualifies and inspires the energy and the creative thinking tenants are looking for,” she said.
What make markets successful throughout the Bay Area and across the country are those that have a mixture of mass transit, retail, office and residential density, Boladian said. Tenants want to be in Oakland. It is much easier to commute, more cost effective than San Francisco and offers a similar quality of amenities, services and mass transit.
Oakland also is very walkable, California Capital & Investment CEO Phil Tagami said. Someone can walk during the lunch hour and enjoy a meal within the radius from the end of Lake Merritt all the way to Old Oakland. His firm has looked at Oakland as one market with opportunities to fill in and connect various nodes. His firm redeveloped the Fox Theater and the Rotunda Building at 300 Frank H. Ogawa Plaza.
Tagami said with a lot of venture capital flowing into San Francisco, many professional firms and a lot of nonprofits are being pushed out to the East Bay. He has seen a shift away from extensive tenant improvement, and tenants want more open spaces and things like bicycle parking and lifestyle amenities like yoga and good restaurants.
With pricing rising in downtown Oakland, the Hegenberger Corridor near the Oakland Airport has had more interest from businesses being pushed out of downtown, and Tagami expects movement in that market next.
If Tenants Like Oakland, Then Where Is The New Office Space?
Despite strong tenant demand, conditions have been difficult in Oakland for developers to build new office buildings. The tides could be changing.
“Over the last 25 years it’s been hard to justify building new Class-A office in Oakland for a specific user. We’ve just been price-constrained,” Tagami said.
Tagami said with pressure on the market, new product can be introduced.
Two major leases for new space in downtown Oakland are close to signing that could kick-start major office spec development, according to Boladian. If that were to happen, additional supply would help meet demand and potentially soften rents and increase vacancy.
“The challenge with Oakland is the supply here has always been dated,” she said. “No one has really invested in the space because it costs money.”
Rents are rising and more investment is coming into Oakland, and new supply would help attract new tenants who want great urban or suburban space at a discount to San Francisco, Boladian said.
Other panelists were skeptical about new office building. Cropper said construction costs are the same as in San Francisco. Even though land is cheaper, rents are still less. He said Oakland needs another Uber-sized tenant to make more spec office happen.
“It seems late in the cycle to get institutional capital to come in and get brand-new spec office,” Cropper said.
Henning said the current cycle has been more about office renovations and rents rising to a level that makes sense. He said he didn’t think spec office was going to happen in this market.
“I think this cycle has been great for Oakland,” Henning said. “It has taken it from a full market to something more like a cool, edgier neighborhood of San Francisco. It’s closer to downtown San Francisco than most parts of San Francisco.”