California's East Bay Area
Offers Relative Bargains

Just across the Bay Bridge from San Francisco and north of Silicon Valley, the East Bay commercial real-estate market offers up some comparative bargains -- even though its recovery from the tech bust appears to be on sounder economic footing than those of its higher-profile neighbors.

Stretching inland from its urban anchors of bohemian Berkeley and the grittier city of Oakland, the area has emerged in recent decades as a distinct region in its own right. It has a population of 2.5 million and a diverse group of employers -- from technology companies to filmmaker Pixar Animation Studios Inc. and energy company Chevron Corp. -- many of which were drawn by its more-affordable housing stock and spacious suburban office offerings.

The Hacienda Business Park in Pleasanton contains about seven million square feet of office and flex space, including office buildings occupied by Oracle Corp.

The East Bay area's November employment level of 1,051,400 was about 1.3%, or about 13,600 jobs, below its peak of 1,065,000 five years earlier, and the area's year-to-year November job growth rate of 1.8% edged out the national pace of 1.5%, according to the Bureau of Labor Statistics. By contrast, San Francisco's November employment was still 13.6% below the 2000 level, while Silicon Valley was 19% off.

Not surprisingly, the performance of the East Bay's job-dependent office sector is lagging behind its stronger retail and warehouse sectors. The East Bay's office market has recently begun to stabilize, as vacancies fell to 17.5% in the third quarter from their peak of 18% at the close of 2004, but rental rates continued to edge down in the third quarter, PPR said. James Paxson, general manager for the Hacienda Business Park in Pleasanton, Calif., said the area's weaker office market was one factor that has prompted the park to pursue developing more residential units as part of a mixed-use project proposed for land previously slated for commercial use. He said the project is aimed at increasing the park's long-term viability, in part by offering more housing options to area workers.

But many office investors appear eager to buy into the recovery. After average building prices fell to $163 per square foot in 2004, they rose to $191 for the 12 months ended in September -- still lower than San Jose's $232 and San Francisco's $277 for the same period, according to Real Capital Analytics Inc. in New York. Steven Leathers, senior real-estate analyst at Triple Net Properties LLC of Santa Ana, Calif., which recently purchased several office buildings in Pleasanton on behalf of investors, believes new home construction in the area will ultimately increase demand for offices.

The East Bay's housing market, with median home prices in some towns there as much as threefold the national level, has also provided the well-heeled consumers who have helped make its retail sector one of the country's healthiest. The third-quarter retail economic vacancy rate was just 2.1%, the lowest of the 54 metro areas tracked by PPR.

Developers are adding new stores to meet the demand. Oakland, with about 1,633 residential units built since 1999 and an additional 5,706 under construction or planned, is getting a new Whole Foods Market. Retail growth is strong on the eastern edges of the region, but for now East Bay remains a landlord's market. "Tenants don't have much room to negotiate," said Ray Devlin, a retail broker in Grubb & Ellis's Walnut Creek offices.

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