Monday, August 06, 2007

East Bay Office lease rates expected to climb in second half

Office lease rates expected to climb in second half
East Bay Business Times - August 3, 2007by Jessica Saunders

View Larger With a large number of office buildings sold or being marketed in the first half of 2007, experts are expecting lease rates to jump in the latter part of the year as new owners look for a return on their investments.

Sales activity in the Tri-Valley market was vigorous in the second quarter, with nearly a dozen buildings from 30,000 to 400,000 square feet coming to market, for sale or in escrow from San Ramon to Livermore, according to Cornish & Carey Commercial/ONCOR International's market report. They included Legacy Partners' purchase of 275,135-square-foot Hacienda Terrace from Blackstone Group "at a price rumored to be just below $300 per square foot," according to the report.

"With the influx of new ownership entities to the Tri-Valley, we anticipate a sharp increase in the asking rental rates for these properties," it said.

Tri-Valley office leasing rebounded and tenant activity was up strongly in the quarter ended June 30, Cornish & Carey said. After a first quarter marked by corporate consolidations that led to 406,799 square feet of negative net absorption, the Tri-Valley had positive net absorption of 210,061 rentable square feet, Cornish & Carey reported. Since the end of the second quarter of 2006, the Class A market has had positive net absorption of 413,376 rentable square feet and a 1.5 percent dip in vacancy. Net absorption measures the change in occupied building square footage, while rentable square feet refers to usable space plus a percentage of common areas.

Cornish & Carey also noted a variety of development projects underway or in the pipeline in the Tri-Valley. "We may be at the front end of a development cycle in the Tri-Valley market place. ... Do not be surprised to see more and more cranes along the skyline."

Like the Tri-Valley, investors were busy grabbing up properties in the North Interstate 680 market in the second quarter, with more then 1.4 million square feet of space in various stages of marketing or escrow, Cornish & Carey reported. "By the end of 2007, we anticipate well over 10 percent (1.7 million RSF) of the total inventory in the North I-680 market having new ownership."

That compares to less than 500,000 square feet in sales for the market in all of 2006.

Again, the sales were expected to result in sharply higher asking rates, Cornish & Carey said.

In comparison with the flurry of sales, second quarter leasing activity in North I-680 was unspectacular: the market reported negative net absorption of 10,000 rentable square feet.

Offices also traded hands in the Interstate 80/880 corridor in the second quarter, with Harvest Properties picking up Bay Center in Emeryville and Brandywine Realty Trust buying Lake Merritt Tower in Oakland. Sales in the market during the past year have already impacted asking rates, with Emeryville's average up 29 percent and Oakland-Lake Merritt's increasing 11 percent, NAI BT Commercial reported.

The office vacancy rate in the Interstate 80/880 corridor increased four-tenths of a percent in the second quarter from 13.5 percent to 13.9 percent, mostly due to 124,000 square feet of negative net absorption in Emeryville, NAI BT found. Overall, the market gave back 122,113 square feet for the first negative quarterly absorption figure since the first quarter 2006.

NAI BT also noted a rise in touring activity in the corridor, with companies either seeking or negotiating leases for 1.1 million square feet of office space, up 20 percent from the first quarter. The majority of the activity was in the Oakland central business district, closely followed by Berkeley and Emeryville. The I-80/880 average asking rate rose $0.05 to $2.16 per square foot full service, which was the eighth straight quarterly increase, the report said.

The "core" of the corridor - Emeryville, Berkeley and Oakland's Lake Merritt, City Center and Jack London Square areas - continued to surpass the periphery submarkets of Richmond, Alameda and Oakland's airport area in vacancy and lease rates. But leasing options in the core market are becoming scarcer, especially for large blocks of space, so they predict spillover into the periphery during the rest of 2007. | 925-598-1427

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