The Azucena Take: Bay Area Office Space in Q4 2021
Marcus & Millichap has published its report on the Office market for the fourth quarter of the 2021 fiscal year. While the reports go in-depth regarding every market, we are going to look at the Bay Area (San Francisco, San Jose, and the East Bay) then compare it to markets that have been growing in the last few years.
Let us start by looking at the performance and expectations of the Office market in the Bay Area.
San Francisco Market is in an unusual predicament when it comes to the office market. Its economy is dominated by finance, fashion, and tech while many companies will go out of their way to have an office in the city (as it's a symbol of prestige). It's also one of the most expensive markets and it was hit the hardest by the pandemic.
The construction of new office spaces has been on the rise in San Francisco. However, vacancy has been up by 510 basis points while the cost of rent has dropped by 9%. Many offices in San Francisco have been built to accommodate the needs of the tech industry, which makes them extremely desirable. Due to other factors at play, it's unknown what the office market will look like long-term.
San Jose Market is made up of every city in Santa Clara County (all of which is dominated by the tech industry). While it faces many of the challenges that the SF Market faces, it has the advantage of also being a suburban community. Many tech companies (like eBay or Apple) are located in a suburban areas which are expected to grow in value due to shifting market demands.
For now, the numbers don't support this as construction and rent have dropped while the vacancy has gone up.
East Bay Market is a diverse one based on the city. The southern part (Fremont, Union City, and Newark) has been dominated by the tech industry. Hayward's economy is mostly dominated by manufacturing and education. Oakland has become a hotspot for start-ups and emerging tech companies that have been priced out of San Francisco and San Jose. The eastern part of the market is driven by the scientific research at the Lawrence Livermore National Laboratory.
The numbers may look no different than the San Jose Market, however it requires some context. Construction is down but that is because there is enough on the market to meet consumer demand. While rent is down by 3.7%, it's what has attracted companies to the market.
How does this compare to other markets? The hottest metros are doing better in regards to the office market. Cities like Dallas and Las Vegas have seen a jump in construction and rent while vacancy is under 90 basis points on average.
What does this mean for investors? The office market is still volatile due to the pandemic and changing trends. While employers want their teams back in the office, employees have been pushing back. Most investors are either being cautious or looking to invest in what they see is going to be the future of the office market.