Office Vacancies Climb, But Retail Remains Solid

By Richard Brenneman
Tuesday February 17, 2009 - 05:58:00 PM

If housing is a bust, offices and commercial rentals aren’t far behind. 

“We’re in uncharted territory,” said Jeffrey Weil, an executive with Colliers International who runs the East Bay Almost-Daily Commercial Real Estate Blog [jeffreyweil.blogspot.com]. 

Weil, who got his MBA from UC Berkeley in 1973, has been in commercial real estate in the East Bay for 33 years. 

“I’ve been through real bad downcycles before,” he said, but the current downturn differs significantly from others—like the dotcom bust—which were limited to certain sectors of the economy. 

“This one is across the board,” he said. “This time, there are very few companies that are not affected.” 

For Berkeley, office vacancies edged up to 15.14 percent at the end of the year, up from 13.35 at the end of September, said city Economic Development Manager Michael Caplan. 

“That’s the highest it’s been since 2004, when it was about 16 percent,” Caplan said. 

Weil said there’s one bright spot in the otherwise gloomy picture. “For a tenant it’s an awesome time, one of the best tenant markets for the last 30 or 40 years. If you have a viable business and you need space, it’s a great time,” he said. “But if you’re an owner and your loan is coming due, it’s a terrible time.” 

The economic meltdown has been so dramatic that “it’s like before the Berlin Wall and after the Berlin Wall,” Weil said, referring to one of the defining moments of the Cold War era. 

While Berkeley is impacted by the same factors as elsewhere, he said the local economy has several bright spots, including the Theater District, Weil said, which is expanding with the move of Freight & Salvage up from the San Pablo corridor, and the university. 

Caplan agreed that the university’s space needs were a stabilizing force on the local office market. “We tend to be more stable, because there’s a relatively small inventory,” he said. At the same time, fluctuations in the few large spaces can have a significant impact on the statistical picture. 

But even green technology, which East Bay cities are counting on to keep the local economies thriving, have been struggling, Weil said. 

“Solar companies are laying off now when just six months ago they were hiring,” he said, “because the world revolves around finance, and to get any now, you have to pledge not only your first-born but your second-born as well. It’s scary.” 

The office market collapse is global, and California has been hard hit, with major brokerage houses reporting soaring vacancies throughout the state, along with plunging rents and a slowdown in new office construction. 

Caplan said Berkeley’s retail vacancy rates were generally good, either stable or improved in three of four key areas. 

Downtown commercial property vacancies were listed at 15.11 percent at the start of the year, down from 16.2 percent a year earlier. Fourth Street vacancies dropped from 8.6 percent in the third quarter of last year to 5.8 percent at the start of this year, while vacancies on Telegraph Avenue declined from 17.19 percent to 14.09 percent in the same period. 

The one area reporting a major increase in vacancies was North Shattuck, where the closing of Elephant Pharm sent the vacancy rate soaring from 4.05 percent to 10.14 percent.  

But even with the good news on the retail front, Caplan said, “It’s a frightening time, though Berkeley’s bottom won’t be as bad as Oakland’s or as bad as Stockton’s.” 

The city’s unemployment rate is also on the rise, with the loss of about 500 workers in current weeks with layoffs at Xoma, the closing of Scharfen-Berger Chocolates and the bankruptcy of Elephant Pharm. 

There’s one bright spot for some of those who lost jobs at Elephant, however. Caplan said they’ll have slots waiting when the new Berkeley Bowl opens in West Berkeley.