Oakland’s central business district office vacancy rate plunged to 4.6 percent in the fourth quarter, down from 12.2 percent in the fourth quarter of 2014, as dozens of companies migrated from San Francisco, according to preliminary data from brokerage Avison Young.
During the same period, San Francisco’s vacancy rate fell slightly to 5.3 percent from 5.7 percent.
A restriction on new office development and high rents have limited tenants’ options in San Francisco and propelled some of them to Oakland, said Todd Campbell, vice president of research at Avison Young.
San Francisco remains one of the strongest office markets in the country, and average rents were $66.64 per square foot in the fourth quarter, while average rents in Oakland were $35.28. But the falling vacancy rate in Oakland is a strong indication of tenants’ shifting perceptions of the East Bay’s largest city.
“Oakland’s getting a lot more action right now,” said Campbell.
Oakland’s dearth of new office construction has also led to low supply. No major office building has been completed since 2008, and a big question is whether construction will move forward this cycle. A small 25,000-square-foot office building at 1630 San Pablo Ave. is under construction. CIM Group is also preparing plans for a 200,000-square-foot office building at 323 22nd St., whileShorenstein Properties and SKS Investments also have long-dormant office development sites.
San Francisco, on the other hand, has seen millions of square feet of new towers under construction and completed. But now, Prop. M, which restricts the amount of office projects over 50,000 square feet that can be approved each year, is looming and pushing mostly technology companies to lease unbuilt space, with fear that further supply will be delayed. That has made it harder for companies that aren’t infused with venture capital to compete for space.
In the fourth quarter, health insurance software company Collective Health leased 52,999 square feet, taking all the space in a new office building at 85 Bluxome St. In the third quarter, Pinterest grabbed the entire 150,000-square-foot 505 Brannan St., which is expected to break ground early next year.
In other major fourth quarter deals, video game engine developer Unity Technologies leased 53,016 square feet at 30 3rd St. and sportswear companyUnder Armour Inc. (NYSE: UA) leased 51,895 square feet at 135 Townsend St. No major leases above 53,000 square feet closed in the fourth quarter to date, but with two weeks left in the year, that could change. Some large deals are said to be pending, including Credit Karma’s potential 150,000-square-foot lease at 650 California St.
In a sign of a cooling economy, some companies are subleasing their offices as growth has been slower than expected. Newly public Square Inc. (NYSE: SQ) is subleasing 50,000 square feet at 1435 Market St., and Charles Schwab Corp. (NYSE: SCHW) is subleasing 327,000 square feet at 215 Fremont St.
Those listings could offer some relief to companies looking for space, especially as some new supply is said to be asking as much as $100 per square foot, such as at Salesforce Tower and Park Tower. It’s a sign that while Oakland has become more popular, developers are confident that San Francisco remains the destination of choice for large companies who are willing to pay a premium.
“SoMa’s commanding some of the highest rents in the world,” said Campbell.