Oakland recovery faces ‘perfect storm’
Investors pull back amid concerns about affordability, safety
When Starwood Capital Group spent nearly $500 million on a trio of prominent office towers blocks from Lake Merritt in 2019, the Miami-based private equity firm was one of many institutional investors who saw longterm potential in downtown Oakland. Years of economic growth had paved the way for new construction, a burgeoning office market and an influx of new businesses and residents fleeing the high costs and oversaturation of other Bay Area cities — notably, San Francisco.
But just five years later, the megadeal has imploded.
People with insight into
Starwood’s investments have confirmed that the firm has surrendered the towers to its lender, Deutsche Bank, and the buildings at 1901 Harrison, 2100 Franklin and 2101 Webster streets are expected to be sold. If recent real estate transactions in San Francisco are an indication, Starwood’s towers will likely sell well below their 2019 values.
Both Starwood and Deutsche Bank declined to comment on the situation.
The foreclosures are the latest trouble for downtown Oakland’s business ecosystem, and they raise further questions about its post-pandemic recovery in a region where commercial real estate has
“Office development isn’t coming back for a long time, but biotech and residential certainly could.”
Scott Greenwood, a senior vice president at CBRE
played a vital role in powering downtown economies. For years, Oakland’s selling point for companies and residents, priced out of high-cost markets like San Francisco, has been its affordability. But the price gap is closing amid plummeting values in San Francisco.
Vacancy across Oakland’s crop of shiny downtown office high-rises was at an all-time high of 30.2% late last year. In 2019, just 8.8% of offices in the business district were vacant, per data provided by real estate firm CBRE. Meanwhile, several storefronts of varying size in the city’s business district have been empty for years.
Oakland’s cultural diversity and unique offering of restaurants, murals, edgy galleries, hip hop and DIY fashion design have long been part of its charm. Its downtown office towers sit among historic buildings, and within walking distance of housing, shops and transportation.
But the lack of activity in the streets during weekday business hours is putting pressure on the city’s merchants and is compounded by worsening perceptions about safety in recent years. Last year, reports of violent incidents citywide rose 21% from 2022, though the city is not at the heights of violent crime it experienced in past decades.
This trajectory mirrors the recent struggles of San Francisco. While downtown San Francisco’s recovery remains elusive four years after the pandemic, the outlook for downtown Oakland could be worse.
“The market for these highly concentrated, financial or technology centers of employment, at least in the medium term, won’t be seeing a total return,” said Leigh Hanson, chief of staff for Oakland Mayor Sheng Thao. “We need to be nimble in terms of responding to that, but also not overreacting.”
Lenders and institutional investors who were previously eager to fuel Oakland’s economic development are taking a big step back.
For Deutsche Bank, Starwood’s lender, “it’s wait and see,” said a person with direct knowledge of the bank’s investment strategy for the next two years.
“Office is a distressed asset. They’re taking a cautious view — more conservative than average,” the person said, adding that Deutsche Bank is “very cautious” about taking on new clients and “devoting resources” to both the San Francisco and the Oakland markets.
With a new plan to guide downtown’s future released on Friday, Oakland officials hope to decouple the city’s economy from San Francisco’s, through zoning changes, incentives and other efforts they envision as not only spurring development, but also protecting Oakland’s arts and cultural assets and ensuring affordability to its stakeholders.
But when the investment needed to implement this sweeping plan will return is an open question. Some say downtown’s recovery could be accelerated if the city focuses on crime and quality-of-life issues that are hurting businesses.
“From a physical standpoint, downtown looks the best it has ever looked. All the Class A office towers are done, and it has more residential than ever before,” said East Bay office broker Scott Greenwood.
On a recent morning, Greenwood, a senior vice president at CBRE, eyed the San Francisco skyline from his firm’s 18th floor suite, located inside one of Oakland’s premier office towers at 1111 Broadway.
“It’s not even close to an exaggeration to say that, between 2017 and 2019, downtown Oakland was significantly more vibrant at night than downtown San Francisco,” Greenwood said. “The problem is: There’s no one living in downtown San Francisco.”
While Oakland’s nightlife surged, fueled by multiple theaters and clubs, street festivals and diverse dining options, San Francisco leaned heavily on its office real estate and tech’s expansion in downtown to power the city’s economy — to its own detriment: More than a third of its downtown offices, which encompass nearly 80 million square feet, sit vacant as a result of tech layoffs and the rising popularity of remote work.
The city had a close to 36% office vacancy rate at the end of last year, up from single digits in 2019. Office rents have dropped significantly, and San Francisco’s office market has shifted into something it hasn’t been for a long time: one where tenants have the power and negotiating leverage, not the landlords.
But at the height of the city’s tech boom, space was tight and expensive, and companies were looking to Oakland for relief.
“Oakland was always your traditional stepsister market to San Francisco,” said Anthony Shell, an executive vice president for real estate brokerage Colliers. He said that the city was long home to nonprofits and professional services firms, and therefore “somewhat impervious” to past downturns affecting the tech sector.
That changed when tech entered the equation.
“There were a lot of tech employees who would buy homes in the East Bay and raise families there, and so, for a desire to be close to those population centers, tech companies would look to open offices in Oakland much more frequently,” Shell said.
In the early years of the Oakland migration trend, local and regional investors began to snatch up the city’s older office buildings and renovate them, in the hopes of “landing a venture capital-backed tenant at higher rents,” Shell said.
“Later in the cycle, we began seeing institutional capital come into the market to buy Class A buildings with a similar focus on improving them to attract tech tenants,” Shell said, referring to investment funds that chased newer office buildings in desirable locations.
Developers and investors responded to the influx of demand for space with new development. At the start of 2018, more construction activity was underway in downtown Oakland “than in any other period in recent history,” per a market report published by real estate firm Avison Young for the first quarter of 2018.
Now, dipping office rents and millions of square feet of available space in San Francisco mean that Oakland’s downtown will need to rely on its other attributes to capture the few tenants searching for new offices.
“If companies were going to compare the two markets, one of the drivers to Oakland was cost, so that driver is probably gone,” said Mark Geisreiter, executive managing director with real estate firm Newmark.
Oakland has but a fraction of San Francisco’s office space — just under 12 million square feet, per CBRE — and yet it is facing similar headwinds. Roughly one-third of offices in Oakland’s central business district, which includes the Uptown, downtown and Lake Merritt neighborhoods — sat empty at the end of last year.
With banks “shying away” from office investments, many landlords across the Bay Area are now facing a challenging credit environment, said Shell.
“This, coupled with the drop in leasing activity and so little tech looking for space, has created almost a perfect storm, especially in Oakland,” he said.
While some tenant migration into Oakland continued during the pandemic — utility giant PG&E completed a large deal to move its headquarters from San Francisco to Oakland in 2021 — other deals did not come together as planned.
Kaiser Permanente, one of Oakland’s largest employers, pulled out of its planned $900 million Oakland headquarters project at 2100 Telegraph Ave., in the heart of downtown. XCorp., formerly Twitter, scrapped plans for a downtown Oakland office lease. And, since signing a 350,000-square-foot lease at Uptown Station, fintech company Block Inc, formerly Square, is working to find subtenants. Meanwhile, a large retail space along Broadway on the ground floor of Uptown Station has been empty for years.
Greenwood, of CBRE, said that in the five years prior to 2020, downtown Oakland saw some 3 million square feet of space leased by companies from outside the market.
Now the city is in danger of losing office tenants to other East Bay markets, like Emeryville and Walnut Creek. Individuals tracking the Oakland office market say affordability and downtown’s conditions are motivating factors.
Greenwood said he’s currently aware of roughly half a dozen downtown companies — which he declined to name but described as non-tech office tenants — that are open to other markets.
Turner Construction Co., which has a regional office at 300 Frank H. Ogawa Plaza downtown, is reportedly among the groups evaluating other East Bay cities for office space.
“Turner has been serving Northern California for more than 50 years. We will maintain our presence in Oakland as we expand our footprint in the Bay Area,” said Dan Wheeler, Turner’s senior vice president for the Northern California region.
“It’s not an exodus,” Greenwood said. “But those tenants are looking for a safe place to be.”
While remote work has emptied offices, Isaac Abid, a partner at Oakland investment and development firm HP Investors, which owns more than a dozen commercial properties downtown, believes concerns about crime and safety have caused the most damage to the city’s downtown business ecosystem.
Public officials are facing pressure to respond to surges in violent crime, property crimes and burglaries over the past two years, which have forced restaurants and businesses to close, hire security or stop accepting cash.
Abid said the problem became so intense over the past year that his team was forced to install security gates for multiple merchants that lease space on the ground floors of HP’s buildings.
“The measures that we have had to take to fortify storefronts are steps that I never thought we would have to take,” said Abid, who is also a member of one of two groups seeking to recall Alameda County’s district attorney, Pamela Price, over concerns that not enough is being done to hold perpetrators accountable.
While crime reductions have followed recent investments in law enforcement in San Francisco, demand for office space in the city remains down.
Oakland, too, has ramped up its downtown police presence in recent months, but there are signs of ongoing tensions.
“Stop crimes. Save our lives. Save our city. Save our businesses,” read a poster hung inside of a storefront near 12th Street and Broadway earlier this month.
DC Looney said that business at Punchdown Wine, his natural wine bar at 1737 Broadway, is down roughly 50% from 2019. He blames a “perfect storm” of unfavorable conditions for keeping a list of downtown storefronts vacant and would-be customers away.
“It’s the lack of foot traffic. You know, quite a few people have moved away from Oakland,” Looney said. “And since the pandemic, the city’s reputation around crime, it’s kept people from wanting to stay downtown.”
Sherri McMullen, who operates a women’s clothing boutique at Broadway and Grand Avenue that suffered four break-ins within eight months in 2022, said that before the pandemic, it “felt safe” to keep the doors to her shop open.
Abid said that the city does not have a “working downtown” at the moment.
“Downtown Oakland has all of the ingredients to be the vibrant cultural and economic center of the city, but it will take a concentrated effort from the private sector and the city to bring it back,” he said.
When it comes to planning for the future of Oakland, Hanson, of the mayor’s office, said the city is “looking for a more equitable downtown.”
“There are lots of things going for Oakland, but I think being able to self-generate a lot of economic activity that we can then rely on, rather than being so dependent on the ebbs and flows of the San Francisco tech economy, is probably a much longer-term, more stable place for us to be in,” Hanson said.
Short-term interventions to address crime and activate downtown include new safety cameras, reduced parking meter fees after 5 p.m. and extended hours for parking garages, Hanson said.
The Downtown Oakland Specific Plan, released by the city on Friday, takes a longer view.
The policy document calls for the construction of 29,100 new homes, with up to 7,275 of them affordable, by 2040. It aims to generate funds for public services and to subsidize affordable housing through development impact fees and taxes. It proposes greater land use flexibility to support diverse businesses downtown and encourages research and development and biotechnology.
Greenwood, the office broker, said that even though funding for biotechnology has cooled since the height of the pandemic, he supports zoning changes that will, at some point, bring diverse industries into downtown.
“Office development isn’t coming back for a long time, but biotech and residential certainly could,” Greenwood said, though he questioned the city’s downtown housing plan, which requires more concessions from developers. “It’s the hardest time to develop — construction and capital are expensive, demand is lower than pre-pandemic and rents don’t pencil for developers. There’s a lot of risk.”
But Alan Dones, a developer who has helped shape Oakland’s skyline, said now is the time to get it right.
“People are so concerned about the current circumstances, the crime, and they want short-term, quick solutions. I look at them like Band-Aids,” Dones said. “It’s those types of big blows, like the pandemic, that show the mistakes we made by not being inclusive.”