140211 T5-6 Feas Study Final

T5/6 Market Feasibility Study February 2014

Michael Cohen

Principal

100 Spear Street, Suite 420

San Francisco, CA 94105

415.272.4387

[email protected]

Scott Stafford

Principal

100 Spear Street, Suite 420

San Francisco, CA 94105

415.263.9142

[email protected]

T5/6 Market Feasibility Study – Oakland, CA Strada Investment Group - 1

Table of Contents

Introduction

2

Office Market Overview

3

Multifamily Market Overview

7

Hotel Market Overview

12

Conclusion

16


Introduction

In connection with assessing the financial feasibility of new development on Parcels T5/6, this report

presents an overview of Oakland’s commercial real estate market, with a focus on the office, multifamily

and hotel sectors. All three sectors are potentially attractive uses for the T5/6 development site, a 1.25

acre site in downtown Oakland that is within the block bounded by Broadway, 11th Street, 12th Street and

Clay Street (the “Site”). The Site was acquired by the now-dissolved Oakland Redevelopment Agency in

the 1970s as part of a 15-block area known as the City Center Activity Area, which has been largely

developed for office and ancillary uses. Over the years, portions of the Site have been reconfigured to

accommodate nearby development, including the transfer of land to the City Center Garage to serve as a

large loading dock.

Strada Investment Group is prepared to invest significant capital to develop office, residential, hotel, or a

mix of these uses on the Site. This report describes the market for each office, residential, and hotel

product in downtown Oakland. Further studies of construction costs and operating proformas will be

conducted to determine the viability and optimal mix of uses for the Site.


Office Market Overview

The Bay Area economy continues to thrive and outpace the rest of the country and state in job growth,

especially in San Francisco and Silicon Valley, with San Francisco unemployment at 5.2% versus the

California rate of 7.9%. This trend has translated into strong market fundamentals for the entire Bay Area

office market. San Francisco’s vacancy rate shrunk to 9.0% by year-end 2013, leading the Bay Area

market. Overall market vacancy in the East Bay stands at 15.7%, with downtown Berkeley and Richmond

leading the market with vacancy rates of 6.3% and 9.4%, respectively. Vacancy has continued to decline

in Oakland’s Central Business District (“CBD”), ending 2013 at 11.8% over all office classes. As noted

further below, sustained demand in the San

Francisco and Silicon Valley office markets are

already increasing demand drivers in Oakland.

Within the East Bay office market, the Oakland

CBD has exhibited strong performance indicators

over the previous year, posting gains in both rent

growth and occupancy. Class A vacancy in

downtown Oakland at the end of 2013 was

9.8% (compared to 11.0% at the end of 2012)

and Class A rents increased to $2.74 full service

psf/mo (up from $2.58 psf at the end of 2012).

As the largest submarket in Oakland’s

metropolitan area, the CBD contains

approximately 10.2 million square feet of Class

A office space, leased to leading professional

and financial service firms, public institutions and governmental entities, technology tenants and leading

conglomerates. The CBD is home to over 80,000 daytime office workers and is divided in two districts: (1)

City Center, with a high concentration of government and supporting service organizations; and (2) Lake

Merritt, dominated by Kaiser Permanente and supporting service organizations.

Major Oakland Employers Employees

Alameda County 8,843

Oakland Unified School District 4,496

Kaiser Permanente Medical Group 4,418

Dreyer’s Grand Ice Cream 4,191

Cost Plus 4,113

City of Oakland 4,073

Alta Bates Summit Medical Center 3,623

Children’s Hospital and Research Center

2,600

BART 1,499

Peralta Community College District 1,400

Source: Oakland 2012 Comprehensive Annual Financial Report


EAST BAY OFFICE MARKET SNAPSHOT

Total Inventory - All Classes (in sf)

Vacancy Rate Asking Rent (All Classes)

Asking Rent (Class “A”)

Submarket

Richmond 3,436,753 9.4% $1.94 N/A

Berkeley Downtown 1,533,355 6.3% $2.44 $2.58

Berkeley West 1,454,998 11.6% $1.99 N/A

Emeryville 4,351,436 18.2% $2.45 $2.70

City Center Oakland CBD 16,891,513 11.8% $2.29 $2.73

Oakland Coliseum Airport 2,032,505 37.0% $1.47 $1.62

Alameda – Marina Village 1,671,320 35.3% $1.79 N/A

Alameda – Harbor Bay 1,684,784 31.6% $1.80 N/A

Source: Colliers International Research & Forecast Report, Q4 2013

The 16.9 million sf Oakland CBD office market has steadily improved as rising leasing rates and falling

vacancies in San Francisco and other Bay Area submarkets have led to tenant spillover in the Oakland

market. The year-over-year improvement in Class A vacancy has resulted in a material increase in asking

rental rates. The current monthly average asking rate for Class A office in Oakland CBD is $2.73 psf, an

increase of 5.8% over 2012.

Positive net absorption is projected for the general East Bay office market in the upcoming years as

market fundamentals continue to improve. The Oakland CBD will likely remain healthy as more San

Francisco tenants start looking in the East Bay for space, especially near BART lines.

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East Bay Office Net Absorption Trend & Forecast (Cassidy Turley 2014 Forecast)


The chart above illustrates the average starting rates for the various Class A office buildings within the

Oakland CBD, using data from 2013 new leases and renewals. 555 12th Street and 1111 Broadway

command the highest rental rates within the Oakland City Center CBD with average monthly asking rents

hovering around $3.00 psf. Within the Lake Merritt CBD market, 1999 Harrison St., 155 Grand Ave and

2100 Franklin lead the market with average monthly rental rates above $2.60 psf.

Significant leases in the Oakland CBD during 4Q 2013 include the relocation of UC Press (23,713 sf) to

155 Grand Ave, the relocation of Big Fish Games (20,755 sf) to 1999 Harrison St., and AMEC’s 29,334 sf

lease at 180 Grand – all in the Lake Merritt submarket. Notable leases within the City Center submarket

include the renewal of CSAA (9,964 sf) in 505 14th Street and the relocation of Pyatok Architects (9,500)

to 1611 Telegraph Ave.

In terms of new construction, there are two major new office projects currently approved in the CBD: SKS

Investments’ 310,000 sf office building across the street from the Oakland Marriott at 1100 Broadway,

and Shorenstein’s 601 City Center, a 600,000 sf office building at 12th Street and Martin Luther King

Way. However, as noted below, while office rents are improving, it is unclear how much new office

construction the CBD can currently support. Thus, flexibility in the development of the Site is recommended.

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Oakland CBD Office Rental Competitive Set 2013 Class A Leases - Average Rent PSF


Office Demand Drivers

There are numerous home-grown successes in Oakland (Pandora, Sungevity) and large corporate

headquarters (Clorox, Kaiser Permanente), but efforts to attract a new “anchor-employer” such as

Salesforce.com have not come to fruition. One of the challenges in attracting a major new anchor tenant to

Oakland is that contiguous large blocks of space are rarely available. Oakland’s relative stability has

limited its ability to grow. As a result, Oakland has tended to attract relatively small new tenants looking

for a bargain relative to San Francisco, and the current cycle is no different in that regard. However, the

opportunity for real growth in Oakland’s office market exists now for a number of reasons:

1. The strength of San Francisco’s office market is being driven by large, stable technology tenants

like Google, Salesforce.com, Twitter, Riverbed Technologies and others. These large firms employ

thousands of Bay Area workers, and their major footprints in San Francisco (versus Silicon Valley)

make the East Bay a logical location to open large, nearby satellite offices.

a. Conversely, more traditional firms like Wells Fargo may opt to move large user groups to

more economical space with easy access to transit

2. Employee satisfaction and consequently retention is a top goal of the major technology firms

located in San Francisco. As increasing numbers of their employees live in the East Bay (an option

that wasn’t as readily available when technology firms were more concentrated in Silicon Valley),

the largest of these firms will want and be able to provide convenient office locations outside of

San Francisco. Oakland is the most central and easily accessible market in the East Bay.

3. There are only three blocks of contiguous space over 100,000 sf in San Francisco. Approximately

75% of the 1Q 2014 office development deliveries in San Francisco have been preleased,

leaving fewer options than ever in San Francisco. For those firms able to secure space in new

developments in San Francisco, the starting rents will likely be in excess of $70 psf FSG. New

construction in Oakland should be able to provide a substantial discount, sufficient to attract large

requirements. Oakland is already experiencing with some San Francisco law firms relocating

operations to the top tier buildings in Oakland.

a. A more in-depth analysis of construction costs will ultimately determine the market rents

required to make office development on T5/6 feasible. Rough estimates suggest $45-50

psf FSG would suffice, but likely for less than all of the full development potential of the

Site.


Multifamily Market Overview

The East Bay residential market has joined in the Bay Area housing market boom, although the residential

market recovery in the East Bay has lagged behind San Francisco and the Peninsula. Multifamily vacancy

throughout the East Bay stood at 3.8% at the end of Q4 2013, slightly declining from the 3.9% vacancy

rate of the previous quarter, but a slight increase from the 3.7% level of Q4 2012, according to Cassidy

Turley’s East Bay 4Q 2013 Apartment Market Report. The low vacancy rates in the region have been

accompanied by rising asking rents. The current average asking rent throughout the East Bay is $1,674

per month, an 8% increase from the prior year and a 17% increase from 2011.

In terms of rents, Alameda County leads the East Bay with the current average asking rate at $1,774 per

month. Other East Bay communities are experiencing similar growth trends to a lesser extent. Contra Costa

County, for example, saw average rental asking rates increase to $1,514 per month last year, close to a

7% increase from Q4 2012. Migration from renters priced out of San Francisco has helped maintain the

low vacancy levels and has supported rental rate increases.

As illustrated in the chart above, average San Francisco rent prices in all categories currently exceed

Oakland’s rate by more than $1,000 per month. In Q4 2013, a 2-bedroom/2-bathroom unit in Oakland

averaged $1,981 per month, while the same unit in San Francisco averaged more than twice as much, at

$4,153 per month. Even with the large gap in rent prices, vacancy rates in the two markets have stayed

relatively consistent since 2011, a testament that demand outgrows supply.


Within Oakland, the CBD’s residential market has been slowly improving with more residents recognizing

the desirable attributes of living in downtown. Downtown Oakland’s proximity to other major business

centers in the Bay Area coupled with its public transportation options, especially BART, has made it an

attractive residential location for commuters. In addition, downtown Oakland offers a growing number of

living amenities, including a burgeoning food and arts scene. Oakland is quickly becoming a prime

residential destination.

During the last cycle, Oakland added some significant new residential supply, including:

The Uptown: Located in Oakland’s uptown submarket, the project contains 665 units delivered in

2008.

The Essex: Located on the shores of Lake Merritt, this 270 unit condominium conversion provides

sweeping views of San Francisco Bay, Lake Merritt and the East Bay Hills.

Domain: This project consists of 264 total units and was completed in 2011.

The Sierra: A 223-unit complex built in 2003 and located in Jack London Square.


Within such residential projects, studios demand the highest rental price per square foot of any unit type.

Additionally, studio units have shown the strongest growth rate in Alameda County over the past year at

about 10%. With East Bay rental prices still remaining significantly less than their San Francisco

counterparts and thus attracting spillover renters, all unit types posted rental growth of 8% or more over

the past year.

Strada conducted an internal survey in February 2014, using asking rental data from eight luxury housing

projects in downtown Oakland, outlined in the chart above. As asking rental rates for all types approach

$3.00 psf, the economy for wood-frame construction becomes more feasible.

The data collected from the Strada survey showed a slight increase in rental asking prices over Q4 2013,

demonstrating continued growth in the residential rental market into 2014, a trend supported by REIS

projections for the next three years.

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Oakland Luxury Apartment Rental Rates Monthly Rent/SF - Feb 2014


Outlined in the chart above, REIS anticipates a steady growth in Oakland’s residential rental rates through

2017. The outlook for the residential market in Oakland appears healthy and demonstrates demand for

new residential product; however, as with new office development, Strada must complete cost diligence to

determine the feasibility of new residential construction on the Site. As demonstrated by the study

completed for Oakland by AECOM in November 2013, the most feasible type of new construction may be

a “mid-rise” project.


Multifamily Demand Drivers

Strada believes the multifamily market in Oakland can support sustained growth for the following reasons:

Whereas Oakland was not necessarily a practical housing option when Silicon Valley was the

central hub for technology firms, Oakland is a viable and desirable location to live now that San

Francisco has become the preferred location of many large tech firms. Moreover, the younger

tech employee base generally desires to live in a dynamic urban environment with easy access to

amenities and transit, all of which are in ample supply in downtown Oakland.

Oakland offers great value in relation to San Francisco – with high quality of life variable and

excellent transportation – at significantly lower costs. Average monthly San Francisco rents have

surpassed $5.00 psf in certain projects and current average rents are more than 16% above

2000 dotcom levels.1 The housing supply in San Francisco is expected to remain constricted, which

means residential demand in Oakland should continue to grow.

Overall, market dynamics bode well for the Oakland residential market and demonstrate sufficient

demand for new construction at efficient construction typologies. The addition of new residents downtown

will not only help create a vibrant retail environment but also make downtown an attractive potential

office location for large firms.

1 Marcus Millichap, San Francisco Q4 2013 report.


Oakland Hotel Market Overview

The strength of the Bay Area’s economy has helped stabilize the local hotel industry after a very

challenging economic recession. According to a PKF Hospitality Research report, RevPAR in Oakland

increased in 2013 by 10.2%, almost twice the national average. Within Oakland, lower priced hotels

performed slightly better in 2013 than their higher priced counterparts, but both categories showed

increases in daily average room rates and occupancy rates, estimated at 7.9% and 0.5% respectively for

higher priced Oakland hotels.

Oakland’s 2013 hotel figures represent further growth in an industry where Oakland has performed well

over the past few years. In 2012, demand for hotel rooms in Oakland grew by more than 6%, making it

the highest growth rate of any California city. Looking forward, Oakland hotels are expected to show

continued RevPAR increases over 2014, but at a slighter lesser rate than 2013. The chart below outlines

the prior performance of the Oakland hotel industry as well as the anticipated patterns over the next four

years. Oakland expects to see continued growth in its hotel industry, but at a lesser rate in the years

following 2015.

As indicated in the chart above, Oakland and San Francisco have experienced similar annual changes in

RevPAR since 2008, but San Francisco’s asking rates for upper-priced hotels far exceed those of Oakland.

By 2017, the ADR for a San Francisco upper-priced hotel room is expected to be $282, while a similar

room in Oakland in 2017 is expected to cost $175.


The Oakland hotel market is comprised of four submarkets totaling approximately 3,428 rooms. The

submarkets are Downtown Oakland (CBD), Jack London Square, Embarcadero, and the Oakland Airport.

The CBD submarket contains three hotels totaling 693 rooms, which include the Marriott City Center (484)

and Courtyard Oakland Downtown (162) and the Washington Inn (47). Demand within this hotel

submarket is driven primarily from business travelers, convention goers, and the airline business.

The T5/6 parcel is situated directly between the Oakland City Center office complex and the Oakland

Convention Center, with direct parking access to the City Center underground garage.

Oakland Convention Center:

48,000 sq ft exhibit space

12 meeting rooms

Parking for 575 cars

10,400 sq ft of ballroom space, accommodating up to 1,100 guests

10 boardroom suites

Oakland CBD:

16.9 million square feet of office space, approximately 10.2 million of which is Class “A”

City Center complex blended vacancy of just 5.8%

Vibrant live-work-play atmosphere with a wealth of nightlife and restaurant amenities

Direct access to public transportation and convenient access to regional Interstates 980 and 880

The Site is 15 minutes from the Oakland International Airport, less than 40 minutes from San Francisco

International airport and walking distance from Oakland’s Chinatown, Old Oakland, Preservation Park

and Jack London Square.


Comparable data from the past 5 years show consistent growth in downtown Oakland’s hotel demand,

with a continual increase year-over-year in both occupancy rates and daily room rates. Oakland CBD’s

hotels showed impressive increases in average daily rates and occupancy rates in 2013, with occupancy

rates topping 75% and an ADR of more than $150. Both ADR and occupancy rates have showed

consistent year-over-year growth since 2010 when the ADR was $135 and occupancy rates were at 60%.

Future projections from PKF Hospitality Research signify growth patterns in Oakland hotel ADRs continuing

through 2017, but occupancy rates declining slightly after 2015. The forecast shows growth in Oakland’s

hotel market peaking over 2014 and 2015, seen in the chart below.

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Oakland Forecast - All Hotel Types

Change in Occupancy Rate Change in ADR Rate


Hotel Demand Drivers

There is clearly market demand for new hotel product in Oakland, but the biggest obstacle to providing it

is the high construction costs that require room rates that are not achievable in the market. Strada believes

there may be an opportunity to deliver a feasible hotel project this cycle due to the combination of the

following factors:

The newly renovated Oakland Marriott and Convention Center provide an environment that is

acceptable to corporate event planners.

o The prior state had been below the standards required to attract most higher-paying

corporate business.

The health of the Oakland office market and the spillover of many smaller San Francisco tenants

to Oakland will create new hotel room demand that was not present in prior cycles.

Alternative financing programs such as EB-5 provide much needed flexibility in financing new hotel

construction. EB-5 financing and other alternative financing vehicles may help provide the type of

“gap subsidy” that redevelopment tax increment used to provide.


Conclusion

With the current market upswing, the Bay Area has shown growth patterns in office, residential and hotel

industries, and Oakland is no exception. Much of the projected demand in Oakland will come from San

Francisco spillover as big technology firms continue to shape the office, multifamily and hotel landscape. In

the office sector, the rising rents in San Francisco will push tenants seeking a central Bay Area location to

consider Oakland. In addition, the scarcity of large blocks of contiguous space in San Francisco suggest

demand for office in Oakland though it is currently unclear if market rents in Oakland can support the cost

of new construction. Within the multifamily market, Oakland offers strong urban amenities and excellent

regional transit at comparatively low costs. The same reasons support growing demand for hotel rooms in

strong downtown Oakland locations.

Ultimately, Strada’s report finds that Oakland can expect increased demand in office, residential and

hotel projects. However, the right mix of uses – and construction typologies – warrant further analysis as

the dynamic and fast-changing market continues to evolve.

Documents

140211 T5-6 Feas Study Final