Tech Firms Spy New Bay Area Frontier: Oakland

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ENLARGE

For much of the technology boom, Oakland’s office market has been curiously sluggish, even as rents and occupancies in nearby San Francisco rocketed.

Finally, the bounty of the tech sector is spilling over across the bay.

Uber Technologies Inc. late last month announced it was buying a 330,000 square foot former department store in downtown Oakland for $124 million. While its ambitions are far larger in San Francisco—it is developing a new building there—it plans to have up to 3,000 employees in the Oakland location, more than the 2,000 it has in the Bay Area today.

More broadly, the Oakland market has lost its lethargy and is kicking into gear, largely fueled by smaller companies escaping San Francisco’s high rents.

Employers have moved into more than 600,000 square feet of additional space in Oakland’s central business district in the past 12 months, bringing the vacancy rate down to 5.8% from 10.9%, according to brokerage Cushman Wakefield. Rent growth is picking up, and developers are gearing up to build in what they think is a market finally hitting its stride.

“It has been a long time coming,” said Daniel Harvey, a broker at CBRE who advises technology companies on their real estate.

The apparent embrace of Oakland as an acceptable venue by San Francisco companies illustrates the rapidly expanding geography of tech within the Bay Area, where space is at a premium and development is a lengthy endeavor. After first having filed up downtown and much of the gritty mid-Market neighborhood by City Hall, tech companies recently have been signing deals with developers for space in Mission Bay, a sterile-feeling neighborhood far from subways that once was meant to be a hub of scientific research.

Meanwhile, real-estate professionals expect tech giants in the prime cities of Silicon Valley to push further south as they expand, following the lead of Apple Inc.,
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which has been buying property around San Jose.

‘It has been a long time coming.’

—Daniel Harvey, a broker at CBRE who advises tech companies on their real estate

Downtown Oakland long has proved a bridge too far, despite being just a 12-minute ride on the subway from San Francisco. Office rents illustrate the tepid demand. While San Francisco rents citywide increased 113% to $66 a square foot since the end of 2009, Oakland and surrounding cities grew just 17.5% to $30.13, according to Cushman Wakefield.

Its also-ran status owes to an array of factors. It is far away from venture capitalists in Silicon Valley, has a reputation for higher crime, and can present a frustrating commute for workers in San Francisco.

But increasingly, Oakland’s housing stock is filling up with those who can’t afford San Francisco’s high housing costs, meaning that more of the natural tech workforce lives in the East Bay. Uber, for instance, expects one out of four of its workers to reside in the East Bay by the time the new Oakland building is ready for occupancy.

This movement has added to housing pressures in the city, fanning gentrification concerns and igniting protests over fast-rising rents.

But at the same time, the strengthening housing market has given investors confidence that offices will continue to fill up.

“You have to feel like there’s legs to the momentum—and there’s definitely legs,” said Sam Hamilton, who runs West Coast acquisitions for investor DivcoWest.

DivcoWest bought the 27-story Oakland office tower Lake Merritt Plaza early last year. Since then, it has wooed multiple San Francisco-based companies, bringing occupancy up from the low-80s to high-90s, Mr. Hamilton said. Rents are up 25%, he said.

Of course, much chatter in the Bay Area is focused on whether the tech sector is in a bubble. If it is—and if it pops—pain would likely spread throughout the market, and could halt Oakland’s recent momentum.

Then again, for now, tech companies are still a small percentage of Oakland’s office market. So few in the East Bay fear the steep losses seen in the post-dotcom bubble, when failed San Francisco startups stopped paying rent on office space throughout the city.

“The good and the bad of it is that not a lot of tech firms have moved out there at this point,” said Robert Sammons, a researcher at Cushman Wakefield.

Write to Eliot Brown at eliot.brown@wsj.com

Article source: http://www.wsj.com/articles/tech-firms-spy-new-bay-area-frontier-oakland-1445355584

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