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2017.05.16 Economic Development Special Meeting Agenda Packet
This AGENDA is posted in accordance with Government Code Section 54954.2(a). If requested, pursuant to Government Code Section 54953.2, this agenda shall be made available in appropriate alternative formats to persons with a disability, as required by Section 202 of the Americans with Disabilities Act of 1990 (42 U.S.C. Section 12132), and the federal rules and regulations adopted in implementation thereof. To make a request for disability-related modification or accommodation, please contact the City Clerk’s Office (925) 833-6650 at least 72 hours in advance of the meeting. ECONOMIC DEVELOPMENT COMMITTEE SPECIAL MEETING AGENDA Tuesday, May 16, 2017 – 12:30 PM City of Dublin Civic Center 100 Civic Plaza, Dublin City Manager’s Conference Room 1. Call to Order 2. Public Comment 3. Minutes of the Standing Economic Development Committee Special meeting of January 24, 2017 The Committee will consider the approval of the minutes of the Special Economic Development Committee meeting of January 24, 2017. 4. Request for Participation in Small Business Assistance Program Staff will present a request from Stanforth Holding Co, LLC to participate in the City’s incentive program to fund the construction of a trash enclosure at Grafton Station retail center. 5. City Business Incentives Program – Overview and Status Report Staff will present an overview of existing programs to the Committee. 6. Key Projects Update Staff will provide an update on key economic development activities and economic development reports for the region. 7. Update on Regional Organizations The Committee will have an opportunity to discuss the City’s participation in regional organizations. 8. Review Standing Agenda Items & Meeting Day and Time of the Economic Development Committee Committee will review the current standing agenda items and consider changing the meeting day and time. 9. Request for Future Agenda Items The Committee and/or Staff can make requests for future agenda items. 10. Adjournment SUMMARY MINUTES OF THE ECONOMIC DEVELOPMENT COMMITTEE SPECIAL MEETING – January 24, 2017 A special meeting of the Economic Development Committee was held on January 24, 2017, in the City Manager’s Conference Room of the Dublin Civic Center. The meeting was called to order at 12:31 PM by Mayor Haubert. 1. Call to Order PRESENT: Mayor Haubert and Councilmember Gupta ABSENT: None 2. Public Comment No comments were made by any member of the public. 3. Minutes of the Standing Economic Development Committee Regular Meeting of June 10, 2016 ACTION: By Consensus, the Committee approved the minutes of the regular meeting of August 8, 2016 4. Discussion on Downtown Hotel The Concept Hotel Group has created a proposal for a new hotel in West Dublin on property adjacent to the BART station. The development team, comprised of representatives from the Concept Hotel Group and Majestic Hospitality Group, were joined by representatives including the property owner (BART) and the land leaseholder (Barings). The team discussed their “Vecino Hotel” concept which would include development of a 175-room hotel, two restaurants, rooftop deck, meeting space/ballroom, retail space, and a health club. The team was seeking feedback from the committee to learn if this concept would be of interest to explore. In addition to the preliminary site plan they have developed, they explained the significant cost of construction/fees in the area, as well as the high cost of parking development. They mentioned the potential need for creation of an incentives program to help stimulate development. ACTION: The Committee provided feedback on features of the proposed hotel and expressed a preference for an upscale hotel with high-quality amenities and finishes. In addition to the construction of the hotel, the Committee provided direction to seek new retail tenants and restaurants to increase the supply of unique dining and beverage options in Dublin. 5. Key Projects Update Due to the length of the meeting, key projects were not discussed. ACTION: None. 6. Update on Regional Organizations Due to the length of the meeting, key projects were not discussed. ACTION: None. 7. Request for Future Agenda Items None. ACTION: None. 8. Adjournment There being no further business to come before the Committee, the meeting was adjourned at 1:51 PM. Minutes prepared by Erin Steffen, Management Analyst II. ___________________________________ Mayor ATTEST: ________________________________ Economic Development Director/ Public Information Officer City-Only Programs Commercial Facade Improvement Grant Program | No Expiration Date The City offers a Commercial Facade Improvement Grant Program for commercial businesses located in the Downtown Dublin Specific Plan Area and the segment of Dublin Boulevard between Village Parkway and Dougherty Road. This grant would permit commercial property owners, or tenants with long-term leases (five or more years remaining on the lease at the time a Program application is submitted) to apply for either: 1) a mini-grant for reimbursement of up to five thousand dollars ($5,000); or 2) a matching grant, which would provide reimbursement for two-thirds (66%) of eligible project costs, up to a maximum determined by the Fiscal Year budget cycle annually. The total cost of the improvement work must be more than five thousand dollars ($5,000). Receipt of a matching grant requires the approved applicant to contribute a minimum of one-third of the total cost of the facade improvement costs. Each year, up to $70,000 is awarded through this program to selected applicants. Grant Recipient Business Name Fiscal Year Award Amount Awarded Project Status The Murphy Trust SF Rents FY2011-12 $70,000 Complete Khaled and Amal Aburahma Rahma Mediterranean Market FY2012-13 $70,000 Construction Underway, Anticipate Opening in July 2017 B&B Borden LLC 7016 Village Parkway FY2013-14 $70,000 Construction Complete, Awaiting City Final (Pending Landscape) B&B Borden LLC 7016 Village Parkway FY2014-15 $27,843 Construction Complete, Awaiting City Final (Pending Landscape) Mush Ahmad Mirchi Cafe FY2014-15 $18,000 Plans Approved, Awaiting Pick-Up Kemprud & Co LLC Amador Valley Medical Center FY2014-15 $22,000 Plans Currently Under Revision/ Review Pete Stephanos Athens Burgers FY2015-16 $70,000 Architecture Consulting Complete; No SDR / Plans Submitted to Date Total Funds Reserved for Projects to Date: $277,843 Sales Tax Reimbursement Program | Expires January 2020 For businesses that generate more than $10 million in taxable sales, the City has developed a program to help offset investments in improvements to the site or building that the business proposes to occupy. The City will reimburse a business up to 50% of their annual sales tax for a period of five years, up to the amount they invested in the property. For users that generate more than $50 million in taxable sales, the City will reimburse a business up to 50% for a period of 10 years. Example: Business A is expected to generate $20 million in taxable sales annually (attributable to the City of Dublin). Business A needs to invest $500,000 in building improvements. Business A enters into an agreement with the City to be reimbursed for their improvements. Business A generates the anticipated $20 million in year one. This results in $200,000 in new sales tax revenue to the City of Dublin. Of this amount, Business A is eligible for $100,000 in year one (50% of the new sales tax revenue to the City). Business Incentives & Programs Summary & Status June 2017 Reimbursement Recipient Business Name Fiscal Year Award Amount Awarded Project Status 6450 Motors Hyundai FY2009-10 $670,000 Complete Bicentennial Square Properties (Ring Properties) Graybar FY2009-10 $997,000 Complete Dick’s Sporting Goods - FY2012-13 $350,000 In Process CJC Fallon Gateway Chevron FY2013-14 $382,000 In Process Regency Centers Persimmon Place FY2013-14 $3,150,000 In Process Sewer Capacity Assistance Program | Expires December 2020 In partnership with the Dublin San Ramon Services District (DSRSD) (provider of water and sewer service), the City offers assistance to businesses that require new or additional sewer capacity. As part of the Program, the City can provide assistance from 25% up to 100% of the DSRSD local and regional sewer connection fees that would otherwise be paid by the applicant. The percentage of assistance varies by user type and square footage. In addition to the City program, DSRSD does offer a financing program of up to $100,000 for users that require sewer capacity. Assistance Recipient Business Name Fiscal Year Award DUEs Awarded Project Status Stanforth Holdings BJ's Restaurant & Brewhouse FY2011-12 6 Complete Regency Centers Persimmon Place FY2011-12 15.02 Complete Red Mountain Habit & Freebirds FY2012-13 4.26 Complete Shops at Tralee Fresh Millions FY2012-13 0.75 Complete Stanforth Holdings Little Sheep Mongolian Hot Pot FY2013-14 2.174 Complete Stanforth Holdings The Dumpling Factory (aka Mayflower Restaurant) FY2013-14 3.495 Complete Lydia Karpenko Tous les Jours Bakery FY2013-14 0.56 Complete B&B Borden Three Sheets Craft Beer Bar FY2013-14 2.86 Complete Regency Centers Paxti’s Pizza FY2013-14 4.18 Complete Dublin Station Owner Great Harvest Bread Company FY2013-14 1.87 Complete Regency Centers Urban Plates FY2014-15 5.095 Complete Regency Centers Pacific Catch FY2014-15 8.4375 Complete Stanforth Holdings Chaat Café FY2014-15 3.75 Complete JJD-HOV Dublin GoGoong Korean BBQ FY2014-15 2.06 Complete 7400 Amador Dublin Brewing Company FY2015-16 4 In Process Regency Centers Firehouse Subs FY2015-16 0.83 Complete Total 65.3415 # Remaining DUEs .8585 Fee Deferral Program | Expires June 2020 The City offers two Fee Deferral Programs, one for non-residential development projects and one for multi-family residential development projects within the Transit Districts. The non-residential development deferral allows development to pay the Traffic Impact Fee to the City just prior to occupancy. The multi-family residential development deferral allows development to pay the Traffic Impact Fees, Public Facilities Fees and Fire Facilities Fees just prior to occupancy. Fee Deferral Recipient Business Name Fiscal Year Award Fees Deferred Project Status Avalon Dublin Station Avalon Bay Communities FY2012-13 $2,110,380 Complete Small Business Assistance Program | MOU Expires June 2018 The City offers a Small Business Assistance Program to assist Dublin-based businesses with the cost of complying with federal, state and local laws relating to disability access requirements, trash enclosures, sewer connections and other such obligations imposed on small businesses. Additionally, the program offers one-on-one consultations for struggling businesses, and provides instructional events designed to advise small businesses on a variety of topics, including marketing, cyber security, and financing. City staff is also available to provide the following services: • One-to-one assistance with zoning related questions • Site Selection Assistance Recipient Use of Award Fiscal Year Award Amount Awarded Project Status Grant Program Dublin Station Partners Trash enclosure FY2013-14 $40,000 Complete Parkway Investors ADA improvements FY2013-14 $10,000 Complete Karpenko Family Partners Trash enclosure FY2013-14 $20,000 Complete Pastime Brew (Three Sheets Craft Beer Bar) ADA improvements FY2014-15 $37,644 Complete 7410 Amador Valley Blvd Trash enclosure FY2014-15 $4,350 Complete Chiu Family Trust (Lamps Plus Plaza) Trash enclosure FY2014-15 $14,000 In Process Mirchi Café ADA improvements FY2014-15 $7,500 In Process CAMP Accessibility improvements FY2015-16 $69,575 In Process Business Name Fiscal Year Award Amount Awarded Project Status Support Program StartUp Dublin FY2014-15 $10,000 Complete Business Review: Dublin Brewing Company FY2015-16 $1,500 Complete Business Review: Great Harvest Bread Company FY2016-17 $750 In Process Tri-Valley Commerce Con FY2016-17 $400 In Process Window Display Seminar FY2016-17 $600 In Process Program Current Balance Grant Program1 $160,606.17 Support Program1 $46,375.00 1: The current balance reflects available funding through December 31, 2016. Funds set aside for projects which have been awarded but are not yet complete have been removed. City- Supported Programs Statewide Community Infrastructure Program (SCIP) Dublin promotes participation in the SCIP financing program that enables developers to pay most impact fees and finance public improvements through tax-exempt bond issuance proceeds. The SCIP program has assisted communities and developers throughout California to finance over $150.2 million in impact fees since 2003. There have been no participants from the City of Dublin in recent years. Learn more at www.cacommunities.com. EB 5 Investor Program The City of Dublin can assist your participation in the Immigrant Investor Program. This federal program promotes job creation and capital investment by foreign investors. Learn more at www.uscis.gov/eb5. The EB 5 Program has been used to assist Kingswood, a residential development in Jordan Ranch. PACE Financing for Energy Upgrades The City has partnered with Figtree Energy Resource Company and CaliforniaFIRST to offer Property Assessed Clean Energy (PACE) financing for energy efficiency, renewable energy, and water conservation upgrades. Some examples on ways you can save money are: • Heating and Air Conditioning • Boilers and Chillers • Lighting • Energy Management Systems • Windows and Exterior Doors • Occupancy Sensors • Electric Vehicle Charging Stations • Solar Thermal Water Heaters • Pool Equipment • Programmable Thermostats • Solar Photovoltaic Systems • Solar Reflective Roofing • Water-Efficient Plumbing Fixtures • And Many More Dublin commercial property owners have the choice to work with Figtree Energy Resource Company or CaliforniaFIRST for financing. We are uncertain of Dublin business participation in this program at this time. 1 3 About the 2017 Mirador View The Tri-Valley continues to prosper. Over the last year, the exciting factors that led us to write our inaugural report have continued to grow and prove our thesis. In this update, we show the persistent job growth, low unemployment rates, and rising incomes that are benefitting residents and companies of the Tri-Valley cities. Innovation is thriving as evidenced by record levels of entrepreneurial activity, venture capital funding, and new technologies emerging. Both private and public companies continue to benefit from high quality employees and a vibrant business environment. We take a closer look at a few companies based in the Tri-Valley to highlight some emerging and established market leaders that provide both inspiring growth stories and compelling investment opportunities. We hope you enjoy this update and look forward to uncovering the hidden gems of the Tri-Valley. -Mirador Capital Partners 3 Acknowledgements This report was prepared by Mirador Capital Partners using research that was supported in part by several Tri-Valley leaders who graciously provided their time and insight on economic activity in the region. We would like to thank the following individuals in particular for their valuable input: Stewart Bambino President and CEO, San Ramon Chamber of Commerce Stephanie Beasley Economic Development Officer, Sandia National Laboratories Brandon Cardwell Executive Director, i-GATE Innovation Hub Tim Harkness Founder and CEO, Unchained Labs Gregory Hitchan Founder and CEO, Tri-Valley Capital Dale Kaye CEO, Innovation Tri-Valley Stephan Kiefer Director of Innovation & Economic Development, City of Livermore Jason Novi CFO and COO, Unchained Labs Pamela Ott Economic Development Director, City of Pleasanton Richard Rankin Director, Industrial Partnerships at Lawrence Livermore National Laboratory Les Schmidt Founder & Executive Director, Bishop Ranch Intelligence Innovation Accelerator Scott Raty President and CEO, Pleasanton Chamber of Commerce Lori Taylor Economic Development Director, City of Dublin Dan Watson Managing Director, Newmark Cornish & Carey 5 Table of Contents Introduction 6 Tri-Valley Growth 7 Affordability & Accessibility 8 Growth from San Francisco and Silicon Valley exodus 8 Appealing office space 9 Accessibility 10 Quality of Life 11 Quality workforce 11 Entrepreneurial Environment 12 Tri-Valley is a hub of startup success 12 Labs fuel innovation 13 Innovation beyond the labs 15 Tri-Valley Index Performance 17 Compelling Sectors in the Tri-Valley 18 Medical Technology 19 Pleasanton is a hub of med-tech activity 19 Cloud Services 21 Local success stories spur future growth 22 Companies 24 25 26 27 28 28 28 29 31 31 31 Unchained Labs Value propostion The Tri-Valley connection Veeva Systems, Inc. (NYSE: VEEV) Opportunity Solutions A compelling future Ellie Mae, Inc. (NYSE: ELLI) Products Opportunity The Tri-Valley connection 32 Conclusion 33 Endnotes 35 6 Introduction Long overshadowed by the extraordinary growth of Silicon Valley and San Francisco, the Tri-Valley is a thriving micro-economy that shouldn’t be overlooked in investment portfolios. The Tri-Valley, which includes Pleasanton, Livermore, Dublin, San Ramon, and Danville, leads the Bay Area in job and income growth, quality of life, and increase in venture capital investment. Supported by the natural expansion of the Bay Area, proximity to research labs and Silicon Valley, and a high quality of life, the Tri-Valley is poised for sustainable growth. We believe specific sectors such as medical technology and cloud services are primed to capitalize on this evolution. Mirador’s deep network within Pleasanton gives us a unique ability to gain firsthand insight into this local investment potential. After studying these sectors and analyzing the strong local companies within them, we believe there are compelling investment opportunities in our immediate community. Our thesis began to form as we witnessed companies within Pleasanton experience incredible success in recent years. We found that an index comprised of public companies headquartered in the Tri-Valley would have outperformed the S&P by over 26% over the last five years.1 To examine the underlying drivers of this outperformance, we began by connecting with the Economic Development Directors and heads of Chambers of Commerce of several Tri- Valley cities to get their take on the area’s evolution. These leaders each told a similar story: that people and companies alike are drawn to the positive business environment and high quality of life offered within the Tri-Valley. These factors are creating a new epicenter of productivity in the Tri-Valley from which exciting businesses are growing and thriving. In this report, we share insight from conversations with local community and business leaders and leverage carefully gathered economic research to describe the compelling growth story of the Tri- Valley and the investment opportunities stemming from this expansion. We begin by providing an overview of the dynamic changes that are taking place locally, then highlight investable themes we believe are positioned to benefit. Finally, we introduce a set of remarkable Tri-Valley companies that operate within these sectors. 7 Tri-Valley + 11% Bay Area + 6% Tri-Valley Growth Tri-Valley growth is not a recent phenomenon. The area’s history tells a story of steady geographic appeal, providing resources for economic development and a high quality of life. In the 1960’s, the explosive growth of pioneering San Francisco Bay Area companies like HP and Intel brought a new generation of skilled workers to the Tri-Valley. Now, we see expansion driven not only by companies relocating to the Tri-Valley region from San Francisco and Silicon Valley, but also from nascent companies originating in the Tri-Valley itself. The Tri-Valley is leading the Bay Area, and the state of California, in job growth, income, quality of life, and growth in venture capital investment.2 From 2000 to 2015, Tri-Valley population growth increased by 37%, nearly tripling the Bay Area’s 13% growth.3 Over the same period, the Tri-Valley created approximately 40,000 jobs, increasing employment by 21% versus overall Bay Area job growth of 3%.4 This job growth has also led to the Tri-Valley boasting the lowest unemployment rate in the region of 2.7% in 2016 compared to 4% in the Bay Area overall.5 0% 2% 4% 6% 8% 10% 12% Bay Area Tri-Valley 2010-2015 Population Growth Since 2010 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 2016 Unemployment Rate Tri-Valley Bay Area Tri-Valley 2.7% Bay Area 4% 8 Affordability & Accessibility To translate this economic momentum into promising long-term growth, certain factors must be in place. Relative affordability, high quality of life, and a strong entrepreneurial environment are key drivers of the sustainable growth and success of Tri-Valley companies. Growth from San Francisco and Silicon Valley exodus People and businesses are increasingly relocating to the Tri-Valley due to skyrocketing real estate prices in San Francisco and Silicon Valley. The 2015 Silicon Valley Index Report noted that Silicon Valley is “proliferating high-wage and low-wage jobs but [is] steadily losing share of the middle… it’s as if the economy has lost its spine.”6 From 2011 to 2015, the median price of an apartment in San Francisco increased by 50%.7 While housing costs increased in the Tri-Valley in 2016, they are still at a substantial discount to San Francisco. As of September 30, 2016, average asking rent in San Francisco was nearly $3,500, a 50% premium over Alameda County. For homeowners, monthly housing costs at median house prices are approximately 40% less in Alameda County than in San Francisco and San Mateo County.8 SonomaNapaAlamedaSanta Clara MarinSan Mateo San Francisco Monthly Housing Cost at Median House Price Principal, Interest, Tax, Insurance by County, Q3 2016 $6,310 $6,320 $5,760 $4,860 $3,870 $3,110 $2,820 Contra Costa County Alameda County MarinSan Jose San Mateo County OaklandSan Francisco Bay Area Residental Rates Average Asking Rent Q3 2016 $3,499 $2,927 $2,913 $2,619 $2,656 $2,310 $1,946 9 Appealing office space Office rents have similarly shot up in San Francisco and Silicon Valley over the last five years, more than doubling in San Francisco and increasing by over 60% in Silicon Valley. Each city within the Tri-Valley offers its own appeal when it comes to office space. Dublin has a significant amount of Class A office space, which is ideal for mature software and technology firms. SaaS company Callidus Software took an additional 34,000 square feet in 2016, marking their continued growth in the city. Neighboring retail giant Ross Stores, occupies over 400,000 square feet of Class A space just down the road where they are headquartered. Pleasanton has optimal space for technology companies but has also seen strong demand for medical device companies grow in recent years. High quality office space at Hacienda Business Park, Rosewood Commons and Koll Center provide solutions for administrative and headquarters space in addition to professional and scientific offices. Unchained Labs, a rapidly growing medical device company founded two years ago, renovated remarkable office space in Koll Center last year and is also able to perform their manufacturing in a facility next door. Established companies ZELTIQ and Ellie Mae took over 250,000 square feet in Rosewood Commons and Workday is expanding, taking on 200,000 square feet of space in the Safeway campus. Livermore is unique in its availability of flex space that is essential for R&D. The 110-acre Livermore Valley Open Campus is available to companies that want office space near the labs for collaboration purposes. Livermore real estate is also ideal for companies who want to have operations and warehouse space near their headquarters. The new Oaks Logistic Center attracted significant businesses to Livermore in 2016. Gillig, a transit bus manufacturer, made the move to Livermore in 2016 after spending 85 years in Hayward. The move was driven by a need for a larger, state-of-the-art manufacturing facility, with the desire to keep their headquarters and manufacturing together in a location that allowed for a higher quality of life and proximity to employees. Next door to Gil lig, Tesla leased over a million square feet of warehouse space and referenced proximity to Fremont and accessibility to workforce from the Central Valley as benefits to the location. In the same complex, the Dräxlmaier Group, an international automotive supplier, is investing $24 million to set up their first-ever manufacturing plant on the West Coast for proximity to Tesla.9 Area Office Rent $ per sq ft/per month Vacancy Rate Tr-Valley $2.55 9.3% San Francisco $5.45 6.9% Peninsula $5.13 4.1% South Bay $4.08 5.5% 10 There had been criticism by tech companies looking to locate to the Tri-Valley that the area lacks ‘tech campus design.’ Existing campuses are now being re-developed to meet this need. Swift Real Estate Partners purchased the Rosewood Commons portion of Hacienda Business Park in 2014 and evolved the campus into a “kind of Google or tech campus that you’d see in Silicon Valley,” said Brett Miles, asset manager at Swift.10 The buildings quickly filled with tenants like Gap, Ellie Mae and SmartZip technologies. In San Ramon, Bishop Ranch contains 10 million square feet of office space across 585 acres, and is providing a younger tech campus feel with full amenities, transportation, childcare, yoga, and restaurants. Shuttles running to San Francisco, San Jose, and BART stations further add to the development’s appeal. In 2016 Bishop Ranch hosted a pilot project for self-driving buses, reflecting a focus on innovative companies and technologies. Current tenants include Chevron, GE Digital, Robert Half, and SAP. Rodan + Fields and GE Digital expanded to take on an additional 250,000 square feet in 2016. Rodan + Fields said they were impressed with the “stunning” structure at Bishop Ranch and also attracted to the relatively inexpensive housing in nearby towns and ability to access to a new labor pool.11 Accessibility Existing BART stations are significant facilitators of Tri-Valley migration, allowing companies and individuals living and working around the Bay Area to relocate without disrupting their employment situation. The eventual BART extension to San Jose and through Livermore will further improve accessibility and encourage additional growth and development. There is also the potential for BART to be linked to the Altamont Corridor Express (ACE) Train, which would relieve current congestion and improve access to the workforce coming from the Central Valley. Existing BART stations are significant facilitators of Tri-Valley migration 11 Quality of Life The San Francisco and Silicon Valley exodus is not the only driver of Tri-Valley growth; the Tri-Valley is attracting people from across the country and the world who come for the quality of life and positive business environment. Pamela Ott, Economic Development Director for the City of Pleasanton, said that most of the growth she is seeing is driven by the expansion of existing companies and locally grown businesses, rather than from companies leaving San Francisco and Silicon Valley for cheaper pastures. Award-winning public schools are a significant draw, not to mention an abundance of local restaurants, retail, and over 155 square miles of open space. Livermore Valley wineries and craft breweries contribute to an increased awareness of the Tri-Valley and serve an expanding customer base. In 2014, Pleasanton was ranked #4 best city to live in by 24/7 Wall Street.12 In 2016, Pleasanton and San Ramon were ranked #1 and #4 best cities in the Bay Area for families.13 Quality workforce The compelling quality of life in the Tri- Valley attracts an educated workforce and encourages them to stay in the area, helping companies grow as they retain happy employees. Tri-Valley companies and national laboratories hire employees with advanced degrees and attract foreign-born science and engineering professionals to the region, leading to a highly-educated population. “The labs are a talent magnet,” says Brandon Cardwell, Executive Director of i-GATE Innovation Hub in Livermore. The percentage of adults in the Tri-Valley with a graduate degree significantly increased from 16% to 22% between 2000 and 2016, and is higher than the Bay Area overall at 18% and Silicon Valley at 21%.14 The compelling quality of life attracts an educated workforce 0% 5% 10% 15% 20% 25% 20162000 Tr i - V a l l e y Si l i c o n V a l l e y Ba y - A r e a Percentage of Adult Population with at least a Master's Degree 12 Entrepreneurial Environment A vibrant entrepreneurial environment is necessary for innovation and sustained increases to an area’s productivity. Growth in venture capital investment, technology transfer from the national labs, and the formation of groups dedicated to encouraging innovation are important elements of the support structure benefitting Tri-Valley businesses. The Tri-Valley is a hub of startup success In 2012, Tri-Valley companies raised $272 million in startup investment funds, ranking the region 19th in venture capital (VC) investment in the United States. According to Mirador estimates, VC funding for Tri- Valley companies has continued to grow, exceeding $350 million in 2016, an increase of nearly 30% since 2012. IMPLAN (Impact Analysis for Planning) studies of multiple effects estimate that every $1 million investment in scientific R&D Bay Area Startup Success: A study applies markers of tech startup success to companies that were founded in the Bay Area between 2007 and 2011. The darker areas on this map have the most startups that look likely to succeed, according to a paper in the Journal of Science written by two MIT economists. Source: Science Magazine “Pleasanton ranked in the top 7% of cities in California for entrepreneurial quality” yields nearly $1.9 million in economic output, $850K in labor income and 10 full- time equivalent jobs. A recent study by economists at MIT shows that the top locations for successful tech startups in the Bay Area cluster near universities and national laboratories. The researchers used data from companies founded between 2007 and 2011 and considered success to be an exit valuation of over $10 million within six years of founding. The same report developed a system of ranking entrepreneurial quality by city, and ranked Pleasanton in the top 7% of cities in the state, ahead of Berkeley and San Jose.16 13 Labs fuel innovation The Tri-Valley has access to two local, world-class research laboratories, Lawrence Livermore National Laboratory (LLNL) and Sandia Labs. Through spin-off startups and companies who want proximity to the labs for research purposes, Stephan Kiefer, Director of Innovation & Economic Development for Livermore, has seen firsthand that “the labs are an asset to the entire Tri-Valley.” To improve the commercialization of technology developed at LLNL, technology transfer expert Richard Rankin was hired in 2013. LLNL now leads all labs in commercial licensing agreements, with 142 commercial licenses and CRADAs (cooperative research and development agreements), $8+ million in annual licensing revenue and more than $300 million in annual product sales based on LLNL technologies. The high performance computing (HPC) technology available at LLNL is in particularly high demand. Companies are partnering with LLNL to apply high performance computing to problems to obtain insight on how to improve products and increase the effectiveness of processes. There are currently ten major US companies with CRADAs using LLNL’s HPC technology. As one example, GlaxoSmithKline announced a partnership with LLNL in 2016 to apply high performance computing technology and data analytics provided by the labs to drug design. Startup companies are benefitting from lab technology and research as well. One successful alumnus of LLNL, Bill Colston, used lab technology to start a biotech company in Pleasanton called QuantaLife, which he sold for $160 million to Bio-Rad Laboratories in 2011. He subsequently started another company, Healthtell, which raised $26.1 million in a Series B round in March 2016, bringing total funding raised to $43.6 million. Four other companies started by LLNL scientists have a combined market cap of over $12.5 billion. Sandia Labs is also producing its own spin- off companies and incubator creations, and has been associated with 95 new companies since 1994.17 One successful spin-off, Sandstone Diagnostics, won a #GameChanger award from Innovation Tri-Valley Leadership Group in March 2017 for its innovative home fertility diagnostic testing product. The technology used by Sandstone Diagnostics was developed by the company’s founder, Greg Sommer, while he worked at Sandia. LLNL and Sandia have collaborated on several initiatives to encourage both technology transfer and entrepreneurial innovation. The two labs formed Livermore Valley Open Campus (LVOC) in 2011 as a research and development campus to encourage collaboration between the labs, large companies, and startups in areas spanning high performance computing, cyber security, combustion research, and 14 advanced manufacturing. In June 2015, LLNL and Sandia co- sponsored the first National Laboratory Entrepreneur Academy (NLEA) to give innovators and entrepreneurs a boot-camp like experience in transferring ideas into application. In March 2015, LLNL and Sandia were selected by the DOE to launch a program called LabCorps in a similar effort to serve as an accelerator to commercialize promising clean energy technology. As part of these programs, the labs host investor events to showcase startup companies looking for their first round of funding. The Department of Energy (DOE) has also created a Small Business Voucher program which provides funding to startups working with the labs. The Tri-Valley may be missing the research university pull of Stanford and Cal, but through the LVOC and a renewed focus on Technology Transfer and Innovation, the labs are opening their doors and providing similar benefits. Innovation beyond the labs The entrepreneurial environment of the Tri-Valley extends beyond the labs. A strong base of successful, established companies, a growing startup scene, and increasing economic ties to Silicon Valley are encouraging tangible innovation. Several institutions have formed in recent years to provide resources for startups and companies looking to innovate. Startup companies are benefitting from lab technology 15 One group leading this movement is Innovation Tri-Valley. Dale Kaye, CEO of Innovation Tri-Valley, described the group’s formation as a result of a collaborative effort between the local labs and businesses, with a goal of creating an “ecosystem of inclusivity.” This encourages businesses to come to the region, grow here, and benefit from the labs’ research and the region’s high quality of life. Examples of local companies benefitting from this collaboration to-date include Chevron Energy Solutions, GE Digital, Lam Research, and Bridgelux. In San Ramon, Bishop Ranch has dedicated 12,000 square feet for the new Bishop Ranch Intelligence Innovation Accelerator (BRIIA), opening in the Summer of 2017. BRIIA will be run by serial entrepreneur Les Schmidt, and will be a true, accelerator-style program for early-stage companies focused on data science and machine learning. Another organization, i-GATE, is a not-for- profit innovation hub focused on building a thriving startup community in the Tri- Valley. i-GATE operates The Switch, a startup incubator located in downtown Livermore, and organizes events and networking opportunities for entrepreneurs to connect with resources and each other. Alumni companies from the incubator have collectively raised over $50 million in capital and employ over 100 people across the region. i-GATE was initially formed by the City of Livermore, LLNL, and Sandia Labs in a combined mission to support technology transfer out of the labs. Over the years, i-GATE’s mission has expanded to support the developing ecosystem in the Tri-Valley, with Dublin, Pleasanton, and Danville also joining the organization. A recent alumnus of i-GATE, POC Medical Systems, raised $21 million in venture capital funding in January 2017 for the commercialization of their portable breast cancer screening test.19 POC Medical Systems licensed 11 patents from both Sandia and LLNL Labs for the development of its proprietary system, highlighting the benefits of collaboration between the labs, entrepreneurs, and cities fostering a network of innovation. 16 In Pleasanton, Tri-Valley Capital and founder Greg Hitchan have been investing in local early stage startups for years and operating co-working space at Innovate Pleasanton for up to a dozen companies at a time, offering business entrepreneurs space for developing and growing their ideas while also providing access to investors and a network of mentors. The Tri-Valley in general offers early stage companies access to a growing resident technical talent pool, and an expanding startup ecosystem while maintaining the proximity to Sand Hill and San Francisco funding sources historically required for these companies to move forward in subsequent development stages. Several Tri-Valley early stage companies that have received significant interest from established venture firms and strategic investors include; AEye, which develops solid state LIDAR technology for autonomous vehicles; SwarmSales, provider of a marketplace platform for on-demand sales by connecting sellers and re-sellers with disruptive companies, and Deep Sentinel, which has developed predictive artificial intelligence software/hardware for residential crime prevention. The founder of Deep Sentinel, Dave Selinger, co-founded real estate technology company RedFin, and has started several companies in Silicon Valley, San Francisco, and Seattle. As an experienced entrepreneur, he appreciates the quality of life he’s found in the Tri-Valley, stating “the great thing about starting this company in Pleasanton is that I actually get to see my kids.” Dave, Greg, Don Garman, and John Murphy are the founding partners in the Tri-Valley’s first venture fund, Tri-Valley Ventures, which brings together resident venture capital experience and startup expertise to meet the growing need for local dedicated capital and the desire of local investors to take part in the success of the Tri-Valley entrepreneurial ecosystem. The Tri-Valley in general offers early stage companies access to a growing resident technical pool of talent 17 Tri-Valley Index Performance Each of the growth drivers we have discussed combine to form a primordial soup from which we have seen numerous examples of success emerge. Both public and private markets are recognizing the strong potential and continued success of Tri-Valley companies. Tri-Valley companies outperformed the S&P 500 To examine the success of Tri-Valley companies from a quantitative standpoint, Mirador constructed an equally-weighted index of Tri-Valley companies (MTVXTM) and found that this index would have outperformed the S&P 500 (equally weighted) by over 26% over the last five years, and over 12% over the last ten years.20 Mirador Tri-Valley Index (MTVX™) vs. S&P 500 (Equally Weighted) - 100 200 300 400 500 600 700 S&P 500 MTVX Source:Factset (2/8/2017) 18 Compelling Sectors in the Tri-Valley Now that we have laid the groundwork for continued growth in the region, we will review two sectors that we believe are primed to thrive within the Tri-Valley over the next decade: Medical Technology and Cloud Computing. These sectors have attracted the majority of venture capital investments over the last ten years and have also produced successful publicly traded companies in the region. 19 Medical Technology We believe that healthcare and, more specifically, medical technology and equipment will persist as a thriving sector within Pleasanton and the Tri-Valley. As industry leaders innovate and new companies form and grow, we will continue to see opportunities for investment. Pleasanton is a hub of med-tech activity Pleasanton has become a destination for med-tech companies, which are attracted to the abundance of office space available at significant discounts to San Francisco and Silicon Valley. The highest demand for office space in the Tri-Valley has been for healthcare and medical device companies, accounting for nearly 25% of all commercial space needs.21 Scott Raty, president and CEO of the Pleasanton Chamber of Commerce, noted that Pleasanton’s proximity to the two national labs is appealing to healthcare companies that want to be on the front lines of faster, cheaper and more portable DNA analysis. Post-9/11 government investment in LLNL specific to bio weapons and DNA analysis has created an additional resource that biotech companies are leveraging. Greg Hitchan, founder and CEO of Tri-Valley Capital, said med-tech companies come to Pleasanton because “the expertise is here.” In 2016, there was over $200 million in Biotechnology and Medical Technology venture funding raised by Tri-Valley companies, more than in 2014 and 2015 Company Location Recent Funding Date POC Medical Systems Livermore $20.4MM January 2017 NeoTract Pleasanton $12.8MM January 2017 HintMD Pleasanton $3.3MM December 2016 Sandstone Diagnostics Livermore $1MM November 2016 Bolt Biotherapeutics Pleasanton $10MM September 2016 GoGo Health Pleasanton $30K September 2016 BioVentrix San Ramon $7.9MM July 2016 Cerebrotech Medical Systems Pleasanton $3.5MM July 2016 Spirosure Pleasanton $17.4MM June 2016 10X Genomics Pleasanton $55MM March 2016 HealthTell San Ramon $26.1MM March 2016 Purigen Biosystems Pleasanton $18.2MM March 2016 Palo Alto Health Sciences Danville $3.5MM March 2015 Unchained Labs Pleasanton $25MM March 2016 GoGo Health Pleasanton $20K January 2016 20 combined. 55% of all Tri-Valley venture capital investments in 2016 were in the medical technology space, more than triple the amount raised in 2012.22 Unchained Labs, a life sciences tools company, raised a second round of $26 million funding in March 2016. 10X Genomics is revolutionizing DNA sequencing technology and raised an additional $55 million in Series C funding in March 2016. Founder Serge Saxonov chose Pleasanton for relatively cheap lab space with the ability to expand, and noted that the reverse commute from San Francisco, Oakland and San Jose was a draw as well.23 Established med-tech companies in Pleasanton continue to thrive as well as startups. Pleasanton-based ZELTIQ, a medical technology company with the proprietary fat reducing CoolSculpting® system, went public in October 2011 with a valuation of $360 million. After over five years of steady growth, ZELTIQ announced in February 2017 that they reached an agreement to be acquired by Allergan plc, a leading global biopharmaceutical company, for $2.5 billion, a 14 percent premium to their share price prior to the announcement, and nearly six times their 2011 IPO valuation. Commenting on the acquisition, the CEO of Allergan stated, “by adding the best-in-class body contouring… we are creating a world-class aesthetics business.”24 Pleasanton-based Natus Medical, a provider of newborn care and neurology Tri-Valley MedTech Companies vs. S&P 500 (Equally Weighted) Tri-Valley MedTech represents an equally-weighted index of MedTech Companies based in the Tri-Valley which Mirador constructed for illustrative purposes - 100 200 300 400 500 S&P 500 T-V MedTech Source:Factset (2/8/2017) 21 healthcare products and services, has seen its stock price increase over 200% in the last five years. Cooper Companies, ranked #9 for healthiest companies in the Bay Area, has similarly seen an increase of 150% since 2012. Pleasanton also houses a significant campus of Thermo Fisher Scientific, a subsidiary of the Swiss mega- company Roche, which draws other medical technology companies to the area. Cloud Services High-tech companies typically cluster around prestigious universities to take advantage of research developments. In the Tri-Valley, the presence of the national labs provides the research draw while successful industry leaders based in the region have created a clustering effect. The cloud-tech industry growing around Workday is a prime example. We believe that technology, and cloud-based services in particular, will continue to be a dynamic and profitable sector in the Tri-Valley. Cloud-related technology has experienced exceptional growth over the last eight years, as both developers and IT managers have shown a preference for the scalability, mobility, and agility of on-demand deployment. In 2008, the total market cap of cloud companies was less than $25 billion; in 2017, it surpassed $300 billion.25 Market research firm IDC estimates that cloud-related technology accounted for approximately one-third of all IT infrastructure spending in 2015 and projects Tri-Valley Cloud represents an equally-weighted index of Cloud Companies based in the Tri-Valley which Mirador constructed for illustrative purposes - 100 200 300 400 500 600 700 S&P 500 T-V Cloud Source:Factset (2/8/2017) Tri-Valley Cloud Companies vs. S&P 500 (Equally Weighted) 22 that cloud-related spending will comprise over one-half of the IT infrastructure market by 2019.26 Bessemer Venture Partners (BVP) produces a cloud computing index and forecasts the index will hit $500 billion in market cap by 2020. BVP predicts that public industry cloud companies like Pleasanton-based Veeva Systems, are primed for a “winner takes most” dynamic. Local success stories spur future growth Two of the ten largest public cloud service providers are based in the Tri-Valley. Workday is the second largest cloud application, behind Salesforce.com. Not trailing far behind in the #4 spot is Veeva.27 Initial growth in the cloud computing industry in the Tri-Valley was in part spurred by PeopleSoft spinoffs, the most successful and well-known example being Workday. Dave Duffield and Aneel Bhusri founded Workday in 2005 following Oracle’s hostile takeover of PeopleSoft. Originally founded in Walnut Creek, Workday moved to Pleasanton in 2008, where PeopleSoft was previously based, and drew numerous former PeopleSoft employees. Workday went public in 2012, raising $637 million and has a current market cap of over $15 billion.28 The company expanded its Pleasanton campus in 2016 with the purchase of a 200,000 square foot building in the Safeway Campus near Stoneridge Mall. Pamela Ott, Pleasanton’s Economic Development Director, has seen Workday’s presence and expansion in Pleasanton attract additional cloud-based companies to the Tri-Valley region. Veeva Systems, which provides customer relationship management (CRM) software for life sciences and pharmaceutical companies, raised $261 million in its IPO in October 2013. Veeva was founded in 2007 by Pleasanton residents and has a current market cap of over $6.5 billion.29 Veeva’s 140,000 square foot HQ has been described as the best tech space in the Tri-Valley 23 A key component of Veeva’s success has been a focus on capital efficiency: it never had to use the initial $7 million in funding raised because the company was able to secure early customer investments and annual contracts.30 Veeva recently opened a remarkable space they completely renovated, which has been described as the best tech space in the Tri-Valley and indicates the company intends to stay in Pleasanton long-term. In the startup space, Tri-Valley cloud companies raised over $137 million in VC funding in 2016 and early 2017. Evident.io, provider of cloud security and compliance automation, raised $15.7 million in April 2016 and $22 million in February 2017. Danville- based Trov, developer of an on-demand insurance platform, raised $25.5 million in a Series C round in April 2016 bringing their total funding to $51.5 million. In a noteworthy Tri-Valley transaction, ServiceMax, a leader in cloud-based field service management located in Pleasanton, was acquired by San Ramon- based GE Digital for $915 million in January 2017. Originally founded in Santa Clara, ServiceMax moved to Pleasanton and now over 90% of their workforce resides in the Tri-Valley. COO Scott Berg said they have been able to attract great talent and employees “love not having to drive to the Peninsula for work.” Company Location Recent Funding Date Evident.io Pleasanton $22MM February 2017 Rootstock Software San Ramon $850K December 2016 SavvyMoney Pleasanton $8MM September 2016 CloudCherry Pleasanton $6.1MM September 2016 SmartZip Pleasanton $12MM August 2016 xMatters San Ramon $42MM August 2016 Cyberinc San Ramon $3MM August 2016 SwarmSales Pleasanton $1.2MM August 2016 Dropr Pleasanton $1.1MM August 2016 Jurni Dublin $100K April 2016 Trov Danville $25.5MM April 2016 Evident.io Pleasanton $15.7MM April 2016 Tri-Valley cloud companies raised over $137 million in VC funding in 2016 and early 2017. 24 Companies We have identified several Tri-Valley companies that we believe are poised to take advantage of the growth and opportunity present in our community. Here we will take a closer look at three companies in the Medical Technology and Cloud Technology space that exemplify this exciting potential. 25 Unchained Labs Though it is less than two years old, Unchained Labs (“Company’) has been quickly garnering attention within the life sciences tools space. The Pleasanton- based Company manufactures tools used by biologics researchers to more efficiently handle key processes such as protein stability testing, aggregation prediction, sizing, and formulation preparation. Founded in 2015, the Company has raised $56 million of funding from three of the industry’s leading venture capital investors: Canaan Partners, Novo Ventures, and TPG Biotech. Unchained Labs utilizes a platform strategy, acquiring a portfolio of innovative technologies and leveraging their industry expertise as well as its manufacturing and sales infrastructure to bring the products to market more efficiently. In less than two years, it has acquired four companies. Unchained Labs has an installed base of over 340 systems, and its products are in nearly every major biopharmaceutical company across the world. Background With all that Unchained Labs has accomplished, it is hard to imagine that it was founded just two years ago. In reality, the seeds of the Company’s success were planted over several decades. During this time, Unchained Labs’ product focus, business model, and leadership team gradually came together, led by its founder, Tim Harkness. With a background in accounting and investment banking (within the healthcare industry), Tim’s corporate career began in 1998 when he became CFO of Molecular Devices, a publicly traded life sciences tools company. While at Molecular Devices, Tim recruited Jason Novi (currently CFO and COO at Unchained Labs), and the two would end up working closely together for much of the next 15 years. The team in place helped Molecular Devices grow revenues over five times before selling itself to a private buyer. “Pleasanton was an easy choice” 26 After evaluating several potential paths, Tim became the CEO of Protein Simple, using a platform strategy to acquire a portfolio of subscale protein tools ranging from immunoassay systems to testing equipment used to determine protein structure and purity. After growing revenues to $50 million, Protein Simple sold itself to Bio-Techne in 2014 for $300 million. Jason and Tim have adopted a similar acquisitions-based strategy at Unchained Labs. Tim describes the life science tools industry as barbell-shaped: a few industry giants inhabit one end, numerous smaller players occupy the other, and little exists between. The larger players benefit from scale, low cost of capital, and in-place infrastructure for distribution; however their size limits growth and innovation. The smaller players are innovative, but their size and relatively high cost of capital hampers their ability to effectively distribute their product or re-invest in ongoing development. Unchained Labs bridges the gap by assembling single ideas into a coherent suite of products, and by leveraging the Company’s operational expertise, capital resources, and infrastructure to bring these technologies to market. Value proposition The dynamics of the biopharmaceutical industry make Unchained Labs’ value proposition all the more compelling. Biopharmaceutical developers have a limited timeframe in which to monetize their product before patents expire; marginal productivity gains from better tools help minimize break-even costs while maximizing time in the market. Recent political attention towards drug pricing underscores the importance of cost-saving productivity enhancements. Unchained Labs’ various tools help biopharmaceutical companies address these concerns by making the development process more efficient. For example, one of its stability testing devices, UNCLE, significantly reduces the resources required for protein stability testing, making the process faster and less cumbersome. The life science tools industry is barbell shaped. 27 Existing solutions rely on one-off tests that aren’t purpose-specific; UNCLE uses three measurement modes to conduct full-spectrum tests on a single sample. Its purpose-built software automates setup, output, and reporting. Although Unchained Labs has products at all major biopharmaceutical companies, Tim believes the market is underpenetrated and that there is plenty of room to sell additional products within the Company’s existing user base. The Tri-Valley connection Unchained Labs has become a landmark in Pleasanton, where it has a 50,000 square foot corporate headquarters and employs over 75. Although Unchained Labs has sales offices all over the world, it conducts all of its key operations and manufacturing in Pleasanton. In November 2016, Unchained Labs was recognized for its impact on the local economy as well as its innovative products when it won the 2016 Economic Driver Award from the Pleasanton Chamber and City of Pleasanton. According to Tim, Pleasanton was an easy choice. He and his wife moved to the area over ten years ago for the community, quality of life, and relative affordability. When determining where to locate his company, Pleasanton was an obvious consideration, and he soon realized that the very same reasons that attracted him to the community make it ideal for recruiting. There is no shortage of local industry talent who are happy to avoid commuting while continuing to enjoy the lower cost of living and enhanced quality of life that the Tri- Valley offers. Meanwhile, those living further away generally benefit from a reverse commute. “When people do the math and look at it,” Tim says, “it’s very easy to get them to come over here.” Unchained Labs’ established management team, compelling value proposition, and strong competitive advantage make it yet another exciting company that calls Pleasanton home. We look forward to tracking its continued success over the following years. 28 VEEV is another example of an innovative Tri-Valley business in our MTVX index. Founded in 2007, Veeva Systems, Inc. (“VEEV” or the “Company”) provides cloud software and data solutions to the life sciences industry. Available on a variety of platforms (web, mobile, tablet), its cloud-based solutions are used by companies of all sizes to streamline critical business processes from R&D through commercialization while more effectively maintaining compliance with regulatory requirements. The Company serves over 500 customers ranging from large pharmaceutical corporations such as Merck & Co, Pfizer, and Gilead Sciences, to emerging companies such as BioMarin, Merrimack, and Alexion. For the trailing twelve months ending January 2017, VEEV generated $544 million of revenue and $122 million EBITDA, up 32% and 36%, respectively, over the prior year. Opportunity Having lacked an integrated solution that addresses the unique regulatory and procedural characteristics of the industry, Life sciences companies are heavily regulated and scrutinized through all phases of the product lifecycle, underscoring the need to keep consistent and comprehensive records of all touchpoints. Existing systems are outdated and often consist of traditional enterprise software or custom built applications, and the initial fixed costs and required IT infrastructure (both hardware and personnel) make many of these solutions impractical for smaller companies. Most cloud-based solutions address a single business function and lack the seamless integration across the product lifecycle, from development through marketing. The VEEV platform address these needs through its various cloud solutions. Solutions VEEV operates under two primary categories: Commercial Cloud and Veeva Vault. Veeva Systems, Inc. (NYSE: VEEV) 29 Commercial Cloud: VEEV’s commercial suite is centered around its flagship platform consisting of its family of applications for mutichannel customer relationship management, around which it has recently introduced additional data and networking offerings: •OpenData: VEEV’s data solution containing demographic, license information, affiliations, and other information regarding healthcare professionals or organizations that is critical for compliance and effective customer outreach. •KOL Data: Offers more in-depth profiles of important healthcare professionals that includes information from conference presentations, clinical trials, grants, and social activity. •Network: Enables life sciences companies to maintain complete and accurate master records healthcare professionals and organizations, as well as products, and helps clients address issues of duplicate or inconsistent records; can be operated in a private mode (relying solely on companies’ proprietary internal data) or linked to VEEV’s data solutions to enable more comprehensive and updated records. Vault: VEEV’s content/information management solution used across virtually all business functions including medical, marketing, and R&D. Similar to the way Network helps standardize data, Vault helps standardize content. A Peninsula-like Campus in Pleasanton VEEV is another example of an attractive business that has opted to remain in Pleasanton: In 2015, VEEV moved into an all-new 141,000 square foot headquarters building located in Hacienda Business Park. With an on-site fitness studio, loaner bike program, and cafeteria, VEEV’s new facility should attract potential employees from both near and afar and support VEEV’s robust growth well into the future. Compelling future We believe VEEV has a number of desirable characteristics that provide it with a compelling future: 1. Strong competitive position: VEEV’s leading industry position creates a powerful barrier-to-entry, network effects create a captive customer base, and as the company’s vast network of data grows, it becomes increasingly difficult to replicate. 30 Veeva CRM is the leading CRM platform within the life sciences industry, and is used by companies such as Bayer, Pfizer, and Novartis. VEEV’s exclusivity agreement with Salesforce provides a solid moat for the core CRM business. New applications expand the platform across other business functions (clinical, regulatory, quality) and act synergistically to streamline processes and add to the mission-critical nature of the integrated platform. Network effects create barrier to entry: Veeva Vault becomes increasingly valuable as more users are added to the platform. 2. Long growth runway: With LTM revenue of $544 million and an estimated addressable market of $7 billion, VEEV has ample opportunity to grow into its valuation through increased penetration, and management has identified multiple avenues for further growth. 3. Favorable industry dynamics: VEEV is in a strong position to take additional share during the replacement cycle as none of the legacy systems have adopted an industry- specific, cloud-based solution. 31 Ellie Mae, Inc. (NYSE: ELLI) Founded in 1997, Ellie Mae, Inc. (“ELLI” or the “Company”) provides end-to-end originations software to the mortgage industry. Its solutions enable mortgage professionals to increase efficiency, maintain regulatory compliance, and reduce errors throughout the originations process by automating the loan application, processing, underwriting, documentation, funding, and closing functions. ELLI serves a diverse customer base exceeding 165,000 users. For the twelve months ending 12/31/2016, the Company generated $83 million of EBITDA on $360 million of revenue. ELLI is headquartered in Pleasanton, CA. Products The Company’s flagship offering, Encompass, combines loan origination and enterprise management software while providing seamless access to investors, lenders and other third-parties on the Ellie Mae Network. The centralized platform helps to increase efficiency, consistency, and compliance with internal processes and regulatory requirements. It assists in all stages of the process including prospecting/marketing, underwriting, closing, and distribution. The Company also acquired AllRegs in 2014, allowing it to enhance its repository of information, documentation, and educational material relating to specific loan products, lending guidelines and regulatory requirements. In October 2015, ELLI acquired Mortgage Returns, LLC, further enhancing its customer relationship management (CRM) functionality and increasing its presence throughout the mortgage lifecycle. Encompass is currently delivered via the web through a hosted SaaS-based subscription, which enhances revenue visibility and enables the company to continuously update the platform to reflect regulatory requirements and functionality enhancements. The online platform has also enabled ELLI to establish Ellie Mae Network, which enables mortgage originators to connect with investors, mega lenders and third-party service providers. Originators can submit loan files investors/mega lenders for pricing and order settlement services and third party reports electronically through the network, greatly streamlining the underwriting process. Opportunity Since 2008, the industry has seen ever- increasing regulation, which has imposed a significant cost on its participants. Largely due to increased regulatory requirements, total loan production costs have increased from $3,400/loan in 2007 to over $6,900 currently, according to the Mortgage Bankers Association. 32 MarketWise Advisors (in a third party evaluation commissioned by ELLI in 2014) calculated that Encompass saves users an average of $570 and up to $970/loan. According to the Nationwide Mortgage License System, there are currently approximately 850,000 mortgage professionals in the US. The Top 10 lenders represent 57% of total originations volume ELLI serves 7 of the top 25 lenders. Management estimates that its potential total addressable market is approximately $6.25 billion. the growth stemming from two areas: •Gaining share in underpenetrated market: The Company has ~19% market share (~165K users of 850K professionals, according to the Nationwide Mortgage Licensing System (NMLS). •Maximizing adoption and driving incremental sales within installed base: ELLI generated approximately $130 per loan in 2016, and feels unit revenue could grow to 3x with full adoption of its current suite and 4.8x with the completion and adoption of its existing development pipeline. The company competes with pure-play competitors, proprietary solutions (often provided by third party providers such as Fidelity National Title or First American) and solutions provided by services businesses (i.e., Accenture). We feel that ELLI competes favorably: proprietary systems generally lack the network advantages and can become outdated as they are not part of the core business while services businesses that offer ancillary software rely on costly up-front implementation. ELLI wins business based on its low upfront costs and straightforward implementation, as ELLI’s success-based pricing offloads some of the initial burden and allows ELLI to capture in the upside. The Tri-Valley connection Like Unchained Labs, ELLI is headquartered in Pleasanton, and most of its 1,069 employees (as of 12/31/2016) operate out of its 280,680 square foot corporate headquarters. Based on the mission- critical nature of its platform, powerful network externalities, and abundant growth opportunities, we expect that Ellie Mae will remain an industry leader and a pillar of economic growth within the Tri-Valley. ELLI’s potential addressable market is approximately $6.25 billion 33 Conclusion The entrepreneurial business environment, talented workforce, and relative affordability of the Tri-Valley has resulted in a natural extension of Silicon Valley and a choice destination for both established industry leaders and innovative startups, particularly those within healthcare and technology. For as long as the Tri-Valley remains under Wall Street’s radar, we believe these local companies will continue to present attractive investment opportunities. We created the Mirador Tri-Valley Strategy (MTVS) to allow clients to participate in the growth taking place in our local community. This strategy invests in the Mirador Tri-Valley Index (MTVXTM), an equally weighted index of companies based in the Tri-Valley. We select the most compelling companies from this index to add to our flagship investment strategies. Mirador continues to be impressed with the proud history and impressive growth of our region, and remains optimistic about its future. Mirador Capital Partners, LP is an SEC-registered Investment Adviser. This presentation is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Mirador and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Mirador unless a client service agreement is in place. 34 Important Disclosures The analyses and conclusions of Mirador Capital Partners, LP (“Mirador”) contained in this presentation are based on publicly available information. Mirador recognizes that there may be non-public information in the possession of the companies discussed in this presentation that could lead these companies and others to disagree with Mirador’s analyses, conclusions and opinions. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities. All investments involve risk, including the loss of principal. The analyses provided may include certain forward-looking statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies discussed in this presentation, access to capital markets, market conditions and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Mirador concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, expressed or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein and Mirador disclaims any liability with respect thereto. Actual results may vary materially from the estimates and projected results contained herein. The information contained in this presentation may not contain all of the information required in order to evaluate the value of the companies discussed in this presentation. The opinions, analyses, conclusions and proposals presented herein represent the views of Mirador and not those of any third party. It is possible that there will be developments in the future that cause Mirador to change its position regarding these companies. Mirador hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Mirador investment. 35 Endnotes 1. As of 2/9/17. Index of equally weighted Tri-Valley companies compared to equally weighted S&P 500 index. Not all companies in index would have outperformed on standalone basis. Past performance is not an indicator of future success. 2.Bay Area Council Economic Institute, ”Tri-Valley Rising: Its Vital Role in the Bay Area Economy” Available at http://www.bayeconfor.org/ media/files/pdf/BACEI_Tri_Valley_report.pdf 3.US Census Bureau, 2000-2015 census data and estimates. Available at https://www.census.gov/topics/population.html 4.NGKF Capital Markets, “Hacienda Plaza & Professional Business Offering Memorandum,” 2017. 5.Colliers International, “Pleasanton | Tri-Valley| Office Research & Forecast Report Q4 2016,” Available at http://www.colliers.com/-/ media/files/marketresearch/unitedstates/markets/pleasanton/pls.ofc.news.q4-16.pdf?la=en-US 6.Silicon Valley Institute for Regional Studies, “Silicon Valley Index Report 2015.” Available at https://www.jointventure.org/images/stories/ pdf/index2015.pdf 7.Pricenomics, “The San Francisco Rent Explosion Part III,” Available at http://priceonomics.com/the-san-francisco-rent-explosion-part-iii/. 8.Paragon Real Estate Group, “San Francisco Bay Area Real Estate Markets Survey,” Available at http://www.paragon-re.com/Bay_Area_ Market_Survey 9.“German Auto Components Manufacturer DRAXLMAIER Investing $24MM to Set-Up Manufacturing Plant in Livermore,” The RegistrySF, October 5, 2016. Available at http://news.theregistrysf.com/german-auto-components-manufacturer-draxlmaier-investing-24mm-set- manufacturing-plant-livermore/ 10.Roland Li, “How this East Bay suburban office park attracted 500,000 square feet in new tenants,” San Francisco Business Times, September 9, 2015. Available at http://www.bizjournals.com/sanfrancisco/blog/real-estate/2015/09/swift-rosewood-commons- pleasanton-office-goog-gps.html?a=. 11.David Mills, “Bishop Ranch expansion helps skincare company draw new employees,” SF Business Times, March 23, 2017. Available at http://www.bizjournals.com/sanfrancisco/news/2017/03/23/real-deals-office-rodan-fields-lease-san-ramon.html 12.Robert Serenbetz et al., “America’s 50 Best Cities to Live,” 24/7 Wall Street, September 17, 2014. Available at http://www.usatoday.com/ story/money/business/2014/09/17/24-7-wall-st-50-best-cities-to-live/15736533/ 13.Roland Li, “Here are the best and worst Bay Area cities for families, new study says,” San Francisco Business Times, January 24, 2017. Available at http://www.bizjournals.com/sanfrancisco/news/2017/01/24/bay-area-family-friendly-cities-housing.html 14.Bay Area Council Economic Institute, “Tri-Valley Rising: Its Vital Role in the Bay Area Economy.” Available at http://www.bayareaeconomy. org/media/files/pdf/BACEI_Tri_Valley_report.pdf 15.Bay Area Council Economic Institute, ”Tri-Valley Rising: Its Vital Role in the Bay Area Economy” Available at http://www.bayeconfor.org/ media/files/pdf/BACEI_Tri_Valley_report.pdf 16.Jorge Guzman and Scott Stern, “Where is Silicon Valley? Forecasting and mapping entrepreneurial quality,” Science Magazine, February 6, 2015 17.Bay Area Council Economic Institute, ”Tri-Valley Rising: Its Vital Role in the Bay Area Economy,” Available at http://www.bayeconfor.org/ media/files/pdf/BACEI_Tri_Valley_report.pdf 18.Don Johnston, “Lawrence Livermore proving to be a key player in Tri-Valley technology innovation ecosystem,” September 15, 2015. Available at https://www.llnl.gov/news/lawrence-livermore-proving-be-key-player-tri-valley-technology-innovation-ecosystem 36 19.Business Wire, “POC Medical Systems™ Raises $21 Million in Series A Funding to Advance Rapid, Portable Breast Cancer Screening Test,” January 10, 2017. Available at http://www.businesswire.com/news/home/20170110006006/en/POC-Medical-Systems%E2%84%A2- Raises-21-Million-Series 20.As of 2/7/2017. Based on an equal weighted index of Tri-Valley based companies with a minimum market cap of $50 million. 21.Colliers International, “Pleasanton | Tri-Valley| Office Research & Forecast Report Q4 2016,” Available at http://www.colliers.com/-/ media/files/marketresearch/unitedstates/markets/pleasanton/pls.ofc.news.q4-16.pdf?la=en-US 22.PitchBook. “Capital Invested by Primary Industry Sector. “ 23.Ron Leuty, “Why this East Bay city is an emerging destination for biotech firms,” San Francisco Business Times, February 12, 2015. Available at http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/02/pleasanton-10x-genomics-roche-tmo-transplant.html 24.PR Newswire, “Allergan to Acquire ZELTIQ, Best-in-Class Company in Fast-Growing Body Contouring Segment, for $2.47 Billion,” February 13, 2017. Available at http://www.prnewswire.com/news-releases/allergan-to-acquire-zeltiq-best-in-class-company-in-fast- growing-body-contouring-segment-for-247-billion-300406097.html 25.Byron Deeter, Kristina Shen and Anna Khan, “The State of the Cloud Report 2017,” Bessemer Venture Partners, February 10, 2017. Available at: https://www.slideshare.net/AnnaKhan9/the-state-of-the-cloud-report-2017-bessemer-venture-partners 26.Byron Deeter and Kristina Shen, “The State of the Cloud – 2015,” Bessemer Venture Partners, June 18, 2015.. Available at https://www.bvp. com/blog/state-cloud-2015 27.As of March 21, 2017. Source: Bessemer Venture Partners, BVP Cloud Index. Available at: https://www.bvp.com/strategy/cloud- computing/index 28.As of March 22, 2017. 29.As of March 22, 2017 30.Sean Jacobsohn, “3 examples of how capital efficiency leads to major growth,” San Francisco Business Times, July 2, 2015. Available at http://www.bizjournals.com/sanfrancisco/how-to/growth-strategies/2015/07/how-capital-efficiency-leads-to-growth.html East Bay EconomicOUTLOOK2017-18 City of Dublin photo by: City of Dublin OUTLOOKEAST BAY ECONOMIC CONTENTS EXECUTIVE SUMMARY 3 EAST BAY EMPLOYMENT 4 EAST BAY BUSINESS ACTIVITY 14 EAST BAY COMMERCIAL REAL ESTATE 23 EAST BAY RESIDENTIAL REAL ESTATE 33 EAST BAY DEMOGRAPHICS / QUALITY OF LIFE 42 2017-18 Demographics and Unemployment 10 Potential Headwinds and Opportunities 11 Labor Market Forecast 13 Personal Income 19 International Trade 19 Venture Capital 21 Retail Construction 29 Warehouse Rental Market 30 Warehouse Submarkets 30 Flex/R&D Rental Market 31 Flex/R&D Submarkets 31 Industrial Rental Market 32 Home and Condominium Prices and Sales 36 Apartment Vacancies and Rents 39 Residential Construction 39 Forecast of Existing Single-Family Home Prices and Sales 40 Forecast of Construction Activity 41 Income and Education 45 Occupations and Workforce Readiness 47 Income Inequality and Poverty 47 Overview 4 Labor Markets 5 Industry Concentration and Firm Size 7 Commuting 8 Overview 14 Local Spending 15 Tourism and Business Travel 18 Overview 23 Office Rental Market 24 Office Submarkets 25 Office Construction 26 Retail Rental Market 27 Retail Submarkets 28 Overview 33 Home Prices 34 Condominium Prices 34 Housing Affordability 34 Defaults and Foreclosures 34 Supply 35 Home and Condominium Sale 36 Overview 42 Population Growth 43 Population Composition (Age and Race) 44 ABOUT THIS REPORT The East Bay Economic Development Alliance (East Bay EDA) is a public/private partnership serving the San Francisco Bay Area’s East Bay (Alameda and Contra Costa Counties). East Bay EDA’s mission is to be the regional voice and networking resource for strengthening the economy, building the workforce and enhancing the quality of life in the East Bay. One of East Bay EDA’s core strategies is to provide valuable information about the trends impacting the East Bay economy. Each year we produce an annual East Bay Economic Outlook report, which is both a forecast and a summary of key economic indica- tors for the East Bay as it compares to the Bay Area region, the state of California and the nation as a whole. REPORT AUTHORS This report was prepared for East Bay EDA by Beacon Economics Christopher Thornberg, Ph.D., Founding Partner Robert Kleinhenz, Ph.D., Executive Director of Research Adam J. Fowler, Manager, Public Policy Research Brian Vanderplas, Senior Research Associate Alan Hooper, Senior Research Associate Justin Niakamal, Research Associate Clarissa Paik, Research Analyst Jordan Giali, Research Analyst To contact Beacon Economics: Rick Smith, Director of Business Development Beacon Economics, LLC (858) 997-1834 | rick@beaconecon.com | www.beaconecon.com SPECIAL EAST BAY EDA ACKNOWLEDGEMENT Darien Louie, Executive Director Robert Sakai, Technology & Trade Director Adrienne Ursino, Government Affairs & Communications Director Dennis Freeman, Assistant to the Executive Director Luis Aguilar, Economic Development Analyst David Le, Economic Development Analyst Lianna Adauto, Administrative Associate Reproduction of this document or any portion therein is prohibited without the express written permission of East Bay Economic Development Alliance and Beacon Economics LLC. Copyright ©2017 by the East Bay Economic Development Alliance. To access East Bay EDA’s reports, economic forecasts and business resources data, please visit: www.EastBayEDA.org East Bay Economic Development Alliance 1221 Oak Street, Suite 555, Oakland CA 94612 (510) 272-6746 | info@EastBayEDA.org East Bay Economic OUTLOOK 2017-18 | 3 EXECUTIVE SUMMARY The east Bay economy had a strong 2016 and is expected to continue on a stable course throughout 2017. From February 2016 to February 2017, nonfarm employment in the East Bay grew by 1.9% (21,200 jobs), outpacing the nation’s 1.6% growth. The East Bay labor market growth outpaced many other urban economies including Denver, Los Angeles, New York City, Chicago and Boston, among others. These job gains will drive the region’s unemployment rate below 4% by the end of 2017. During this period, the growing labor force participation will start to outpace job growth, beginning a gradual process of loosening conditions in the labor market. East Bay home prices remain considerably more affordable, in absolute terms, than prices in the neighboring communities of San Francisco and the South Bay. The supply constraints that have hindered the East Bay housing market in recent years took deeper root in 2016, as homebuyer demand continued to be fueled by the region’s affordability advantage, sustained income and population growth. Although median household income ($82,410 in 2015) grew by nearly 17% from 2010 to 2015, housing costs have appreciated at a faster rate. With the East Bay economy on track for continued economic expansion in the year ahead, Beacon Economics is projecting another strong year for consumer spending activity in the region. This is welcome news as one of the primary components of the East Bay’s economic growth over the last five years has been strong consumer spending activity. The report that follows examines the recent performance of the East Bay economy and looks at trends in the region and how they compare to San Francisco, the South Bay and the state overall. Key highlights from the analysis include: • The East Bay labor market moved forward at a healthy pace in 2016, matching statewide job growth rates and surpassing average job growth rates in the nation. The region also boasted a lower unemployment rate in 2016, compared to the state and nation. • Since 2010, the proportion of East Bay residents who commute outside of the East Bay for work has steadily increased. From 2010 to 2015, the share of East Bay residents commuting to San Francisco County has increased by nearly 4 percentage points. • As local incomes continued to rise, the East Bay economy has benefited from higher spending. From 2015 to 2016, consumer and business spending in the East Bay continued to increase at a vigorous pace. The region’s taxable sales grew 5.0% from 2015 to 2016, moving from $45.4 million to $47.7 million, placing the East Bay ahead of San Francisco, the South Bay, and the state as a whole in terms of percentage growth. • Venture capital funding was a very bright spot for the East Bay, as total funding increased significantly from 2015 to 2016, driven in large part by strong movement in Biotechnology, Financial Services and Software. • There was sustained demand for East Bay commercial real estate due to tightening of vacancy rates across all the key categories in 2016 even as developers added new projects at a robust pace. Despite rapidly rising rents for commercial properties, the East Bay is still more affordable than the South Bay and San Francisco, and thus continues to entice businesses to the region. • Residential construction activity picked up somewhat over 2016, particularly in the single-family segment of the market. However, new housing construction remains well below its historical pace and has done little to curb the extremely low inventory of homes for sale. • With the cost of living gap growing in the East Bay, the ability for median income earners to stay and afford housing becomes an increasing challenge due to higher income earners relocating to the area. These conditions may amplify the displacement of small businesses and residents, unless comprehensive retention strategies are in place. Building on the gains achieved in 2016, economic growth in the East Bay is expected to remain strong in 2017. Affordability remains a vital asset for the East Bay, and the region is projected to see continuing gains from this advantage for the foreseeable future. East Bay Economic OUTLOOK 2017-184 | 45% of workers work at firms with less than 50 employees. E AST B AY EMPLOYMENT OVERVIEW T he east Bay’s la Bor market continues to post steady gains and is poised for further growth in 2017 and 2018. Recent revised estimates show that its growth in 2016 was much better than previously reported. Nonfarm jobs from December 2015 to December 2016 grew by 3.1%, rather than by the 2.7% originally estimated by the State’s Employment Development Department (EDD). East Bay nonfarm employment grew by 1.9% (21,200 jobs) from February 2016 to February 2017, outpacing the 1.6% growth in the nation during the same period. Although this is slightly behind the continued extraordinary growth in the San Francisco Metropolitan Division (MD) (2.7%), the East Bay surpassed the San Jose Metropolitan Statistical Area (MSA) and the state as a whole. 21,200 more jobs East Bay added 21,200 jobs from 2016- 2017. 33.1% workers commute out 33.1% of workers in the East Bay commute out of the East Bay each day. Largest Sectors (by number of workers) Professional Sci. and Tech. 91,294 Retail Trade 100,986 Government 129,549 Health Care 22,510 East Bay Economic OUTLOOK 2017-18 | 5 E AST B AY EMPLOYMENT employment increase of at least 1.5% during 2017. L ABOR MARKETS Employment in the East Bay increased at a faster pace than in the nation as a whole and in many other urban economies. The East Bay outpaced Denver, Los Angeles, New York City, Chicago, and Boston among others. From February 2016 to February 2017, nonfarm employment in the East Bay grew by 1.9% (21,200 jobs), outpacing the 1.6% growth in the nation over the same period. During this time, job growth in the East Bay only matched the state’s (1.9%), however, and fell short of San Francisco’s (2.7%). Local business growth is about average for California, but the East Bay’s employment growth benefits greatly from its proximity to fast growth in other parts of the Bay Area. As noted above, growth in the East Bay from December 2015 to December 2016 went from an estimated 2.7% to 3.1%. That translates into an additional 4,700 new jobs across nonfarm employment sectors and puts the East Bay well ahead of the 2.2% growth in the nation overall over the same period. The East Bay’s 4.0% unemployment rate in February 2017 is well below the rate in the nation (4.7%) and the state overall (5.0%), but higher than in the tight labor markets in San Francisco (2.9%) and San Jose (3.6%). As unemployment fell in the East Bay, the labor force continued to expand over the past year, growing by 3,100. The East Bay’s unemployment rate fell to 4.0% in February 2017, compared with 5.0% in the state of California. Over the last year, the Health Care sector (5,600 jobs) led in absolute job gains, and the Professional, Scientific, and Technical Services sector (5.5%) was one of the job growth leaders in percentage terms. From a longer-term perspective, the East Bay’s Construction sector has led in percentage gains, increasing payrolls by 12.9% from February 2015 to February 2017 and outpacing every other major industry. This indicates that cities are recognizing the pressing need for more office space and housing, and that developers are continuing to take notice of the immense opportunities in the East Bay for residential and commercial developments. This is a welcome sign for the region, as costs for both owner-occupied and rental units have increased steadily. New housing stock will be necessary to offset high housing costs if the East Bay is to grow and attract new residents in the years to come. Outbound commuting among East Bay residents remained most common in high-skill industries—Professional, Scientific, and Technical Services and Information—which means that these workers are bringing home relatively higher wages. Many of these workers moved to the East Bay for more affordable housing and improved quality of life while working in San Francisco or San Jose. They represent a local talent asset that can be leveraged to attract businesses to the East Bay and to foster growth at existing firms. Overall, the East Bay is poised for steady growth, and Beacon Economics forecasts a payroll Delta Pacific Products in Union City photo by: Don Feria Photography The East Bay region has transformed into a higher- skilled labor market more quickly than the rest of the state, while losing fewer of its mid-skilled jobs. East Bay Economic OUTLOOK 2017-186 | ends of the wage spectrum. Some of the fastest-growing sectors over the last year have been Wholesale Trade (6.2%), Financial Activities (5.4%), and Educational Services (5.1%). Such high-skilled sectors as Professional, Scientific, and Technical Services (5.5%) and Information (2.5%) also posted significant growth. The East Bay’s largest sector, Government, grew by 2.6%. Health Care led in absolute job gains, increasing payrolls by 5,600 from February 2016 to February 2017. Local Government (5,300 jobs) and Professional, Scientific, and Technical Services (5,100 jobs) followed. Construction also remains a bright spot, with payrolls expanding by 2.3% from February 2016 to February 2017. Construction sector payrolls have expanded by 12.9% After increasing early in the recovery from the Great Recession, average hours worked in the East Bay reached a plateau of approximately 35.5 for three years before edging down in recent months. The average work week in the East Bay was 33.7 hours in February 2017 on a seasonally adjusted basis, down from 35.0 in February 2016 but up from 33.5 hours in February 2012. The decrease in hours does not seem to be a result of workers moving into part- time positions because of a sluggish economy. The number of those employed part time for economic reasons has steadily declined across the state, falling by 6.4% from February 2016 to February 2017. Employment gains have been seen across a broad range of sectors in the East Bay in recent years, and the region is creating jobs on both Growth in the East Bay created 4,700 new jobs across nonfarm employment sectors and puts the East Bay well ahead of the 2.2% growth in the nation overall over the same period. East Bay Payroll Employment Benchmark, Feb-12 to Feb-17 Source: CA Employment Development Department Be n c h m a r k Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 2015 Benchmark 2016 Benchmark 900 950 1,000 1,500 2,000 2,500 3,000 East Bay Payroll Employment Growth by Industry Feb 2017 (thousands) % Change 1 yr. 2 yr. Total Nonfarm 1,145.3 1.9 5.8 Total Private 968.4 1.8 5.9 Wholesale Trade 51.2 6.2 8.8 Prof Sci and Tech 98.8 5.5 9.7 Financial Activities 59.6 5.4 8.3 Educational Services 23.9 5.1 8.8 Health Care 165.4 3.5 7.8 Government 176.9 2.6 5.4 Information 26.8 2.5 11.0 Construction 68.3 2.3 12.9 Leisure and Hospitality 112.8 2.3 8.4 Other Services 39.4 1.2 4.7 Transport, Warehouse, Util. 38.5 0.7 4.5 Natural Resources/Mining 0.8 -0.1 -11.1 Manufacturing 88.7 -1.3 3.9 Management 22.1 -2.4 -13.7 Admin Support 60.5 -2.8 1.5 Retail Trade 111.6 -2.8 -0.7 Source: CA Employment Development Department E AST B AY EMPLOYMENT East Bay Economic OUTLOOK 2017-18 | 7 E AST B AY EMPLOYMENT sector was a significant source of new jobs, generating 1,200 new positions from February 2016 to February 2017. And demand for skilled workers extends well beyond tech jobs. Architectural/Engineering Services and Information Services combined to create 2,000 jobs in the East Bay last year as well. INDUSTRY CONCENTRATION AND FIRM SIzE In assessing job numbers, it is helpful to note that the industrial composition of the economy in the East Bay is noticeably different from San Jose’s and San Francisco’s. The latter has a higher share of payroll jobs in Professional, Scientific, and Technical Services and Tourism/ since February 2015, making it the fastest growing sector over this period and reaffirming the observation that developers are capitalizing on residential and commercial development opportunities in the area. A few major sectors saw declining employment over the last year: Retail Trade (-2.8%), Administrative Support (-2.8%), Management (-2.4%) and Manufacturing (-1.3%). Although job losses are always a concern, these sectors lost only 6,600 jobs, 0.6% of total jobs in the region. As advanced manufacturing continues to affect jobs in the manufacturing sector through technological advancements and automation, improved efficiencies and safety standards will also contribute to economic gains. High-tech jobs are a strong presence in the East Bay. The Computer Systems Design and Related Services Share of Total Payroll Employment by Industry East Bay San Francisco San Jose California 2017 1997 2017 1997 2017 1997 2017 1997 Government 15.4 17.8 11.6 12.5 8.8 10.0 15.2 16.4 Health Care 14.4 9.9 9.6 8.2 11.0 6.4 13.3 8.9 Leisure and Hospitality 9.9 7.6 12.8 11.4 9.6 7.2 11.6 9.4 Retail Trade 9.7 11.1 7.3 8.7 8.0 9.0 10.1 11.0 Prof, Sci, and Tech 8.6 5.4 16.2 9.6 14.0 9.8 7.4 5.7 Manufacturing 7.7 11.6 3.4 6.8 15.2 26.5 7.8 13.8 Construction 6.0 5.3 3.6 3.4 4.4 4.0 4.7 4.2 Admin Support 5.3 6.5 5.7 6.5 5.8 7.3 6.5 6.2 Financial Activities 5.2 4.9 7.2 9.8 3.3 3.4 5.0 5.6 Wholesale Trade 4.5 4.9 2.6 3.7 3.4 4.5 4.4 4.5 Other Services 3.4 3.2 3.7 4.0 2.6 2.8 3.4 3.4 Transport, Warehouse, Util. 3.4 4.2 4.4 6.5 1.5 1.8 3.6 3.6 Information 2.3 3.3 6.4 3.7 7.0 3.0 3.2 3.5 Educational Services 2.1 1.4 2.6 1.7 4.1 2.5 2.2 1.5 Management 1.9 2.7 2.8 3.4 1.2 1.7 1.4 2.0 Natural Resources/Mining 0.1 0.3 0.0 0.0 0.0 0.0 0.1 0.2 Source: CA Employment Development Department John Muir Hospital in Pleasanton photo by: John Muir Health The East Bay is more concentrated in Retail Trade, Health Care, Government, and Construction, largely inward-facing industries serving the local population. East Bay Economic OUTLOOK 2017-188 | the region during the recovery and expansion, with businesses with fewer than 500 employees adding more than 100,000 jobs from 2010 to 2015. The distribution of employment by size of business in the East Bay indicates that the region is well equipped to support small businesses. The region contains a number of government and nonprofit accelerators, incubators, business assistance centers, business resources and business incentive programs. It has successfully grown large businesses as well, although it is home to fewer large businesses and corporate headquarters than its neighbors. COMMUTING Information about where East Bay residents work reveals that the region has a significant share of outbound commuters. In 2015, roughly 33.1% of workers in the East Bay commuted out of the area each day, with San Francisco County and Santa Clara County as the most popular destinations. Leisure and Hospitality, while San Jose’s is more concentrated in Professional, Scientific, and Technical Services and Manufacturing. The East Bay is more concentrated in Retail Trade, Health Care, Government, and Construction, largely inward- facing industries serving the local population. The East Bay’s job structure has been changing, however. Over the last 20 years, encompassing the dot-com collapse and the Great Recession, the East Bay region has seen growth in Professional, Scientific, and Technical Services jobs, with 3.2 percentage points more of those jobs in the East Bay today than 20 years ago. This outpaces California as a whole, which saw shares rise by 1.7 percentage points over the same period. The East Bay’s Manufacturing sector has also been somewhat more resilient over the last 20 years, with its share of total employment falling by 3.9 percentage points relative to California’s -6.0 percentage points, San Francisco’s -3.4 percentage points, and San Jose’s -11.3 percentage points. As a result, the region has become a higher-skilled labor market more quickly than the rest of the state, while losing fewer of its mid-skilled jobs. The East Bay has a large small business community, with a higher concentration of small firms than San Francisco and San Jose. Moreover, 85% of East Bay workers are employed at businesses with fewer than 500 employees. Firms with fewer than 50 employees made up 45.1% of employment in the region, compared with 40.7% in San Francisco and 34.5% in San Jose. These small businesses have been a huge asset to Employment Shares % by Size of Business, 2015 Number of Employees 0- 49 50- 99 100- 499 500+ East Bay 45.1 14.4 26.0 14.5 San Francisco 40.7 12.6 24.6 22.1 San Jose 34.5 12.0 22.3 31.1 California 40.7 14.0 24.6 20.7 Source: CA Employment Development Department Sh a r e o f P a y r o l l E m p l o y m e n t ( % ) Professional, Scientific, & Technical CA East Bay SF South Bay Source: CA Employment Development Department 0 5 10 15 20 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 Share of Payroll Employment, 1997 to 2017 Sh a r e o f P a y r o l l E m p l o y m e n t ( % ) Manufacturing Employment CA East Bay SF San Jose Source: CA Employment Development Department ‘97 30 25 20 15 10 5 0 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 Share of Payroll Employment, 1997 to 2017 E AST B AY EMPLOYMENT East Bay Economic OUTLOOK 2017-18 | 9 E AST B AY EMPLOYMENT riders per day.1 Completion of the Berryessa extension to Silicon Valley is anticipated by the end of the year.2 Outbound commuters tend to be some of the highest-skilled residents of the East Bay, working in Utilities (46.5%), Professional, Scientific, and Technical Services (45.5%), and Information (45.1%). Clearly, many Bay Area residents are taking advantage of more affordable housing and the high quality of life in the East Bay, while commuting to nearby counties for jobs. Although this puts strain on the region’s infrastructure, the East Bay benefits from these commuters over the short run through increased demand for housing and more spending in the local economy. Over the longer term, these outbound commuters represent a significant local talent asset that can be leveraged for a variety of economic development efforts. Because of employment opportunities across the Bay Area and the relative affordability of the East Bay, Alameda and Contra Costa counties saw significant population inflows from 2015 to 2016. In fact, they received the third and fourth-highest number Since 2010, the share of East Bay residents who commute outside the East Bay for work has steadily increased. This trend is most pronounced among those commuting to San Francisco County. From 2010 to 2015, the share of East Bay residents commuting to San Francisco County has increased by more than 3 percentage points. In order to keep up with demand to both San Francisco and the South Bay, the Bay Area Rapid Transit (BART) continues to expand services. Their Warm Springs station began service in late March 2017 and is expected to serve between 4,700 and 7,200 1 http://www.eastbaytimes.com/2017/03/22/bart-riders-fremont-residents-hope-relief-is-on-the-way-with-warm- springs-station-opening/ 2 http://www.sfchronicle.com/bayarea/article/BART-extension-to-San-Jose-on-track-but-new-cars-11047689.php East Bay Residents Commute Pattern Shares (2010-2015) Share (%) County of Work 2010 2011 2012 2013 2014 2015 East Bay 72.9 70.6 69.5 68.2 68.2 66.9 San Francisco 9.8 10.5 11.0 11.5 12.3 12.9 Other 6.7 9.3 8.8 9.9 9.7 10.3 Santa Clara 6.6 6.4 7.2 6.8 6.0 6.7 San Mateo 3.9 3.2 3.5 3.6 3.8 3.3 Source: CA Employment Development Department Place of Work for East Bay Residents County of Work Employed Residents 2015 2015 Share % East Bay 923,784 66.9 Other 177,478 12.9 San Francisco 141,795 10.3 Santa Clara 92,102 6.7 San Mateo 45,396 3.3 Total 1,380,555 100.0 Source: U.S. Census Bureau, American Community Survey El Cerrito Del Norte Bart Station photo by: Robert Couse-Baker Many Bay Area residents are taking advantage of more affordable housing and the high quality of life in the East Bay, while commuting to nearby counties for jobs. East Bay Economic OUTLOOK 2017-1810 | DEMOGRAPHICS AND UNEMPLOYMENT The unemployment rate for East Bay residents with bachelor’s or higher degrees was 3.5% in 2015, compared with 6.3% for residents with only a high school diploma.3 These unemployment rates are lower than the statewide average across the majority of education levels. Millions of federal and state dollars have been invested in the East Bay for workforce development through the local community colleges, regional occupation centers, adult schools, workforce development boards and of new residents in the state over this period, signaling the attractiveness of the region and indicating the promise of benefits from the population increase. Although numerous residents commute each day, the region has many home-grown industries, as well. For example, 75.7% of East Bay residents employed in Health Care work primarily in the East Bay. Residents account for 75.3% of workers in Other Services, 75.2% of those working in Accommodations and 71.5% of those with local jobs in Petroleum and Coal Manufacturing Products. Place of Work for East Bay Residents by Industry (2015) East Bay San Francisco San Mateo Santa Clara Other Share (%) Number Share (%) Number Share (%) Number Share (%) Number Share (%) Number Health Care 75.7 122,510 7.5 12,179 3.9 6,260 1.4 2,323 11.5 18,571 Other Services 75.3 53,888 11.5 8,201 3.4 2,444 0.9 665 8.9 6,401 Accommodations 75.2 68,770 11.4 10,457 2.4 2,235 2.2 2,002 8.7 7,929 Retail Trade 75.2 100,986 9.6 12,911 4.0 5,406 2.7 3,636 8.5 11,434 Wholesale Trade 74.8 26,891 9.1 3,285 6.7 2,402 3.5 1,259 5.9 2,114 Real Estate 74.0 21,431 9.0 2,597 4.9 1,410 2.8 820 9.4 2,721 Government 72.0 129,549 11.7 21,033 3.3 5,951 2.8 5,128 10.2 18,282 Natural Resources/Mining 71.5 5,589 10.0 779 1.4 111 1.1 85 16.0 1,249 Educational Services 71.2 33,752 10.1 4,777 4.0 1,891 3.4 1,617 11.4 5,393 Art & Entertainment 67.6 19,945 15.6 4,619 5.1 1,520 1.8 536 9.8 2,901 Admin Support 63.2 42,373 19.0 12,755 5.2 3,476 1.5 1,034 11.1 7,434 Transport/Warehousing 60.6 29,438 16.2 7,885 2.3 1,107 7.8 3,786 13.1 6,368 Construction 60.0 49,676 13.5 11,150 8.4 6,980 4.2 3,458 13.9 11,498 Manufacturing 58.3 66,822 4.7 5,351 19.9 22,779 5.6 6,416 11.5 13,177 Finance & Insurance 55.5 33,862 25.9 15,770 4.3 2,599 5.2 3,196 9.1 5,556 Information 54.9 22,773 23.1 9,587 13.3 5,531 3.1 1,281 5.6 2,339 Prof, Sci, and Tech 54.5 91,294 18.8 31,575 11.4 19,075 4.8 7,976 10.6 17,708 Utilities 53.5 4,028 31.7 2,381 4.1 307 2.4 178 8.3 628 Management 18.8 207 16.9 186 56.0 618 0.0 0.0 8.3 92 Total 66.9 923,784 12.9 177,478 3.3 45,396 6.7 92,102 10.3 141,795 Source: U.S. Census Bureau, American Community Survey 3 U.S. Census Bureau, American Community Survey 56% of East Bay residents who are in Management industries commute to San Mateo County for work. E AST B AY EMPLOYMENT East Bay Economic OUTLOOK 2017-18 | 11 E AST B AY EMPLOYMENT POTENTIAL HEADWINDS AND OPPORTUNITIES Along with the rest of the nation, the East Bay will have to tackle the growth of e-commerce and its impact on employment levels and local tax revenues. This could have a larger impact on the East Bay than on other parts of the Bay Area as the Retail sector accounts for roughly 9.7% of the region’s nonfarm employment, compared to 7.3% in the San Francisco MD and 8.0% in San Jose MSA. Nationally, e-commerce made up roughly 8.3% of retail sales in the fourth quarter of 2016, up 3.2 percentage points from five years earlier and up 5.2 percentage points from a decade ago.4 This shift from traditional brick and mortar stores to online establishments will weaken demand for goods at local retail establishments and increase activity at warehouse and distribution centers. Some examples of this shift can be seen with the recent closings of Sears, Kmart, Barnes & Noble and other brick and mortar stores— including the JCPenny at Hilltop Mall in R ichmond, one of the 138 stores the company will close nationwide— while demand is increasing for warehouse fulfillment centers. The overall effect on jobs numbers should be minimal. But closure of more flagship and “big box” stores in the region could harm the balance sheets for local governments, causing cities to look at new ways to generate the sales tax revenues they need for operations. Food trucks, pop-up stores, restaurant automation, and home delivery of training programs. Compared to other regions, these activities appear to have been effective in creating job opportunities for both higher and lower-skilled workers. Furthermore, recent numbers from California’s EDD suggest that the region’s unemployment rates are continuing to decline. In 2015, the unemployment rate for East Bay residents younger than 25 remained elevated (13.5%), but it was lower than the unemployment rate for the same age range in the state overall (16.8%). Members of the workforce ages 25-24 are also ahead of their peers in other parts of the state, with the unemployment rate at 5.9% in the East Bay, compared with 7.3% in the state overall. East Bay Residents 25 and Older (2015) Educational Attainment Unemployment Rate Less Than High School 9.6% High School Graduate 8.1% Some College 7.7% Bachelor’s Degree + 4.1% Source: U.S. Census Bureau, American Community Survey 4 U.S. Census Bureau, Retail Indicators Branch East Bay Residents (2015) Age Unemployment Rate Under 25 14.0% 25 to 34 8.5% 35 to 44 5.2% 45 to 54 5.3% 55 to 64 5.8% Over 65 6.0% Source: U.S. Census Bureau, American Community Survey This shift from traditional brick and mortar stores to online establishments will weaken demand for goods at local retail establishments and increase activity at warehouse and distribution centers. San Leandro Tech Campus photo by: City of San Leandro East Bay Economic OUTLOOK 2017-1812 | Although the departure of the teams will affect full and part-time employees who work at Raiders’ games, the infrequency of football games will limit the overall effect.6 Also, while the Golden State Warriors are moving across the bay, the team has promised to employ current workers at the new arena. As a result, a significant portion of the wages paid to stadium employees will not be leaving the East Bay economy.7 Other potential headwinds include the scaling back of Uber’s Oakland expansion plans. Uber initially planned to move up to 3,000 employees into the former Sears Building on Broadway in Oakland’s Uptown neighborhood. Now the plan calls for just a few hundred. The economic effect of this change will probably be minimal because the company plans to lease the rest of the roughly 380,000 square feet to tenants, which will draw new companies and workers to the region. A longer-term concern for the East Bay is a potential slow-down in tech in the Bay Area. Growth in Professional, Scientific, and Technical Services and Information has slowed in recent years, although these sectors are still rising by healthy margins across the Bay Area. From February 2016 to February 2017, payrolls in the Professional, Scientific, and Technical Services sector grew by 2.7% in the San Francisco MD, 3.2% in the San Jose MSA, and 5.5% in the East Bay. semi-prepared and fully prepared meals directly and from third-parties are changing the food and beverage service industry, as well. T hird- party delivery services, in particular, provide a potentially significant benefit to local restaurants. These businesses allow restaurants to tap into markets that were previously inaccessible because they can now reach residences and offices within a third-party’s delivery service area. Smaller food outlets also may benefit from these services. In major cities, food delivery start-ups may not be able to afford prime operating locations, but might do well in other locations with less expensive overhead because of the potential for a high number of delivered meals.5 Two professional sports teams plan to leave the East Bay in coming years, with the Golden State Warriors moving to San Francisco in 2019 and the Raiders moving to Las Vegas in 2019 or 2020. These moves are not expected to have a significant effect on the East Bay’s economy, although they impact the region’s branding and entertainment options. Scott McKibben, executive director of the Oakland Alameda County Coliseum Authority, estimates local taxpayers have been losing about $1 million a year on the Raider’s lease agreement, and the city of Oakland also covers security costs for games. T he Raiders’ move will enable local officials to divert some funds to other parts of the economy, such as infrastructure improvements to support mixed-use developments near BART stations which would have multiplying effects on the East Bay economy. 5 http://www.jllrealviews.com/industries/food-demand-delivery-services-reshaping-restaurant-industry/ 6 https://www.wsj.com/articles/raiders-exit-a-loss-for-oakland-workers-touchdown-for-taxpayers-1491044403 7 http://fox6now.com/2017/03/31/heres-what-else-oakland-is-losing-along-with-the-raiders/ Downtown Pleasanton photo by: Bella Luna Studios Scott McKibben, executive director of the Oakland Alameda County Coliseum Authority, estimates local taxpayers have been losing about $1 million a year on the Raider’s lease agreement, and the city of Oakland also covers security costs for games. E AST B AY EMPLOYMENT East Bay Economic OUTLOOK 2017-18 | 13 E AST B AY EMPLOYMENT L ABOR MARKET FORECAST Beacon Economics forecasts that East Bay payroll employment will continue to grow at more than 1.5% in 2017. With these gains, the unemployment rate in the East Bay is expected to remain near 4.0%, which is in line with historical norms. In addition, payrolls are expected to grow by 6.4% (74,200 jobs) from current levels to 2021. Perhaps more importantly, high-wage sectors are expected to be at the forefront of this growth, with Management and Professional Services expected to grow by 13.3% (16,100 jobs) during the same period. East Bay Employment Forecast, Q1-17 to Q4-21 by Industry Q1-17 Q1-18 Q1-19 Q4-21 Q1-17 to Q4-21 Change (%) Total Nonfarm 1152.8 1171.2 1187.4 1227.0 6.4 Unemployment Rate 4.0 4.0 4.3 4.5 N/A Government 176.9 179.1 181.0 184.6 4.4 Education/Health 187.9 191.8 195.5 205.7 9.5 Management/Professional 121.1 124.9 128.3 137.2 13.3 Retail Trade 115.6 115.8 116.1 117.0 1.2 Leisure/Hospitality 112.9 114.1 115.5 120.3 6.6 Manufacturing 90.3 91.0 91.4 92.1 2.0 Construction 68.8 70.9 73.0 77.4 12.5 Admin Support 63.8 64.5 64.7 65.1 2.0 Financial Activities 58.5 59.0 59.6 60.3 3.1 Wholesale Trade 50.2 50.8 51.3 52.6 4.8 Other Services 39.6 40.1 40.6 42.2 6.6 Trans/Warehouse/Utilities 39.6 40.3 40.6 41.1 3.8 Information 26.8 27.8 28.8 30.6 14.2 Natural Resources/Mining 0.9 0.9 0.9 0.9 0.0 Source: CA Employment Development Department Payroll Employment Forecast Actual Forecast Source: CA Employment Development Department Forecast by Beacon Economics East Bay, 1995 to 2022 850 950 1050 1150 1250 ‘95 ‘98 ‘01 ‘04 ‘07 ‘10 ‘13 ‘16 ‘19 ‘22 To t a l J o b s ( T h o u s a n d s ) Unemployment Rate Forecast Actual Forecast Source: CA Employment Development Department Forecast by Beacon Economics East Bay, 1995 to 2022 3 7 5 9 11 13 ‘95 ‘98 ‘01 ‘04 ‘07 ‘10 ‘13 ‘16 ‘19 ‘22 Un e m p l o y m e n t R a t e ( % ) Mgmt & Prof. Employment Forecast Actual Forecast Source: CA Employment Development Department Forecast by Beacon Economics East Bay, 1995 to 2022 ‘95 ‘98 ‘01 ‘04 ‘07 ‘10 ‘13 ‘16 ‘19 ‘22 To t a l J o b s ( T h o u s a n d s ) 65 80 95 110 125 140 155 Manufacturing Employment Forecast Actual Forecast Source: CA Employment Development Department Forecast by Beacon Economics East Bay, 1995 to 2022 ‘95 ‘98 ‘01 ‘04 ‘07 ‘10 ‘13 ‘16 ‘19 ‘22 To t a l J o b s ( T h o u s a n d s ) 60 70 80 90 100 110 120 East Bay Economic OUTLOOK 2017-1814 | taxable sales increased 30% Taxable sales increasing more than 30% in the past 5 years, more than SF, South Bay, and State of California. E AST B AY BUSINESS ACTIVITY OVERVIEW Nearly all Business activity indicators in the East Bay showed strength from 2015 to 2016. Consumers and businesses increased their spending considerably, with the exception of fuel services which can be traced to low prices during this time period. With personal income continuing to rise, residents in most East Bay cities increased their overall spending. The tourism and travel industry in the East Bay continued to thrive as the Oakland International Airport posted a record year. Moreover, local hotels benefitted from this boom, as room and occupancy rates continued to rise. As the East Bay becomes recognized as a more desirable and centralized site to reach other parts of the Bay Area, spending from tourists should continue to increase. 48% increase in income Personal income in the East Bay growth from 2005 to 2015. over 12 million passengers In 2016, well over 12 million passengers passed through OAK, representing an increase of 7.4% from 2015 when traffic was around 11.2 million. 27.5% more venture capital Jack London Square in Oakland photo by: Port of Oakland $ Venture capital funding in the East Bay increases by 27.5% from 2015 to 2016. East Bay Economic OUTLOOK 2017-18 | 15 Similar to the year before, international trade in the East Bay was somewhat sluggish — a problem experienced by most ports around the country. The U.S. dollar remained very strong relative to other currencies, while other economies, like China, were still recovering from a recent slump. After considering price changes, however, the trade picture was actually better than it initially appeared. Furthermore, when compared to other major ports in the nation, Oakland, but less so Richmond, did quite well. Venture capital funding was a very bright spot for the East Bay, as total funding increased significantly from 2015 to 2016. Biotechnology, Financial Services, and Software together claimed most of the cash, while other industries like Industrial Energy and Computers and Peripherals saw major drop-offs in funding. Altogether, the East Bay continues to flourish in terms of business activity. Offering close proximity to all that the Bay Area has to offer, yet more affordable than other regions, East Bay growth will continue to stay the course during 2017. LOCAL SPENDING From 2015 to 2016, spending in the East Bay continued to grow at a vigorous pace. The region’s taxable sales grew 5.0% from 2015 to 2016, moving from $45.4 million to $47.7 million. This put the East Bay ahead of San Francisco, the South Bay and California, which respectively grew 2.5%, 3.2% and 3.9% during the same period. Much of the growth in spending for the East Bay came from the Autos and Transportation, Building and Construction, and Restaurants and Hotels categories, which grew 6.3%, 6.0% and 5.2%, respectively. While not as strong as in 2015, consumer spending on big-ticket items like cars held steady as personal incomes continued to climb and the population continued to expand. Having more disposable income also prompted consumers to spend more on leisure activities like dining out and entertainment. Meanwhile, businesses invested in themselves to keep up with demand, as evidenced by the 6.0% increase in the Building and Construction category. Some shopping centers in the East Bay saw large increases in consumer activity as a result of serious E AST B AY BUSINESS ACTIVITY East Bay Tax Receipts, 2015 to 2016 Category 2015 2016 Change (%) Autos and Transportation 77,040,970 81,896,675 6.3% Building and Construction 38,091,638 40,383,876 6.0% Restaurants and Hotels 49,994,170 52,592,310 5.2% Food and Drugs 25,096,369 25,805,724 2.8% Business and Industry 75,760,951 77,018,619 1.7% General Consumer Goods 93,028,844 94,461,446 1.5% Fuel and Service Stations 35,031,394 31,904,952 -8.9% Total 457,589,098 473,728,390 3.5% Source: HdL Companies 100 110 120 130 Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 Q4-16 In d e x e d T a x a b l e S a l e s ( Q 4 - 2 0 1 1 ) Taxable Sales Comparison Q4-11 to Q4-16 CA East Bay SF South Bay Source: California Board of Equalization Downtown Berkeley photo by: City of Berkeley East Bay Economic OUTLOOK 2017-1816 | In contrast, some national stores around the East Bay have been closing recently due to competition from online shopping and services. Still, according to data from the Bureau of Labor Statistics, the total number of establishments has been increasing in both Alameda and Contra Costa counties. From the third quarter of 2015 to the third quarter of 2016, establishments grew by 4.2% in Alameda County and 3.9% in Contra Costa County6. The only category to post a decrease in spending was Fuel and Service Stations, which dropped 8.9% during the year. As with last year, low global fuel prices have allowed consumers to spend less at the pump.7 The promotion of alternative fuel vehicles and build out of more charging stations has also contributed to lower gas sales. Gas prices may increase later this year, as state lawmakers passed Senate Bill SB1, which will increase the fuel tax by 12 cents per gallon in order to raise revenue for infrastructure and road repairs8. At the city level, top performers included Hayward and Livermore, with 11.8% and 10.2% growth rates, respectively. Hayward is among the cities in California with the highest combined sales tax rate of 9.75%. It hosts a high performing shopping mall, Costco business center and a new major sports-related retail store. redesign efforts. The Broadway Plaza in Walnut Creek, for example, completed a $250 million renovation plan, adding new shops and restaurants to attract Millennials and stay competitive in the age of online retailing1. Other large developments in the region that are well positioned to benefit from increased spending activity include a new 340,000 square foot Ikea store in Dublin2 and a new IMAX theater at T he Veranda in Concord3. Following the East Bay trend of innovation in the food industry, Impossible Foods recently announced plans to establish a production facility in East Oakland 4. From there, it will supply its meatless ‘beef’ to 1,000 restaurants, helping to increase spending by health-conscious residents. Additionally, Blue Shield recently announced the signing of a 200,000 square-foot lease in downtown Oakland as it moves its headquarters from its more expensive San Francisco site5. This marks the largest office transaction in Oakland’s history and is sure to increase spending as more employees will invest in and possibly move to the region. Indeed, the East Bay serves as the health care hub for the Bay Area, making up 7.4% of all health care jobs in the state, compared to the South Bay (5.4%) and San Francisco (4.8%). 1 http://www.eastbaytimes.com/2016/05/23/with-big-renovation-broadway-plaza-helps-walnut-creek-shopping- scene-thrive/ 2 http://proposeddublinca.com/ 3 http://www.eastbaytimes.com/2017/03/10/imax-theater-coming-soon-to-new-concord-shopping-center/ 4 http://www.eastbaytimes.com/2017/03/23/oakland-impossible-meatless-burgers-ramp-up-production-at-new- facility/ 5 http://www.bizjournals.com/sanfrancisco/news/2017/03/08/blue-shield-oakland-lease-shorenstein-office-tower.html 6 https://data.bls.gov/cgi-bin/dsrv. It is important to note that data for the third quarter of 2016, for both Alameda County and Contra Costa County, are preliminary and thus are subject to change, albeit by a relatively small margin. 7 https://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_sca_a.htm 8 http://www.latimes.com/politics/essential/la-pol-ca-essential-politics-updates-legislative-panel-sends-gas-tax- 1491249099-htmlstory.html Downtown Danville photo by: Paige Green The East Bay serves as the health care hub for the Bay Area, making up 7.4% of all health care jobs in the state, compared to the South Bay (5.4%) and San Francisco (4.8%). E AST B AY BUSINESS ACTIVITY East Bay Economic OUTLOOK 2017-18 | 17 E AST B AY BUSINESS ACTIVITY Dining in the City of Alameda photo by: Lori Eanes Still, according to data from the Bureau of Labor Statistics, the total number of business establishments has been increasing in both Alameda and Contra Costa counties. San Ramon (9.1%) and Danville (8.2%) also experienced remarkable growth from 2015 to 2016, as well. At the other end, Alameda (-4.3%), Clayton (-4.7%), (Pittsburg -4.9%), and El Cerrito (-17.7%) all experienced substantial drop-offs in taxable sales across this same period. The appearance of a significant drop- Hayward also saw strong auto sales and increased business to business sales. The increase in Livermore sales tax can be attributed to robust sales at the San Francisco Premium Outlets in Livermore, a high-end retail complex attracting international visitors, and the w ineries in the Livermore Valley, an alternative to Napa Valley as a destination point. Fremont (9.7%), East Bay Taxable Sales by City, 2015 to 2016 City 2015 2016 Change (%) Hayward 2,710,530 3,029,971 11.8 Livermore 2,358,743 2,599,124 10.2 Fremont 3,784,244 4,152,735 9.7 San Ramon 834,099 909,710 9.1 Danville 428,317 463,608 8.2 Antioch 998,801 1,058,917 6.0 Richmond 1,272,490 1,345,454 5.7 Albany 211,704 223,519 5.6 Dublin 1,683,546 1,776,984 5.6 Concord 2,741,308 2,866,151 4.6 Brentwood 643,643 671,149 4.3 San Leandro 2,438,671 2,542,762 4.3 Newark 1,015,757 1,058,815 4.2 Lafayette 263,784 272,857 3.4 San Pablo 180,571 185,323 2.6 Oakley 144,385 147,975 2.5 Pleasant Hill 723,612 740,096 2.3 Berkeley 1,604,817 1,641,078 2.3 Union City 835,968 854,632 2.2 Walnut Creek 1,996,597 2,039,580 2.2 Pinole 314,441 319,570 1.6 Orinda 90,968 91,067 0.1 Oakland 4,455,627 4,445,989 -0.2 Hercules 178,896 178,195 -0.4 Pleasanton 2,078,459 2,035,969 -2.0 Martinez 424,581 411,901 -3.0 Piedmont 16,344 15,817 -3.2 Emeryville 778,586 752,770 -3.3 Moraga 90,282 87,173 -3.4 Alameda 853,540 816,630 -4.3 Clayton 38,965 37,141 -4.7 Pittsburg 741,445 705,200 -4.9 El Cerrito 320,123 263,403 -17.7 Source: CA Board of Equalization East Bay Economic OUTLOOK 2017-1818 | Increasingly, the East Bay is becoming a much more desirable flight destination for visitors to the Bay Area who might otherwise use San Francisco International Airport. The Mediterranean climate of the East Bay avoids the fog delays experienced by the San Francisco International Airport, and the Oakland International Airport is actually closer to downtown San Francisco than any other major airport. This has and will continue to provide a boost to local spending activity. Part of this growth and desirability is due to a large increase in Oakland’s flight offerings from low-cost carriers like Southwest, British Airways, Norwegian and Spirit Airlines9. Recently, these airlines added dozens of routes to places like Mexico, Denmark and the United Kingdom. Moreover, new domestic and international routes planned for 2017 will be sure to add to this tremendous growth at the Oakland International Airport. Smaller general aviation airports supporting private aircraft or private charter lines, such as JetSuiteX in Concord, also provide convenient air travel alternatives in East Bay cities that are not subject to frequent adverse weather conditions. Going hand-in-hand with growing airport traffic is better hotel performance. From 2015 to 2016, off in taxable sales in El Cerrito was due to an exceptional performance in 2015. With the exception of 2015, spending in El Cerrito has remained relatively stable across the past few years. With planned retail and housing development along its San Pablo corridor, there should be an increase in this city’s taxable sales in the future. TOURISM AND B US INESS T RAV EL Growth in consumer and business spending depends in part on the East Bay’s tourism and travel industries. One way to gauge the performance of these industries is through airport traffic, according to which the East Bay is doing very well. From 2015 to 2016, total airline passengers at the Oakland International Airport increased by more than 830,000 passengers — a 7.4% growth rate. This marks a record year for the airport, and serves as a testament to the advantage it holds over busier airports like the San Francisco International Airport. And although Oakland grew less than the San Jose International Airport (11.0%) during this period, it surpassed the annual increases of San Francisco International Airport (6.1%) and California overall (7.2%). 9 http://www.sfgate.com/business/article/Flying-high-Bay-Area-airports-all-launching-new-11033897.php Pa s s e n g e r s ( T h o u s a n d s ) OAK Airport Traffic Jan-12 to Jan-17 Source: Visit California 700 800 900 1,000 1,100 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Bay Area Hotel Data Region Occupancy Rate (%) Average Daily Room Rate ($) Revenue Per Available Room ($) 2015 2016 Chg (pp) 2015 2016 Chg (%) 2015 2016 Chg (%) East Bay 68.8 69.3 0.5 127.18 134.41 5.7 87.47 93.18 6.5 San Francisco 79.3 80.1 0.8 211.48 223.37 5.6 167.63 178.98 6.8 South Bay 62.1 64.6 2.5 178.4 176.43 -1.1 110.83 114.01 2.9 Source: PKF Consulting Oakland International Airport photo by: Jim Maurer E AST B AY BUSINESS ACTIVITY East Bay Economic OUTLOOK 2017-18 | 19 E AST B AY BUSINESS ACTIVITY It is important to note that while the East Bay certainly has an affordability advantage compared to other parts of the Bay Area, the cost of living is still high relative to the rest of the state. As such, income growth does not always have a proportional effect on spending activity, as much of this will only offsets the higher cost of living. INTERNATIONAL TRADE In a slight contrast to other business activity indicators, international trade saw mixed results, not unlike its performance in 2015. On one hand, the Port of Oakland experienced significant improvement, while on the other hand, the Port of Richmond continued to decline in both imports and exports. Things appear to be stabilizing for both ports, however, as commodity prices begin to recover for many of the state’s exports. From 2015 to 2016, imports for the Port of Oakland increased by 9.0%, for a total value of $30.2 billion. During this time, imports at the Port of Richmond declined by 11.7%, falling from a total value of $7.1 billion to $6.2 billion. For Oakland, this marks an improvement from the 4.8% decline during the previous year, while for Richmond it adds to the 33% decline it saw during that same time. In terms of exports, during the last year, the Port of Oakland grew by 4.7% to a total value of $18.8 billion, while the Port of R ichmond fell to $1.1 billion — a decrease of 33%. From 2014 to 2015, Oakland exports declined by 15%, while in Richmond exports declined by 30%. Although hotels in the East Bay saw average daily room rates increase by 5.7%, or about $134 per night, while occupancy rates hovered around 69%, a 0.5 percentage point increase. Compared to the South Bay (-1.1%) and San Francisco (5.6%), the East Bay experienced the most growth in daily rates, indicating increased traveler preference for staying in the East Bay. Additionally, this led to an increase of 6.5% in revenue per available room for the East Bay. With over 20 BART stations within the region, connectivity to San Francisco is excellent, enabling tourists to benefit from the better weather, different attractions and lower costs in the East Bay. PERSONAL INCOME Increased spending activity in the East Bay has been further driven by local residents’ increased earnings. During 2015, the latest data available, personal income in Alameda County reached $61,900 while in Contra Costa County it hit $66,400, placing these as the 7th and 6th highest ranked counties in the state, right behind Santa Clara (4th) and San Francisco (2nd). This equates to an increase of 6.6% in the East Bay from 2014 to 2015, on par with the South Bay (6.6%), while outpacing San Francisco (6.2%) and the state overall (5.4%). An expanding job market, especially for well-paying, highly-skilled professional jobs, has greatly contributed to this growth in income for the East Bay. As more companies choose to establish themselves in the East Bay and attract talented workers, incomes and spending should continue to move upward. 2005 2007 2009 2011 2013 2015 In d e x ( 2 0 0 5 = 1 0 0 ) Personal Income Growth Bay Area and California, 2005 to 2015 CA East Bay SF South Bay Source: U.S. Bureau of Economic Analysis 100 120 140 160 180 Park Street Bridge in Alameda photo by: Maurice Ramirez East Bay Economic OUTLOOK 2017-1820 | The top exported commodities for the Port of Oakland were Edible Fruits and Nuts (-3.9% in value), Meats (+42.0%) and Beverages (+13.2%), which together made up half of all exports for the port. A major decrease came from Vehicles, which were more expensive to trading partners as a result of the U.S. dollar’s strength. Other large decreases came from Dairy Products and Prepared Vegetables and Fruits, which both suffered from major declines in price. For the Port of Richmond, the Mineral Fuel and Oil category made up 84.6% of all exports, for a total value of $942 million. This represents a significant drop in value from 2015 when the value of this export category was $1.6 billion. Weak performance from export trading partners, especially in Central and South America, mainly caused Richmond has experienced another year of decline, it is important to keep in mind that the drop in export value does not take commodity price changes into consideration. For instance, export vessel weights from Richmond were down by just 14.8% during this time, indicating a less severe decrease than the export values suggest. Compared to other ports in the state and the country, the Port of Oakland has done very well. From 2015 to 2016, the Port of Los Angeles saw exports increase by 3.1% while imports increased by only 0.8%. At the same time, the Port of Long Beach saw exports grow by 4.5% and imports shrink by 6%. The average change for all ports in the U.S. was a decrease of 3.3% for exports and a decrease of 2.6% for imports. Maritime Trade Activity, East Bay Ports, 2015-2016 Port Total Export Values Total Import Values 2015 2016 Chg (%) 2015 2016 Chg (%) Port of Oakland 17,915,965,636 18,763,984,186 4.7 27,716,634,446 30,218,532,888 9.0 Port of Richmond 1,664,655,829 1,114,235,010 -33.1 7,074,809,692 6,245,118,100 -11.7 Source: WISERTrade Imports & Exports Port of Richmond, Jan-12 to Jan-17 Source: WISERTrade To t a l V a l u e ( $ M i l l i o n s ) Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Imports (Smoothed)Exports (Smoothed) 0 200 400 600 800 1000 Imports & Exports Port of Oakland, Jan-12 to Jan-17 Source: WISERTrade To t a l V a l u e ( $ M i l l i o n s ) Jan-12 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Imports (Smoothed)Exports (Smoothed) Port of Oakland Top Exports by Commodity Commodity 2014 ($000s) 2015 ($000s) Chg (%) % of All Oakland Exports % of All CA Exports Difference, Oak vs. CA (pp) Edible Fruit/Nuts/Citrus Fruit/Melon Peel 5,635,344 5,413,311 -3.9 28.8 2.8 26.1 Meat/Edible Meat Offal 2,082,371 2,956,603 42.0 15.8 1.5 14.2 Beverages/Spirits/Vinegar 968,903 1,096,366 13.2 5.8 0.6 5.3 Industrial Machinery, Incl Computers 808,795 970,397 20.0 5.2 0.5 4.7 Optic/Photo/Medical/Surgical Instruments 516,654 663,702 28.5 3.5 0.3 3.2 Vehicles/Parts 719,877 544,979 -24.3 2.9 0.3 2.6 Dairy/Eggs/Honey/Animal Products 643,473 483,311 -24.9 2.6 0.2 2.4 Electric Machinery/Sound Equip/TV Equip 480,067 489,996 2.1 2.6 0.3 2.3 Prep Veg/Fruit/Nuts/Other Plant Parts 664,213 471,838 -29.0 2.5 0.2 2.3 Cereals 441,991 462,560 4.7 2.5 0.2 2.2 Source: WISERTrade E AST B AY BUSINESS ACTIVITY East Bay Economic OUTLOOK 2017-18 | 21 E AST B AY BUSINESS ACTIVITY this drop. However, export vessel weights for this category showed only a 16.8% drop, which indicates much of this weak performance was caused by falling prices. In June of 2016, the City of Oakland passed a law banning the handling and storage of coal in the city in an effort to fight climate change and address health issues10. This is not a major commodity for the port, however, and the ban should have only a marginal effect on total values moving forward. More noteworthy was Oakland’s loaded container volume, which set a record in 201611. Close proximity to the state’s agriculture industry has helped boost the port’s exports to Asian countries demanding American food products. There was also some disruption in service to container ships when Outer Harbor Terminal, a joint venture between Ports American and Terminal Investment Ltd., ended its 50-year lease for terminal operations with the Port of Oakland. As the operator filed for Chapter 11 bankruptcy protection, the Port of Oakland was forced to find new operators to accommodate their unserved shipping lines. While domestic demand was strong during this period, a strong U.S. dollar and low demand from still recovering international markets explains much of the lackluster performance in trade. Furthermore, when taking prices into consideration, it is clear that the situation is not as bad as it would seem. VENTURE CAPITAL While international trade in the East Bay was sluggish, venture capital funding offered a nice contrast. From the first three quarters of 2015 to the first three quarters of 2016, venture capital funding increased by 27.5% for a total of nearly $1.3 billion. This marks a significant improvement from the same 2014 to 2015 period, when funding slumped by about $150 million, or 12.5%. Moreover, compared to Silicon Valley (-23%) and the country as a whole (-19%), the East Bay did exceptionally well. Leading the pack in terms of absolute funding were the Biotechnology and Financial Services industries, which combined to receive about half of the total funding. Gritstone Oncology in Emeryville, a cancer immunotherapy company, received $102 million in funding in October 201512. This money will go toward the development of tumor-specific neo-antigen (TSNA) based immunotherapies focused on combating lung cancer. Another biotech firm, 4D Molecular Therapeutics, also in Emeryville, received $7 million in funding in August 2015 to further develop new gene therapy technology13. In the financial tech world, Marqeta in Oakland received $25 million to support its innovative payment processing technology14. Other industries that saw a healthy amount of funding were Software and Medical Devices and Equipment which together received $308 10 http://www.ktvu.com/news/ktvu-local-news/222835282-story 11 http://www.mercurynews.com/2017/01/09/port-of-oakland-sees-record-growth-in-2016/ 12 http://www.prnewswire.com/news-releases/gritstone-oncology-announces-102-million-series-a-financing-to- support-discovery-and-development-of-personalized-cancer-immunotherapies-300161742.html 13 https://www.crunchbase.com/organization/4d-molecular-therapeutics#/entity 14 https://techcrunch.com/2015/10/27/payment-services-firm-marqeta-adds-25-million-for-u-s-global-expansion/ From the first three quarters of 2015 to the first three quarters of 2016, venture capital funding increased by 27.5% for a total of nearly $1.3 billion. Moreover, compared to Silicon Valley (-23%) and the country as a whole (-19%), the East Bay did quite well. East Bay Economic OUTLOOK 2017-1822 | East Bay Venture Capital Funding by Industry Industry 2015 ($ millions) 2016 ($ millions) Chg (%) Share of Total VC Funding, 2015 (%) Share of Total VC Funding, 2016 (%) Biotechnology 216.6 382.2 76.4 21.5 29.7 Computers and Peripherals 70.0 0.0 -100.0 6.9 - Consumer Products and Services 76.3 52.4 -31.3 7.6 4.1 Electronics Instrumentation 10.1 88.0 771.3 1.0 6.8 Financial Services 0.0 241.8 - - 18.8 IT Services 0.0 19.6 - - 1.5 Industrial Energy 207.7 74.1 -64.3 20.6 5.8 Media and Entertainment 12.1 4.0 -66.5 1.2 0.3 Medical Devices and Equipment 109.0 112.6 3.2 10.8 8.8 Retailing Distribution 12.9 17.8 38.0 1.3 1.4 Semiconductors 17.2 99.0 474.3 1.7 7.7 Software 272.3 195.0 -28.4 27.0 15.2 Telecommunications 5.0 0.0 -100.0 0.5 - Total 1,009.3 1,286.6 27.5 100.0 100.0 Total 1191.8 1042.4 -12.5 100.0 100.0 Source: MoneyTree in the East Bay as a region compares favorably to entire states, such as Texas. During this period, most funding went to middle-expansion stage companies, which received 37% of funding, followed closely by later stage companies with 31% of funding. Early stage companies received roughly the same amount of funding as in 2015, 28% compared to 26% in 2016, while startups received almost 6% of total funding — up from 0% in 2015. million, or 24% of total funding. Semiconductors grew 474% during this period and received $99 million in funding. Industries that saw significant decreases in funding were Consumer Products (-31.3%), Industrial Energy (-64.3%), and Media and Entertainment (-66.5%). W hile Software pulled in a large amount of funding, this still represented a decrease from the year before, when it received well over $270 million in funding. Still, venture capital funding E AST B AY BUSINESS ACTIVITY East Bay Venture Capital Funding by Stage Stage 2015 ($ millions) 2016 ($ millions) Chg (%) Share of Total VC Funding, 2015 (%) Share of Total VC Funding, 2016 (%) Early Stage 283.2 334.4 18.1 28.1 26.0 Expansion 310.2 480.4 54.9 30.7 37.3 Later Stage 415.9 398.8 -4.1 41.2 31.0 Startup Seed 0.0 73.0 -0.0 5.7 Total 1,009.3 1,286.6 27.5 100.0 100.0 Source: MoneyTree Lam Research Facility in Fremont photo by: Lam Research East Bay Economic OUTLOOK 2017-18 | 23 +210% in office construction 210% increase over 2015 in office construction permitting in East Bay. +21.3% commercial rents More affordable than San Francisco (+62.0%) and the South Bay (+31.9%) since 2010 . E AST B AY COMMERCIAL R EAL ESTATE OVERVIEW Sustained demand for commercial real estate in the East Bay was evidenced by tightening vacancy rates across all major categories as developers added new projects at a robust pace. Despite rapidly rising rents for commercial properties, the East Bay is still relatively more affordable than the South Bay and San Francisco, and thus continues to entice employers to the region. Although planned construction for 2016 dipped slightly below record high post- recession investment in 2015, this was largely the result of a drop in permitting of industrial properties, as every other major category gained ground. Much of the drop in industrial permitting was offset by strengthened interest in office properties, which accounted for 7.7% of nonresidential construction spending in 2016, up from 2.4% the year prior. East Bay Office Construction (in millions) Emeryville: $50.9 Oakland: $30.5 Tri-Valley: $16.4 Aerial view of Gillig in Livermore photo by: City of Livermore 13.6% office vacancies 13.6% vacancy rates in the East Bay office rental market are at a seven-year low. East Bay Economic OUTLOOK 2017-1824 | OFFICE R ENTAL MARKET The East Bay’s office market is catching up to the rest of the Bay Area because of a pronounced affordability advantage. In 2016, demand for office space grew alongside employment increases in the professional, technology, and business sectors. The rate at which office space has been absorbed continued to push vacancy rates down, and a quickly tightening market triggered marked gains in rental rates. In the fourth quarter of 2016, average asking rates accelerated to $31.59 per square foot, representing year-over- year growth of 8.1%. The East Bay has lagged behind San Francisco and San Jose in rental rate gains. While office rents are 59.3% higher in San Francisco and 42.4% higher in San Jose than they were in early 2010, rental costs rose only 21.3% in the East Bay in that same period. To further illustrate the difference, in the fourth quarter of 2015, the rent per square foot in the East Bay was 21.6% lower than in the South Bay and 42.4% lower than in San Francisco. In contrast, in the fourth quarter of 2014, East Bay rents were 23.5% and 45.8% lower, respectively. Even though East Bay rent growth was stellar in the last year, the South Bay and San Francisco saw even stronger rent growth, enabling the East Bay to retain its cost advantage for Bay Area office space. Nonresidential Building Permit Values, in Millions ($) Type of Property 2010 2011 2012 2013 2014 2014 2015 2015 - 2016 Change (%) East Bay San Francisco South Bay Office 3.50 67.50 13.50 8.10 76.90 37.90 117.40 210.1 -54.4 89.2 Retail 43.00 102.80 33.30 66.90 171.10 180.30 212.40 17.8 83.0 12.9 Industrial 112.10 24.70 35.00 149.00 124.10 107.50 19.40 -81.9 n/a -54.0 Renovations/Alter. 568.60 606.70 477.10 695.20 895.50 868.90 924.30 6.4 -27.8 27.9 Total 850.10 1,029.80 622.90 1,025.30 1,461.80 1,540.10 1,515.50 -1.6 -14.2 35.8 Source: Construction Industry Research Board Rent Discounts in the East Bay Relative to San Francisco and the South Bay Property Type Property Class East Bay Avg. Rent in Q4-2016 ($ per sq. ft. per year) Discount from San Francisco (%) Discount from the South Bay (%) Office Total 31.59 45.8 23.5 Office A 35.56 44.9 23.4 Office B, C 27.44 43.0 24.3 Retail Total 29.66 18.4 15.3 Warehouse/Distribution Total 5.55 38.3 24.2 Flex/R&D Total 9.59 35.4 35.3 Source: REIS 10 15 20 25 10 15 5 5 20 25 Q1-10 Q2-11 Q3-12 Q4-13 Q1-15 Q2-16 Va c a n c y R a t e ( % ) Office Vacancy Rates Q1-10 to Q4-16 East Bay San Francisco South Bay Source: REIS E AST B AY COMMERCIAL R EAL ESTATE East Bay Economic OUTLOOK 2017-18 | 25 E AST B AY COMMERCIAL R EAL ESTATE Not surprisingly, vacancy rates in the East Bay office rental market are at a seven-year low, and the gap between vacancy rates in the East Bay and South Bay continues to widen. At a current vacancy rate of 13.6%, the overall East Bay office market tightened by 1.7 percentage points between the fourth quarter of 2015 and the fourth quarter of 2016. This decrease is similar to the declines experienced last year. However, over 7.1 million square feet remains available on the market. More than half of available space is comprised of lower quality, or “Class B” and “Class C” space – pointing to a much tighter market for high quality office space. OFFICE SUBMARKETS Although the most notable gains in office rents have been concentrated in northwest Alameda County, they were also robust in outlying areas. Virtually every submarket saw average asking rents rise in 2016 as occupancy increased. Rental rate appreciation was the strongest in North Alameda1 and the Central Business District2 submarkets, where asking rates rose 10.3% and 14.4%, respectively. These are also the East Bay’s priciest submarkets, with average asking rates of $33.51 and $42.89 per square foot. The North Alameda submarket saw particularly heated absorption over the year, and the average vacancy rate fell to 5%, down from 9% the year prior. Contra Costa County also saw healthy gains over the previous year. Rental rate appreciation was particularly strong in the North Contra Costa submarket,3 where average asking rents rose to $30.71 per square foot. This marked a 7.2% year over year increase in the fourth quarter of 2016. According to Transwestern, 2016 – 2017 to date has seen office vacancy rates decline by as much as 18% in the non-core submarkets of Concord, Walnut Creek, Fremont and the area near the Oakland International Airport. 1 Reis, Inc. includes parts of the cities of Emeryville, Berkeley, Piedmont, Alameda, and outlying areas of Oakland City within the North Alameda submarket. 2 As defined by Reis, Inc., the Central Business District includes Downtown Oakland, and is bounded by Interstate 980/State Route 24, the I-580, Fruitvale Avenue, and the Brooklyn Basin. 3 The North Contra Costa submarket includes the cities of Concord, Pittsburg, Pleasant Hill, Martinez, and Walnut Creek. Office Submarket Snapshot: Q4-15 Submarket Rent ($ per sq. ft. per year) Vacancy Rate (%) Vacant Square Feet (000s) North Alameda 33.51 5.0 270 North I-680 29.03 8.6 648 Central Business District 42.89 9.0 948 North Contra Costa 30.71 13.2 1,481 West Contra Costa 30.09 14.4 278 Airport/San Leandro/Hayward 23.33 19.5 832 Fremont/Newark 22.31 21.6 684 South I-680 27.61 23.7 1,998 Source: REIS Rosewood Commons in Pleasanton photo by: Rosewood Commons In the fourth quarter of 2015, the rent per square foot in the East Bay was 21.6% lower than in the South Bay and 42.4% lower than in San Francisco. East Bay Economic OUTLOOK 2017-1826 | 0 100,000 200,000 400,000 300,000 500,000 1995 1999 2003 2007 2011 2015 Pe r m i t V a l u e s ( $ T h o u s a n d s ) Office Construction Permits Alameda County Contra Costs County Source: Construction Industry Research Board 4 http://www.businessinsider.com/uber-scales-back-oakland-expansion-2017-3 The Central Business District continued to command the highest asking rates in the East Bay, with average submarket rents rising to an annual rate of $42.89 per square foot in the fourth quarter of 2016, up from $37.50 per square foot the year prior. Despite relatively tepid absorption in the Central Business District, renovations and alterations of existing buildings probably contributed to the rising rates. It is also likely that gains were related to the expectation that Uber’s entrance would quickly encourage growth in the technology sector. Uber recently announced that their new Oakland headquarters will employ a few hundred, rather than a few thousand, workers by early 2018,4 so there may be some deceleration in expected growth. However, Uber still maintains an office-space landlord role and intends to lease their office-space to other tenants in an attractive market. OFFICE CONSTRUCTION Office construction permitting spiked in 2016 after dipping in the prior year. Based on data from the Construction Industry Research Board, the total value of new office projects was $117.4 million. Overall, planned office construction increased 210% over the prior year and reached a post-recession high for the East Bay. Still, planned office construction remains centered in Alameda County, accounting for more than 99% of the region’s annual investment. Office developers’ preference for Alameda County has been particularly strong coming out of the recession. The reason for this is simple. Professional jobs that left Contra Costa County during the recession have been slow to return, prompting more members of the highly skilled local workforce to commute to better opportunities in the Bay Area. The county has therefore attracted a smaller share of office projects since the recession. In the 10 years leading up to the recession, from 1997 to 2006, the county accounted for 29.4% of regional development, but from 2007 to 2016 it accounted for only 17.9%. With more land available for development, the Tri-Valley area of the East Bay continued to attract a Retail Submarket Snapshot: Q4-15 Submarket Rent ($ per sq. ft. per year) Vacancy Rate (%) Vacant Square Feet (000s) Central Contra Costa 32.18 4.6 352 Central/North Alameda 30.68 4.9 287 North Alameda/West Contra Costa 33.93 5.3 124 East Alameda 28.09 7.2 329 South Alameda 25.51 7.2 339 East Contra Costa 23.62 10.0 307 Santa Clara/Sunnyvale 33.70 4.3 910 San Francisco (MD)35.54 3.1 307 Source: REIS E AST B AY COMMERCIAL R EAL ESTATE Still, planned office construction remains centered in Alameda County, accounting for 99% of the region’s annual investment. East Bay Economic OUTLOOK 2017-18 | 27 E AST B AY COMMERCIAL R EAL ESTATE large share of planned office projects in 2016. However, developers are increasingly turning to Oakland and Emeryville, where rent appreciation has been particularly heated. Several high-profile projects are cropping up where local professionals can find urban amenities and public transit. These projects include those in Oakland at 1100 Broadway, Oakland City Center and Jack London Square, and EmeryStation West in Emeryville. Because professionals represent a majority of Alameda County workers who use public transit,5 it is likely that office space near well-developed public transportation lines will continue to carry a high premium. RETAIL RENTAL MARKET With comparatively low rents and a comparatively high vacancy rate, the East Bay retail market remains the most accessible of the major Bay Area markets. As more retail space became available in the last year, vacancy rates rose 0.5 percentage points to 6.6% in the fourth quarter of 2016. Rental rate appreciation has shown signs of winding down, however, with 1.0% year-over-year g rowth in the fourth quarter of 2016. Carried by high incomes and increased visitations, the East Bay retail sector has seen substantial growth since pre-recession highs, but recent trends indicate that the region has not been immune to changes in consumer behavior. Tech-savvy consumers are increasingly looking for the most price-competitive and convenient options online, which has been particularly hard on larger retailers as evidenced by recent closures. According to Moody’s Investor’s Service, the number of distressed U.S. retailers has tripled since the Great Recession.6 Renovation in East Bay malls, however, reflects ongoing adaptation. Local malls, for example, are migrating away from heavy emphasis on apparel and are adding open space, restaurants with amusement options and entertainment choices.7 Another trend that could have some impact on retail is growth in the third-party food delivery industry. Globally, McKinsey & Company estimates that online food delivery represented up to 36% of the total food delivery market in 2016, up from 8% in 2011.8 More locally, Office Construction by Submarket City/Submarket 2016 Change (%) East Contra Costa 320,111 3,101.1 Other 7,000,000 2,101.0 Oakland 1,393,849 2,091.1 Alameda 6,134,000 33.3 Tri-Valley 16,379,897 16.9 I-80/I-880 2,789,906 -70.3 Emeryville 50,906,178 n/a East Bay Total 117,410,483 210.1 Source: CIRB 5 In the County of Contra Costa, workers in “management, business, science, and arts occupations” made up 53% of county residents who reported using public transit on their workday commutes in 2015. For Alameda County, workers in this category made up 53.8% of county workers who used public transit. 6 https://www.moodys.com/research/Moodys-Number-of-distressed-US-retailers-triples-since-the-Great-- PR_362722 7 http://www.eastbaytimes.com/2017/03/07/newark-mall-gets-massive-entertainment-complex/ 8 http://www.mckinsey.com/industries/high-tech/our-insights/the-changing-market-for-food-delivery In the 10 years leading up to the recession, from 1997 to 2006, Contra Costa County accounted for 29.4% of regional development, but from 2007 to 2016 it accounted for only 17.9%. East Bay Economic OUTLOOK 2017-1828 | Amazon recently rolled out a free delivery service for 40 Oakland restaurants.9 As traditional dine- in restaurants adapt their business models to account for new modes of consumption, their priorities for real estate may shift as well. While there is little evidence currently to indicate that this trend is having a significant impact on the East Bay, it is worth noting that some restauranteurs in urban centers have been experimenting with delivery-only models. Delivery-only restaurants have begun to crop up in New York 10 and San Francisco11 as a way for owners to access potential markets despite high rental costs and little available space. For the moment, however, delivery-dependent models will probably remain limited to the costliest areas. RETAIL SUBMARKETS In contrast to the office market, since the recession, the Retail and the Leisure and Hospitality sectors have increased their presence in Contra Costa County, as reflected by strong performance in the local retail market. Submarkets in West and Central Contra Costa retained the highest average asking rents in the region, per Reis, Inc. estimates. The last year saw some occupants of higher-cost submarkets leave as rents rose. This was particularly notable in Central/North Alameda, where the level of occupied stock fell 1.7% over the last year as some tenants were priced out of the market. Vacancy rates accordingly increased 2.2 percentage points to a current 7.4%. Demand appears to be moving toward the lower end of the market, with the most affordable submarkets posting the strongest gains over the last year. Rental properties in East Contra Costa and South Alameda saw stronger momentum than those in any other East Bay submarket in terms of absorption and rental rate appreciation. In East Contra Costa, rental rates increased 2.7%, the strongest pace over the last year, and vacancies decreased 1.4 percentage points. South Alameda saw gains in average asking rates, which rose 1.8% between the fourth quarter of 2015 and the fourth quarter of 2016. Nevertheless, the two submarkets retain a strong affordability advantage over the rest of the region. Retail Submarket Snapshot: Q4-16 Submarket Rent ($ per sq. ft. per year) Vacancy Rate (%) Vacant Square Feet (000s) West Contra Costa 34.39 5.3 124 Central Contra Costa 32.46 5.5 414 South Alameda 25.96 6.2 291 East Alameda 28.4 7.3 335 Central/North Alameda 30.86 7.4 449 East Contra Costa 24.25 8.6 263 Source: REIS 9 http://www.bizjournals.com/sanfrancisco/news/2016/11/03/amazon-prime-restaurant-delivery-oakland.html 10 http://ny.eater.com/2016/9/26/12717518/delivery-only-restaurants-nyc 11 http://www.eater.com/2016/9/28/13023076/munchery-sf-menu-delivery-how-it-works-photos#6664185 3 4 5 6 7 8 3 4 22 5 6 7 8 Q1-10 Q3-11 Q1-13 Q3-14 Q1-16 Va c a n c y R a t e ( % ) Retail Vacancy Rates Q1-10 to Q4-16 East Bay San Francisco San Jose Source: REIS 26 28 30 32 34 36 38 Q1-10 Q3-11 Q1-13 Q3-14 Q1-16 Pe r S q . / F t . ( $ ) Retail Cost of Rent Q1-10 to Q4-16 East Bay San Francisco South Bay Source: REIS E AST B AY COMMERCIAL R EAL ESTATE East Bay Economic OUTLOOK 2017-18 | 29 E AST B AY COMMERCIAL R EAL ESTATE food, arcade games and park rides to the NewPark Mall in Newark, probably account for much of this.16 Both trends point to retail property developers adapting to changing consumer habits, and focusing on providing entertainment and leisure experiences that online shopping cannot. Planned retail construction has been heavily concentrated in the Tri-Valley and North I-680 submarkets in recent years. Although retail development is spreading to outlying areas, the two submarkets accounted for almost half of retail permitting activity in 2016. Retail development appears to be picking up in the I-80/I-880 and Fremont submarkets as well. R ETAIL CONSTRUCTION In 2016, the East Bay saw planned retail investment reach $212.4 million, the region’s highest level in twenty years. Based on statistics provided in a recent Cushman & Wakefield report, in the fourth quarter of 2016, “lifestyle” or mixed-use shopping centers had the strongest rate of construction in the East Bay accounting for 42.7% of retail space under construction.12 More is expected, with several major mixed-use projects planned. For example, the Brooklyn Basin project in Oakland recently broke ground, and is anticipated to add 200,000 square feet of mixed-use retail space.13 Another mega project in the works, the Richmond Bay Specific Plan, could add 720,000 square feet of retail space.14 However, the University of California, Berkeley recently announced an indefinite suspension of plans to develop two parcels of the plan region, which could stall the development as a whole.15 Although malls accounted for significantly less construction activity, they are by no means dormant. Cushman & Wakefield reported that 74,170 square feet of power and regional shopping centers were under construction in late 2016. Renovations and alterations to existing malls, such as the recent addition of John’s Incredible Pizza, a chain establishment featuring Retail Construction by Submarket City 2016 Change (%) I-80/I-880 26,706,736 782.8 Emeryville 4,114,435 644.0 Other 8,013,270 487.1 Fremont 30,747,190 161.0 Richmond 24,252,802 129.5 East Contra Costa 3,315,341 126.9 Tri-Valley 54,509,350 -6.1 North I-680 47,110,197 -23.0 Oakland 5,780,000 -48.5 Berkeley 220,000 -98.9 Alameda 6,267,437 N/A East Bay Total 212,374,989 17.8 Source: CIRB 12 http://www.cushmanwakefield.com/en/research-and-insight/unitedstates/east-bay-retail-snapshot/ 13 http://www.bizjournals.com/sanfrancisco/blog/real-estate/2016/05/oakland-brooklyn-basin-housing- signature.html 14 http://www.ci.richmond.ca.us/2647/Richmond-Bay-Specific-Plan 15 http://www.mercurynews.com/2016/08/26/richmond-residents-stunned-by-cals-cancellation-of-global- campus-project/ 16 http://www.eastbaytimes.com/2017/03/07/newark-mall-gets-massive-entertainment-complex/ 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 1995 1999 2003 2007 2011 2015 Pe r m i t V a l u e s ( $ T h o u s a n d s ) Retail Construction Permits Alameda County Contra Costa County Source: Construction Industry Research Board “Lifestyle” or mixed- use shopping centers had thestrongest rate of construction in the East Bay accounting for 42.7% of retail space under construction. East Bay Economic OUTLOOK 2017-1830 | The relative affordability of East Bay warehousing properties has also attracted non-traditional renters. These have run the gamut from local artists in need of lower cost housing to illegal marijuana operations.17 The recent Ghost Ship fire alerted the nation to the prevalence of unpermitted warehouse conversions to “live/work” centers in Oakland artist enclaves, which highlighted the problem of low apartment vacancies and high costs of rent. In response to the recent tragedy, Oakland officials are looking to create legal pathways for such conversions that would bring properties out of unregulated territory.18 While the required updates to bring such properties to code could result in costs that some landlords will find prohibitive, legalizing the process could bring larger players into what is a tight and swiftly gentrifying residential market. WAREHOUSE SUBMARKETS All East Bay submarkets posted gains. The Oakland/San Leandro submarket continued to lead in rental WAREHOUSE RENTAL MARKET Warehouse properties in the East Bay continued to be in high demand through 2016. Vacancy rates fell 0.7 percentage points, reaching 8.6% in the fourth quarter of 2016. This is the tightest market the region has seen during the current expansion, with 10.9 million square feet on the market. The region’s comparative affordability advantage has continued to help draw high-tech manufacturers from other parts of the Bay Area. Notably, San Francisco vacancy rates barely budged in the same time frame. The metro vacancy rate fell 0.4% to 7.0% over the course of the last year. Rents are rising as well due to the tightening availability. As of the fourth quarter of 2016, the average asking rate stood at $5.55 per square foot. Year to year, warehouse properties posted a 3.2% increase in the fourth quarter of 2016, up from 2.6% during the previous annual period. Still, the East Bay rate is substantially lower than San Francisco’s (-62.0%) and the South Bay’s (-31.9%). 17 http://www.eastbaytimes.com/2016/10/06/oakland-marijuana-grow-discovered-in-warehouse-fire/ 18 http://www.eastbaytimes.com/2017/01/28/what-oakland-can-learn-from-new-york-la-and-colorado-when-it- comes-to-warehouse-conversions/ 8 10 12 14 16 8 10 6 6 12 14 16 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Va c a n c y R a t e ( % ) Warehouse Vacancy Rates Q1-10 to Q4-16 East Bay San Francisco South Bay Source: REIS Warehouse and Distribution Center Submarket Snapshot: Q4-16 Submarket Rent ($ per sq. ft. per year) Vacancy Rate (%) Vacant Square Feet (000s) Oakland/San Leandro 5.02 7.1 1,968 Union City 5.64 7.5 1,132 North Alameda/West Contra Costa 5.55 8.1 1,409 Concord/Pittsburg 5.22 8.7 884 Pleasanton/Livermore 5.82 9.7 1,342 Hayward 5.99 9.8 1,974 Newark/Fremont 5.72 9.8 2,190 Source: REIS Planned retail construction has been heavily concentrated in the Tri-Valley and North I-680 submarkets in recent years. E AST B AY COMMERCIAL R EAL ESTATE East Bay Economic OUTLOOK 2017-18 | 31 E AST B AY COMMERCIAL R EAL ESTATE recession low, and it is likely that as the market tightens the deceleration will continue. The East Bay performed well compared to the broader Bay Area. Although average asking rates are increasing across Bay Area markets, in the fourth quarter of 2016, the East Bay achieved the highest rental rate growth at 2.8% year over. In general, the addition of new flex/R&D space since the start of the decade has been fairly sluggish, at 174,000 square feet. This could change when new developments will bring more space online. One of the largest proposed projects is the Coliseum City development in Oakland, which could add 4.7 million square feet of flex/R&D. FLE x/R&D SUBMARKETS Vacancies tightened substantially across most submarkets, with the greatest uptick in occupancy and rents in Union City, the smallest and most affordable East Bay submarket. Rents appreciated in burgeoning industrial hotbeds, including Union City, Hayward, and Newark/ Fremont. These submarkets remained substantially cheaper than in the North Alameda/West Contra Costa20 and Concord/Pittsburgh submarkets. Even the Oakland/San Leandro submarket, by far the tightest of the East Bay, saw vacancy rates continue to fall, reaching 3.2% in the fourth quarter of 2016. rate appreciation, and vacancy rates fell significantly as well. Demand has probably picked up in the area because of stronger logistics activity. The Port of Oakland reported a 4% increase in handled T EUs (twenty- foot equivalent units) during 2016. Tesla, Inc. has also continued to make its mark on the East Bay warehouse market, and signed a lease for three warehouses, or 1.3-million-square- feet in Livermore in March 2017.19 The project build-out singlehandedly increased total stock in the Pleasanton/ Livermore submarket by 10.3% over 2016 and will likely spur further interest in the locale. Vacancy rates stood at 9.7% in the fourth quarter of 2016, posting a 1.7 percentage point decrease since the year prior. At $5.82 per square foot, average rental rates for the submarket increased 3.2% year over year by the fourth quarter of 2016. FLEx/R&D RENTAL MARKET As the East Bay continues to evolve into a center of innovation, the flex/R&D market showed strength through 2016. Robust expansion in the local technology sector over the last year led to a strong uptick in occupancy. As of the fourth quarter of 2016, the vacancy rate stood at 12%, down 1.2 percentage points from the fourth quarter of 2015. This represents a slight deceleration from the previous year, when vacancy rates fell 1.9 percentage points. At 12%, current vacancies are at a post- 19 http://www.bizjournals.com/sanfrancisco/news/2017/03/23/real-deals-industrial-tesla-at-oaks-logistics.html 20 This submarket covers the cities of Berkeley, Richmond, and Martinez. 5 10 15 20 25 5 10 0 0 15 20 25 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Va c a n c y R a t e ( % ) Flex/R&D Vacancy Rates Q1-10 to Q4-16 East Bay San Francisco South Bay Source: REIS 200 700 1,200 1,700 2,200 2,700 200 700 1,200 1,700 2,200 2,700 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Ho u s i n g P e r m i t s ( S A a n d S m o o t h e d ) Residential Construction Permits Q4-07 to Q4-16 East Bay San Francisco South Bay Source: Construction Industry Research Board East Bay Economic OUTLOOK 2017-1832 | Flex and Research and Development Submarket Snapshot: Q4-16 Submarket Rent ($ per sq. ft. per year) Vacancy Rate (%) Vacant Square Feet (000s) Oakland/San Leandro 9.47 3.2 70 Pleasanton/Livermore 10.31 7.6 293 Concord/Pittsburg 10.19 8.9 195 North Alameda/West Contra Costa 19.14 12 153 Union City 5.61 12.2 119 Hayward 8.91 12.9 527 Newark/Fremont 8.7 15.7 1,668 Source: REIS Despite Tesla, planned development in the East Bay appears to be losing steam overall, with an 81.9% fall in the value of industrial permits granted in 2016, compared to the year prior. Still, this follows three years of exceptionally high investment levels in the region. It also bears mentioning that 73.2% of new industrial construction has been fueled by five firms in the region—Tesla, Amazon, FedEx, and UPS, and Apple—over the last two years, according to Collier’s International.24 Therefore, falling investment in the region is likely due to slowing expansion of these firms, but there will likely be another wave of construction as ancillary firms, as in the case of Tesla’s suppliers, follow these major players into the region. The East Bay industrial market is well placed within an existing logistics and distribution network and offers substantial rent discounts and more available space compared to its neighbors. These advantages will continue to serve the East Bay region well. INDUSTRIAL RENTAL MARKET The East Bay industrial market is playing an increasingly prominent role in the Bay Area tech ecosystem as space becomes scarce and costly in San Francisco and the South Bay. Already, some of Tesla’s 300 suppliers have moved into the East Bay, which has led some to speculate that the region could become the manufacturing center for electric vehicles.21 These include SAS Automotive Systems, a vendor based in Germany that recently pre-leased a Newark industrial building.22 As Tesla moves toward their stated production goal of 500,000 units annually by 2018, Tesla’s ability to meet this mark will depend on a rapid expansion in production and supply chain capacities. The recently signed warehouse lease represents a step in this direction and will expedite the movement of intermediate and finished goods to the Fremont factory.23 E AST B AY COMMERCIAL REAL ESTATE 21 http://www.bizjournals.com/sanfrancisco/news/2016/08/04/how-tesla-drives-manufacturing-bay-are-elon- musk.html 22 http://www.bizjournals.com/sanfrancisco/news/2016/11/11/tesla-sas-eureka-landing.html 23 http://www.bizjournals.com/sanfrancisco/news/2017/03/23/real-deals-industrial-tesla-at-oaks-logistics.html 24 https://www.bisnow.com/san-francisco/news/industrial/east-bay-industrial-is-thriving-69811 Industrial Construction by Submarket City/ Submarket 2016 Change (%) North I-680 245,000 188.2 Richmond 8,928,000 -31.7 Other 64,280 -96.5 I-80/I-880 10,165,662 N/A East Bay Total 19,402,942 -81.9 Source: CIRB Planned development in the East Bay appears to be losing steam overall, with an 81.9% fall in the value of industrial permits granted in 2016, compared to the year prior. East Bay Economic OUTLOOK 2017-18 | 33 0nly 4.1% vacant units Only 4.1% of housing units in the East Bay were vacant in 2015, well below the statewide average of 7.8% E AST B AY RESIDENTIAL REAL ESTATE OVERVIEW T he supply constraints that have hindered the East Bay housing market in recent years took deeper root in 2016, as homebuyer demand continued to be driven by the East Bay region’s relative affordability advantage, sustained income and population growth. Though overall residential construction activity picked up over the last year, particularly in the single-family segment of the market, new housing construction remains well below its historical pace. This activity has done little to remedy the extremely low inventory of homes for sale in the East Bay. The combination of strong homebuyer demand fueled by a population of homebuyers with greater spending capacity coming from high-cost counties elsewhere in the Bay Area, limited inventory, and a recovery defined by subpar construction activity has the East Bay housing market headed toward a critical inflection point. Will supply pick up and preserve the region’s long-held affordability advantage, or w ill long-term supply constraints yield something similar to the sky-high prices and diminished home sales observed just across San Francisco Bay? $719K median home price Median home price in Alameda County: $719k, Contra Costa County $543k 3.9% increase in rents East Bay rents rise 3.9% from 2015 to 2016 Housing price forecast 11.9% 11.9% 11.9% 11.9% San Francisco Bay from the East Bay hills photo by Joe Parks, Berkeley, CA 2017 2018 2019 2020 Housing prices are forecasted to increase 11.9% year-to-year from 2017 to 2020 East Bay Economic OUTLOOK 2017-1834 | more modest 4.1% between the fourth quarter of 2015 and the fourth quarter of 2016, recovering from a brief dip in the first half of 2015 HOUSING AFFORDABILITY Persistently low inventories of homes for sale across the Bay Area have resulted in red-hot competition for the limited number of homes on the market.2 As a result of this long-term supply constraint, the average household in the East Bay would have to spend $35,300, or 51.9%, of its income each year to afford the mortgage payment for the median-priced ($629,633) home in the region. Moreover, potential homebuyers would also be on the hook for a $125,900 down payment3 on the median-priced home in the East Bay. Nonetheless, East Bay home prices remain considerably more affordable than prices in neighboring communities in San Francisco4 and Santa Clara counties. D EFAULTS A ND FORECLOSURES Sustained increases in local incomes in recent years have dramatically improved household finances in the East Bay, which has further reduced HOME PRICES The relative affordability of housing in the East Bay, coupled with growing household incomes, propelled price appreciation in the region last year, albeit at a far more moderate pace than in recent years. Price appreciation in Alameda County (6.7%) and Contra Costa County (6.2%) lagged growth in San Francisco (13.1%) in 2016, though early figures for the first quarter of 2017 indicate that a reversal of this year-long trend is on the horizon.1 Home prices in San Francisco may be reaching a tipping point, though they would have to fall by a considerable margin across the Bay Area before making a sizable dent in the East Bay’s cost advantage. Falling home prices elsewhere in the Bay Area will do little to influence short-term trends in the East Bay. CONDOMINIUM PRICES With more buyers priced out of nearby San Francisco and Santa Clara counties, the market for existing condominiums held steady in the East Bay over the last year. At 7.5% price appreciation over the year, Alameda County logged the fastest growth among Bay Area regions and outpaced the state overall. Existing condo prices in Contra Costa County grew at a E AST B AY RESIDENTIAL REAL ESTATE 200 350 500 650 800 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Me d i a n P r i c e s ( $ 0 0 0 , S A ) Existing Single-Family Home Prices Q4-07 to Q4-16 California Alameda County Contra Costa County Source: DataQuick 100 200 300 400 500 600 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Me d i a n P r i c e s ( $ 0 0 0 s , S A ) Existing Condominium Prices Q4-07 to Q4-16 California Alameda County Contra Costa County Source: DataQuick 30 40 50 60 70 80 90 100 110 Q4-00 Q4-02 Q4-04 Q4-06 Q4-08 Q4-10 Q4-12 Q4-14 Q4-16 Ho u s i n g C o s t s a s % o f I n c o m e Home Affordability Index Bay Area Q4-00 to Q4-16 East Bay San Francisco South Bay Source: U.S. Federal Reserve; DataQuick; U.S. BEA 1 Riley McDermid, “S.F. home sales hit 5-year low, and prices are falling.” San Francisco Business Times. March 27, 2017. Available at http://www.bizjournals.com/sanfrancisco/news/2017/03/27/san-francisco-house-prices- sales-falling.html. 2 Richard Scheinin, “Seller’s market? Bay Area home sales slip, but prices soar.” East Bay Times. March 24, 2017. Available at http://www.eastbaytimes.com/2017/03/23/sjm-housing-0324/. 3 Assuming 20% down. 4 The historical Home Affordable Index for San Francisco (MD) has changed significantly since last year’s report. The Bureau of Economic Analysis significantly revised local personal income in many regions as part of their revised statistics for the 1998 to 2014 period. As such, the affordability index for San Francisco (MD) was overstated for the time period in question. More information about these revisions can be found at https://www. bea.gov/newsreleases/regional/lapi/lapi_newsrelease.htm. East Bay Economic OUTLOOK 2017-18 | 35 0 10 20 30 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 (S A ) Defaults per 1,000 Mortgaged Housing Units Q4-07 to Q4-16 California Alameda County Contra Costa County Source: DataQuick home mortgage products are now being utilized. SUPPLY With strong demand for housing and below-average residential construction activity during the recent recovery, the supply of available housing in the East Bay continues to tighten.5 Only 4.1% of housing units in the East Bay the number of default notices in Alameda and Contra Costa counties in 2016. Parts of Contra Costa County were previously hit with high foreclosure rates, partially due to the use of predatory lending products. With 1.3 and 2.2 defaults per 1,000 mortgaged housing units in Alameda County and Contra Costa County, respectively, few distressed properties will be on the market in the months ahead. Mirroring the downward trend in defaults, foreclosures fell throughout the East Bay in 2016. After years of significant declines from ultra-high levels during the Great Recession, foreclosures in Oakland, Berkeley, Concord, Fremont and other area cities have fallen below the pre- recession average. And although foreclosures remain higher than their pre-recession averages in several East Bay cities, the number of foreclosures in many of these cities fell significantly between the fourth quarter of 2015 and the fourth quarter of 2016. The decrease in foreclosures will continue as new E AST B AY RESIDENTIAL REAL ESTATE Foreclosures in Select Cities in the East Bay City 1998-2006 Average Q4 2015 Q4 2016 Change (%) Q4-2015 to Q4-2016 1998-2006 Average to Q4-2016 Oakland 37 39 25 -35.9 -32.4 Concord 9 14 7 -50.0 -22.2 Fremont 6 10 5 -50.0 -16.7 Berkeley 2 5 2 -60.0 0.0 Hayward 10 14 11 -21.4 10.0 Richmond 12 14 16 14.3 33.3 Antioch 15 55 26 -52.7 73.3 Alameda 1 0 2 NA 100.0 Brentwood 3 8 6 -25.0 100.0 Source: DataQuick Housing Vacancy Rate (%) Year Alameda Contra Costa East Bay CA 2007 8.0 6.7 7.4 8.3 2008 8.6 7.0 7.9 9.1 2009 8.7 8.1 8.5 9.1 2010 7.8 8.1 7.9 9.3 2011 6.7 6.2 6.5 9.1 2012 6.1 5.2 5.7 8.4 2013 5.4 5.4 5.4 8.3 2014 4.9 4.6 4.8 8.2 2015 4.0 4.1 4.1 7.8 Source: U.S. Census American Community Survey 5 Richard Scheinin, “Once red hot, Bay Area housing market still simmers.” The Mercury News. March 1, 2017. Available at http://www.mercurynews.com/2017/01/31/bay-area-real-estate-home-sales-dip-prices-rise/. As a result of this long- term supply constraint, the average household in the East Bay would have to spend $35,300, or 51.9%, of its income each year to afford the mortgage payment for the median- priced ($629,633) home in the region. East Bay Economic OUTLOOK 2017-1836 | culmination of five straight years of considerable price appreciation has eliminated a growing number of potential homebuyers. The East Bay has been no different, with home and condominium sales growing 0.6% in Alameda County and falling 0.8% in Contra Costa County between 2015 and 2016. However, even this lackluster sales activity in the East Bay is better than declining sales in San Francisco (-2.4%) and Santa Clara counties (-5.7%). Clearly, the East Bay’s affordability advantage made the region’s housing market relatively more resilient to the significant supply concerns rooted deep in the broader Bay Area. HOME AND CONDOMINIUM PRICES AND SALES With supply failing to keep pace with homebuyer demand again in 2016, home prices grew at a strong clip throughout the year. However, price appreciation was spread more evenly between Alameda and Contra Costa counties than it was a year earlier. Potential homebuyers responded quickly to the more severe shortage of housing in Alameda County, with many households looking instead to housing options in Contra Costa County in 2016. Nonetheless, the fastest-growing markets in the East Bay over the last year were again concentrated in Alameda County, led by the City of Oakland, home to some of the hottest neighborhoods for home appreciation in the broader Bay Area.6 The higher demand for housing were vacant in 2015, well below the statewide average of 7.8% despite a modest increase in new housing construction in the last three years, indicating that demand for housing in the region continues to dwarf the supply. Years of price appreciation have started to slow the pace of households entering the East Bay, as a growing number of households are priced out of even the Bay Area’s most affordable locales. In 2016, 10,133 new households entered the East Bay, well below the average of 12,500 during the previous three years. The pace of housing construction continues to lag behind household formation in the East Bay, however, despite sizable increases in the numbers of housing units permitted over the last three years. Indeed, roughly 141,600 new households have entered the East Bay since 2000, compared to 121,700 new housing units permitted for construction. This gap has become more severe in recent years, with nearly twice as many households moving into the East Bay since 2012 (57,277) than housing units permitted for construction during that time period (30,295). This persistent gap between household formation and housing construction will continue to constrain the supply of housing in the East Bay, barring a sizable uptick in construction activity or drop in demand. HOME AND CONDOMINIUM SALES Sales volume has started to decline throughout the Bay Area. The E AST B AY RESIDENTIAL REAL ESTATE 80 90 100 110 Q4-12 Q4-13 Q4-14 Q4-15 Q4-16 Sa l e s ( S A , I n d e x e d Q 4 - 1 2 = 1 0 0 ) Single-Family and Condominium Sales Q4-12 to Q4-16 California Alameda County Contra Costa County Source: DataQuick 0 5,000 10,000 15,000 20,000 1996 2000 2004 2008 2012 2016 Ho u s i n g U n i t s / H o u s e h o l d s Housing Permits and New Households East Bay, 1996 to 2016 New Households New Housing Permits Source: CIRB, U.S. Census 6 Kevin Truong and Riley McDermid, “The five hottest Bay Area neighborhoods for home appreciation are all in Oakland.” San Francisco Business Times. January 5, 2017. Available at http://www.bizjournals.com/ sanfrancisco/news/2017/01/05/zillow-housing-market-oakland-price-growth.html. East Bay Economic OUTLOOK 2017-18 | 37 Although the pace of price appreciation picked up in Contra Costa County in 2016, after a subpar showing in 2015, many of the slowest-growing housing markets in the East Bay are in the county’s more expensive locales. For example, prices fell 1.5% in Lafayette, where the median-priced home sold for more than $1.3 million, while price adjacent to BART and other transit lines, entertainment and dining, especially among younger residents, added to the popularity of housing in Oakland. This has contributed to the acute housing shortage that remains concentrated in the East Bay’s urban cores. Prices in these more densely populated areas should continue to rise. E AST B AY RESIDENTIAL REAL ESTATE Home and Condominium Sales and Median Prices in East Bay Areas with the Fastest-Growing Prices in 2016 City or Town/County Annual Sales Median Prices ($000s) Year-over-Year Change in Price (%) Alameda County 12,867 719 7.8 San Lorenzo 193 536 12.6 Oakland 3,064 662 11.2 San Leandro 723 552 10.7 Berkeley 607 1,067 9.8 Union City 498 687 9.4 Contra Costa County 12,816 543 6.8 Pleasant Hill 399 658 11.1 Walnut Creek 1,495 680 9.8 Oakley 602 405 9.5 Concord 1,380 492 8.6 Martinez 581 533 8.2 Source: California Association of Realtors Home and Condominium Sales and Median Prices in East Bay Areas with the Slowest-Growing Prices in 2016 City or Town/County Annual Sales Median Prices ($000s) Year-over-Year Change in Price (%) Alameda County 12,867 719 7.8 Newark 381 663 3.7 Emeryville 158 480 3.9 Livermore 1,213 682 5.2 Pleasanton 809 935 6.3 Dublin 800 810 6.5 Contra Costa County 12,816 543 6.8 Lafayette 268 1,327 -1.5 Moraga 178 1,026 3.2 San Ramon 990 886 3.3 Clayton 161 720 4.0 El Cerrito 225 772 5.3 Source: California Association of Realtors Homes in Town of Danville photo by: Karl Nielsen Roughly 141,600 new households have entered the East Bay since 2000, compared to 121,700 new housing units permitted for construction. East Bay Economic OUTLOOK 2017-1838 | 2015 and 2016 (5.3%) was more subdued than it had been in previous years, implying that more homes in high-priced parts of the East Bay are beyond the reach of a large proportion of would-be homebuyers. With many households priced out of higher-cost areas in the East Bay again in 2016, most residential market activity remains concentrated in the East Bay’s more affordable regions. Unlike last year, however, home sale volumes also fell in many appreciation in Moraga cooled to just 3.2% between 2015 and 2016. The choppy trends in the upper end of the East Bay housing market in 2015 carried into 2016. In fact, the relatively slow price appreciation and declining sales activity in these high- cost areas were more pronounced over the last year, with home and condominium sales falling in most areas in the East Bay. Moreover, the pace of price appreciation in these high-cost areas between E AST B AY RESIDENTIAL REAL ESTATE Home and Condominium Median Prices and Sales in Affordable East Bay Areas in 2016 City/County Median Prices ($000s) Year-over-Year Change in Price (%) Annual Sales Year-over-Year Change in Sales (%) Oakland 662 11.2 3,064 -6.8 San Leandro 552 10.7 723 -3.6 San Lorenzo 536 12.6 193 -17.2 Martinez 533 8.2 581 3.4 Hayward 524 9.0 1,315 -1.4 Concord 492 8.6 1,380 -4.3 Emeryville 480 3.9 158 -15.1 Oakley 405 9.5 602 10.9 Total 565 9.5 8,016 -3.8 Source: California Association of Realtors Home and Condominium Median Prices and Sales in Higher Cost East Bay Areas in 2016 City/County Median Prices ($000s) Year-over-Year Change in Price (%) Annual Sales Year-over-Year Change in Sales (%) Alamo 1,613 7.3 202 1.5 Orinda 1,443 7.6 233 -10.7 Lafayette 1,327 -1.5 268 -22.5 Danville 1,116 6.3 869 -2.0 Berkeley 1,067 9.8 607 -3.8 Moraga 1,026 3.2 178 -17.2 Pleasanton 935 6.3 809 -3.9 San Ramon 886 3.3 990 -9.1 Total 1,071 5.3 4,156 -7.0 Source: California Association of Realtors Family plays in playground photo by: Paige Green A large portion of recent East Bay single-family construction has been concentrated in East Contra Costa County, where there is more developable land than in the region’s urban cores. A disproportionate amount of single-family construction over the last three years has occurred in Brentwood, Oakley and Pittsburg. East Bay Economic OUTLOOK 2017-18 | 39 RESIDENTIAL CONSTRUCTION Despite significant supply concerns, the East Bay housing market stands on firmer footing than markets in neighboring San Francisco and the South Bay, if only for the elevated pace of residential construction over the last several years. Nearly 15,500 new residential housing units have been permitted in the East Bay since the first quarter of 2015, compared to 11,253 units in San Francisco and 11,492 in the South Bay. One major factor underpinning the resurgence of construction has been a flurry of activity in downtown Oakland, where more than 2,000 units are in the development pipeline.8 Residential construction activity in the East Bay for 2016 exhibited a growing balance between single- family and multi-family construction, as multi-family housing plateaued in 2015 and 2016 after a major surge during the prior two years. And while the multi-family explosion has lost momentum, single-family construction has increased. The number of single- family permits issued in the East Bay grew 14.8% to 3,890 units in 2016, while multi-family permits grew at 1.9% to 4,134 units. A large portion of recent East Bay single-family construction has been concentrated in East Contra Costa County, where there is more developable land than in the region’s urban cores. A disproportionate amount of single-family construction over the last three years has occurred in Brentwood, Oakley and Pittsburg, of these areas, providing some idea of the extent to which housing supply constraints have pervaded the East Bay market. Home and condominium sales in affordable East Bay areas fell 3.8% from 2015 to 2016. At the same time, these major supply concerns resulted in strong price appreciation, particularly in the City of Oakland and its outlying areas. APARTMENT VACANCIES AND RENTS Trends in the homebuyers’ market have continued to push many potential homeowners into the East Bay rental market, with rental costs rising at a steady 3.9% from the fourth quarter of 2015 to the fourth quarter of 2016. The most significant rental cost increase, led by a 71% increase over a 3.5 year period, was in Oakland7. The apartment vacancy rate in the East Bay has started to tick up slightly, though at 3.2%, it is the lowest in the broader Bay Area. The small increase in vacancies stems from a modest increase in residential housing construction that began at the start of 2015, though persistent demand for rentals has kept conditions in the market at ultra-tight levels. Clearly, it will take a sizable increase in residential construction activity to remedy the structural issues in the homebuyer market that have spilled over into the rental market. E AST B AY RESIDENTIAL REAL ESTATE 200 700 1,200 1,700 2,200 2,700 200 700 1,200 1,700 2,200 2,700 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Ho u s i n g P e r m i t s ( S A a n d S m o o t h e d ) Residential Construction Permits Q4-07 to Q4-16 East Bay San Francisco South Bay Source: Construction Industry Research Board 1,200 1,400 1,600 1,800 2,000 2,200 2 3 4 5 6 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Av e r a g e M o n t h l y R e n t ( $ ) Va c a n c y R a t e ( % ) Apartment Vacancy Rates and Rents in the East Bay Q4-07 to Q4-16 Vacancy Rate Rent Source: REIS 7 http://www.bizjournals.com/sanfrancisco/blog/real-estate/2016/10/oakland-3000-average-rent-zillow.html 8 David Debolt, “Oakland: Downtown grows up with new residential towers, but who will afford them?” The Mercury News. March 17, 2017. http://www.mercurynews.com/2017/03/16/oakland-downtown-grows-with- residential-towers/. 200 400 600 800 1,000 1,200 200 400 600 800 1,000 1,200 Q4-07 Q2-09 Q4-10 Q2-12 Q4-13 Q2-15 Q4-16 Ho u s i n g P e r m i t s ( S A a n d S m o o t h e d ) Single-Family and Multi-Family Construction Permits Q4-07 to Q4-16 Single-Family Multi-Family Source: Construction Industry Research Board East Bay Economic OUTLOOK 2017-1840 | FORECAST OF ExISTING SINGLE- FAMILY HOME PRICES AND SALES The effects of the regional housing shortage will continue to dictate trends in the East Bay housing market in the year ahead. Beacon Economics predicts that price appreciation will increase through the third quarter of 2017, with year-over-year growth peaking at 11.9% as the housing market strains under persistently low inventories. As developers respond to rising prices with new construction projects, prices will cool into the 4% to 6% range for the duration of the forecast. Meanwhile, home sales will stall in the East Bay during the first half of 2017 before coming back to life to close out the year. Overall, where a relatively large amount of developable land remains. The City of Brentwood, for instance, has identified roughly 2,333 acres for development and is working on a growth plan.9 The City of Oakley has plans for 47 projects that are slated to include 5,452 single-family homes and 195 apartments in the periphery of the East Bay.10 In the Tri-Valley, the neighboring cities of Pleasanton and Dublin are poised to become major multi-family housing hubs in the East Bay, with almost 2,650 units permitted. These projects will significantly boost the multi-family housing stock in these areas and will help alleviate the region’s housing shortage. However, these new housing units and the associated increase in population density remain a challenge for cities in their efforts to provide services proportional to the number of new residents moving in. E AST B AY RESIDENTIAL REAL ESTATE 0 200 400 600 800 0 2 4 6 8 10 12 Q4-02 Q4-05 Q4-08 Q4-11 Q4-14 Q4-17 Q4-20 Me d i a n P r i c e s ( $ 0 0 0 s , S A ) Sa l e s ( 0 0 0 s , S A ) Median Home Price and Sales Forecast East Bay, Q4-02 to Q4-20 Sales Sales Forecast Price Price Forecast Source: DataQuck Forecasts by Beacon Economics 9 Rowena Coetsee, “Environmental group monitoring East Contra Costa’s disappearing open space,” East Bay Times. March 27, 2017. Available at http://www.eastbaytimes.com/2017/03/27/environmental-group- monitoring-east-contra-costas-disappearing-open-space/. 10 I bid. Cities in the East Bay Developing the Most Multi-Family Units Relative to their Current Multi- Family Housing Stock City Permits 2013 to 2015 Permits as a Share of Housing Stock (%) Pleasanton 1,353 21.9 Dublin 1,297 21.6 Lafayette 127 7.9 Livermore 475 7.9 El Cerrito 188 7.5 Pittsburg 300 6.6 Albany 175 4.9 Piedmont 7 4.4 Source: Construction Industry Research Board Cities in the East Bay Developing the Most Single-Family Units Relative to their Current Single- Family Housing Stock City Permits 2014 to 2016 Permits as a Share of Housing Stock (%) Dublin 1,392 13.4 Brentwood 1,486 9.1 Oakley 595 5.8 Pittsburg 589 3.7 Hayward 1,032 3.6 Orinda 159 2.5 Livermore 591 2.4 Source: Construction Industry Research Board Overall, Beacon Economics projects home sales in the East Bay to grow roughly 7% in the year ahead. East Bay Economic OUTLOOK 2017-18 | 41 by as much as 9.0% by the middle of 2018. Although it may take longer than expected, increased housing construction in the East Bay will mitigate some of the more severe effects of the housing shortage that have been observed elsewhere in the Bay Area and will play a major role in protecting the region’s affordability advantage. Nonetheless, supply constraints in the East Bay will linger and will influence residential real estate trends in the year ahead. Ultimately, a near-term increase in residential construction would go a long way toward alleviating the supply constraints in the East Bay over the last year, but another year of strong price appreciation and diminished sales may be necessary before that happens. Beacon Economics projects home sales in the East Bay to grow roughly 7% in the year ahead. FORECAST OF CONSTRUCTION AC TIVITY Beacon Economics expects construction permits to hold steady in the year ahead as single-family housing construction continues its upward march and multi- family construction is reined in a bit. Looking further out, overall residential construction activity is expected to pick up again, with single-family construction permits forecast to grow by as much as 8.4% on a year-over-year basis and multi- family construction projected to grow E AST B AY RESIDENTIAL REAL ESTATE 0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000 Q4-02 Q4-05 Q4-08 Q4-11 Q4-14 Q4-17 Q4-20 Un i t s ( 0 0 0 s , S A ) Residential Construction Permits Forecast East Bay, Q4-02 to Q4-20 Single-Family Single-Family Forecast Multifamily Multifamily Forecast Source: Construction Industry Research Board Forecasts by Beacon Economics Residential construction photo by: City of Hayward East Bay Economic OUTLOOK 2017-1842 | ~8,000 new individuals From 2010 to 2015 net migration from San Francisco, San Mateo, and Santa Clara County to the East Bay was nearly 8,000 individuals. E AST B AY DEMOGRAPHICS / QUALITY OF LIFE T he demographic composition of the East Bay has changed significantly over the last five years. Population growth has been faster than in some other Bay Area counties and in the state as a whole. In 2016, the East Bay added 31,405 individuals, mostly coming from San Francisco, San Mateo and Santa Clara counties. T he share of high- income households has increased while the share of low- income households has decreased. Steady gains have been made in educational attainment. Because of the regional labor demand for highly skilled workers, human capital accumulation will continue to be a priority in the East Bay in the years to come. 11% more millenials The “millennial” population (aged 20- 34) has grown by 11.1% from from 2010 to 2015, in the East Bay. 40% earn over $100,000 About 40% of households had an income of more than $100,000 in 2015. Average income of individuals who have less than a high school education (no diploma). $24,369 - East Bay $23,564 - San Mateo $22,419 - Santa Clara $21,223 - San Francisco $20,880 - California Cyclists on Pleasanton Ridge photo by John Krzesinski East Bay Economic OUTLOOK 2017-18 | 43 applicants from Mexico and a 10% decrease from countries with large Muslim populations2. H-1B visas, which are used to bring in foreign workers with specialized skills to fill U.S. job vacancies, reached their annual limit for the year in less than a week. After the application period opened on April 3, 2017, 65,000 H-1B applications were submitted for the fiscal year 2018. However, the overall number of applications was down from last year. Announced review changes from the U.S. Citizenship and Immigration Services agency and uncertainty about future guidelines for assessing fraud and abuse in the program’s use may affect the future of the H-1B visas. The Bay Area’s booming economy has attracted many individuals to the region, which has led to a tight housing market and exorbitant rents in some areas, including San Francisco and Santa Clara counties. This has caused a significant increase in the number of Bay Area residents choosing to live in the more affordable East Bay region. From 2010 to 2015, net migration from San Francisco, San Mateo and Santa Clara counties to the East Bay was nearly 41,200. POPULATION GROW TH The East Bay has continued to lead Bay Area population growth over the last year. From 2015 to 2016, its population grew by 1.1%, outpacing California (0.75%) and Santa Clara County (0.78%). In absolute terms, the East Bay added 31,045 individuals in the last year, a larger gain than San Francisco, San Mateo, and Santa Clara counties combined. From 2006 to 2016, the East Bay’s population grew by 11.8%, an increase of nearly 290,000 people. The natural increase—births minus deaths—has been decreasing steadily over the last 10 years, reaching a 10-year low of 14,148 in 2016. Although domestic migration was negative for the first time in five years, that decrease was offset by a 10-year high in foreign immigration (18,240 individuals). With uncertainty about U.S. immigration policies, the East Bay is starting to show signs of faltering visitation and immigration rates. The University of California, Berkeley reported the first decrease in international applications in more than a decade, a 1.2% drop1. There was a 30% decrease in student 95 100 105 110 115 120 Q1-05 Q1-07 Q1-09 Q1-11 Q1-13 Q1-15 Po p u l a t i o n I n d e x ( Q 1 - 0 5 = 1 0 0 ) Population Growth Bay Area & California Q1-05 to Q2-16 East Bay California San Francisco County San Mateo County Santa Clara County Source: CA Department of Finance -40,000 -30,000 -20,000 -10,000 0 10,000 20,000 30,000 2,300,000 2,350,000 2,400,000 2,450,000 2,500,000 2,550,000 2,600,000 2,650,000 2,700,000 2,750,000 2,800,000 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 Na t u r a l I n c r e a s e a n d M i g r a t i o n Po p u l a t i o n East Bay Population 2005 to 2016 Total Population Foreign Immigration Natural Increase Domestic Migration Zero Source: CA Department of Finance E AST B AY DEMOGRAPHICS / QUALITY OF LIFE 1 http://www.dailycal.org/2017/04/03/number-uc-berkeley-international-applicants-decreases-1st-time-decade/ 2 http://www.sfchronicle.com/bayarea/article/UC-sees-1st-drop-in-international-applicants-in-11043891.php East Bay Inbound and Outbound Migration Patterns (2010-2015) County Inbound Inbound Share Outbound Outbound Share Net Migration Marin 4,735 2.0% 6,347 3.4% -1,612 Other California 112,454 47.6% 105,373 55.6% 7,081 San Francisco 55,106 23.3% 30,063 15.9% 25,043 San Mateo 23,029 9.8% 15,590 8.2% 7,439 Santa Clara 40,686 17.2% 31,981 16.9% 8,705 Total 236,010 100.0% 189,354 100.0% 46,656 Source: American Community Survey East Bay Economic OUTLOOK 2017-1844 | East Bay’s population will continue to increase as people migrate from surrounding Bay Area counties, with the region’s population expected to reach nearly 2,950,000 by the end of 2022. POPULATION COMPOSITION (AGE AN D R ACE ) Workers, ages 20 to 34, continue to view the East Bay as an attractive place in which to establish residences because of a diversity in living environments ranging from dense urban centers to suburban housing. The population of these young workers has grown by 11.1% from 2010 to 2015. The senior population in the East Bay has continued to grow dramatically because of the nation’s aging baby boomers. The population of residents From 2015 to 2016, Contra Costa County and Alameda County saw significant inflows of new residents, receiving the third and fourth-highest number of inbound migrants in the state during this period. Although people are continuing to migrate to the East Bay, many residents are concerned about the high cost of housing. According to a poll conducted by the Bay Area Housing Council, 40% of Bay Area residents report that they are likely to leave the Bay Area in a few years because of high housing costs, transportation gridlock as well as the cost of living.3 If that should eventually happen, the exodus of people from the Bay Area could be extremely detrimental to the regional economy. To avoid this, measures should be taken quickly to improve housing affordability in the region. Because of the flourishing regional economy and strong housing demand for the immediate future, Beacon Economics is forecasting that the E AST B AY DEMOGRAPHICS / QUALITY OF LIFE East Bay Population Distribution by Age Age 2010 2015 2010-2015 Change (%) Under 5 Years 164,391 164,228 -0.1 5 to 9 Years 169,708 171,616 1.1 10 to 14 Years 164,330 171,259 4.2 15 to 19 Years 173,873 166,034 -4.5 20 to 24 Years 167,292 176,170 5.3 25 to 34 Years 359,171 408,786 13.8 35 to 44 Years 376,631 394,056 4.6 45 to 54 Years 386,609 394,090 1.9 55 to 59 Years 159,519 189,779 19.0 60 to 64 Years 145,421 156,001 7.3 65 to 74 Years 162,622 218,098 34.1 75 to 84 Years 91,795 103,462 12.7 85 Years and Older 45,417 51,381 13.1 Total 2,566,779 2,764,960 7.7 Source: American Community Survey Jupiter Restaurant in Berkeley photo by: City of Berkeley 2,000 2,200 2,400 2,600 2,800 3,000 Q1-90 Q1-94 Q1-98 Q1-02 Q1-06 Q1-10 Q1-14 Q1-18 Q1-22 To t a l P o p u l a t i o n ( 0 0 0 s , S A ) Population Forecast East Bay, Q1-90 to Q4-22 Actual Forecast Source: CA Department of Finance Forecasts by Beacon Economics 3 http://www.bizjournals.com/sanfrancisco/news/2017/03/30/bay-area-council-millennials-bay-area-housing.html East Bay Economic OUTLOOK 2017-18 | 45 of households earning $75,000 to $99,999 remained nearly constant. In contrast, the share of households earning more than $100,000 has increased significantly. About 42% of East Bay households had incomes of more than $100,000 in 2015 compared to 35% in 2010. This is in part because of the influx of higher- income earners to the East Bay4 and residents benefitting from the economic recovery. Individuals with college degrees are particularly likely to see improved earnings potential. 65 years or older grew by 24.4% from 2010 to 2015. The 65 to 74-year old bracket alone grew by 34.1% in the same period. This supports the idea that the East Bay’s affordability is attractive to older residents who are homeowners, who tend to have fixed incomes, and who may feel they are getting more housing value in the East Bay than in any other part of the Bay Area. The ethnic composition in the East Bay has been changing gradually in recent years. There was a 2 percentage point decrease in the number of White residents in the region from 2010 to 2015. Still, the White population remains the largest racial category in the East Bay, accounting for 37% of the population. The Asian population has increased from 21% to 23% of the total population over the same five- year period. INCOME AND EDUCATION From 2010 to 2015, the share of households earning less than $75,000 decreased by about 7 percentage points to about 46%. The share E AST B AY DEMOGRAPHICS / QUALITY OF LIFE East Bay Population by Race/Ethnicity Race/Ethnicity Share 2010 (%) Share 2015 (%) Change (p.p.) Asian 21.5 23.6 2.1 Other 4.8 5.4 0.6 Hispanic 23.3 23.7 0.4 Black 10.8 9.9 -0.9 White 39.6 37.4 -2.2 Source: American Community Survey 4 http://www.mercurynews.com/2016/10/03/silicon-valley-east-bay-gain-wealthy-households-while-middle- income-dwindles/ Cycling in Emeryville photo by: City of Emeryville East Bay Population by Household Income Income Category Share 2010 (%) Share 2015 (%) Less than $10,000 5.1 4.4 $10,000 to $14,999 4.5 3.8 $15,000 to $24,999 8.1 6.8 $25,000 to $34,999 7.3 6.3 $35,000 to $49,999 11.5 9.5 $50,000 to $74,999 16.8 14.8 $75,000 to $99,999 12.3 12.4 $100,000 to $149,999 16.7 17.9 $150,000 to $199,999 8.6 10.6 $200,000 or More 9.2 13.6 Source: American Community Survey Workers, ages 20 to 34, continue to view the East Bay as an attractive place in which to establish residences because of diversity in living environments ranging from dense urban centers to suburban housing. East Bay Economic OUTLOOK 2017-1846 | earnings in 2015 than residents of other Bay Area counties. It is also worth noting that East Bay residents without high school diplomas had higher annual median earnings than those in other Bay Area counties and in the state overall. This group has seen median earnings increase by an astounding 20% from 2010 to 2015, in part because of progressive minimum wage ordinances specific to certain cities in the East Bay, where current and future minimum wage rates exceed the state rates. Although this is good news for the employees, there is still a great need for balance between the educational requirements of jobs in the region and the educational attainment of its residents, especially as computer aptitude and advanced technology continue to affect an increasing number of jobs. It is fortunate that educational attainment has been moving in the right direction in the East Bay. From 2010 to 2015, the share of the population ages 25 and older with bachelor’s or higher degrees increased by 3.5 percentage points to 43.2%. The Bay Area labor market continues to demand employees with college degrees, creating a need for higher educated residents as well as increasing numbers of college-educated individuals from outside the region. E AST B AY DEMOGRAPHICS / QUALITY OF LIFE Educational attainment seems to be highly correlated with East Bay income levels, as the difference between college graduates and those who did not graduate from college is significant. In 2015, bachelor’s degree holders had annual median earnings nearly two times higher than high school graduates. Annual median earnings of associate degree holders were nearly $23,000 less than the median earnings of individuals with bachelor’s degrees. Individuals with graduate or professional degrees earned even more. However, median earnings for college graduates in the East Bay in 2015 tended to be lower than in other parts of the Bay Area, even though bachelor’s degree holders in the East Bay saw their median earnings increase by 9.5% from 2010 to 2015. Programs were also created in community colleges, providing certificate and apprenticeship opportunities in which mastery of specific skills supporting jobs in growing industries can be obtained without associate degrees. These programs are linked to local hiring needs and often enable students to secure well-paying jobs. T his may also account for some East Bay residents with high school diplomas or less formal education having higher median Annual Earning Rates by Educational Attainment, 2015 ($) Educational Attainment California East Bay San Francisco San Mateo Santa Clara Less than High School Graduate 20,880 24,369 21,223 23,564 22,419 High School Graduate (Includes Equivalency) 29,108 33,119 30,628 32,193 31,007 Some College or Associate's Degree 36,161 41,354 42,350 41,845 42,242 Bachelor's Degree 57,282 64,638 72,016 66,992 76,244 Graduate or Professional Degree 80,442 88,172 95,182 101,959 110,657 Source: American Community Survey Songran Festival in Fremont photo by: Howard Stateman East Bay residents without high school diplomas had higher annual median earnings than those in other Bay Area counties and in the state overall. This group has seen median earnings increase by an astounding 20% from 2010 to 2015, in part because of progressive minimum wage ordinances. East Bay Economic OUTLOOK 2017-18 | 47 From 2010 to 2015, the share of the population ages 25 and older with bachelor’s or higher degrees increased by 3.5 percentage points to 43.2%. OCCUPATIONS AND WORKFORCE READINESS The largest share of employed East Bay residents work in Management, Business, Science, and Arts. The share of East Bay residents in these occupations grew 2.3 percentage points to 46% from 2010 to 2015. This reflects the integral role the East Bay continues to play in the Bay Area’s technology sector. In a related example of the strong influence of the tech sector on workforce, Tesla Inc. recently finalized the East Bay’s largest industrial lease ever.5 INCOME INEQUALITY AND POVERTY Based on the Gini Coefficient, a measure of income inequality, income inequality increased in the East Bay from 2010 to 2015. This was true for the Bay Area as a whole as well as the state. It is worth noting, however, that the Gini Coefficient indicates lower income inequality in the East Bay than in the rest of the Bay Area and California. Aside from the issue of income inequality, poverty continues to be a problem in the East Bay. Although improvements have been made, nearly 20% of residents without high school diplomas live below the poverty line. Fortunately, there is a East Bay Occupation Composition of Civilian Employed Population Age 16 and Over Occupation Type East Bay 2010 East Bay 2015 Management, Business, Science, and Arts 43.7 46.0 Sales and Office 23.3 20.9 Service 16.6 16.5 Production, Transportation, and Material Moving 9.1 9.0 Natural Resources, Construction, and Maintenance 7.2 7.5 Source: American Community Survey Educational Attainment Rates of Population Age 25 and Older, 2015 Educational Attainment California (%) East Bay (%) San Francisco (%) San Mateo (%) Santa Clara (%) Less than 9th Grade 9.9 6.5 8.2 7.4 7.4 9th to 10th Grade, No Diploma 7.9 5.5 4.1 4.6 5.3 High School Graduate (Includes Equivalency) 20.8 18.0 12.8 15.2 14.8 Some College, No Degree 21.5 20.0 14.1 17.8 16.0 Associate's Degree 7.6 6.9 5.6 7.8 7.1 Bachelor's Degree 20.3 25.8 33.2 27.5 26.3 Graduate or Professional Degree 12.0 17.4 22.0 19.6 23.2 Source: American Community Survey E AST B AY DEMOGRAPHICS / QUALITY OF LIFE 5 http://www.bizjournals.com/sanfrancisco/news/2017/03/23/real-deals-industrial-tesla-at-oaks-logistics.html UC Berkeley Cal Day photo by: City of Berkeley East Bay Economic OUTLOOK 2017-1848 | Recently, the Bayer USA Foundation provided a grant that will be used to promote STEM education7. Other businesses have invested in school districts, community colleges, county offices of education and community nonprofits to emphasize the importance of education and career pathways. The ultimate goal is to raise the level of educational and skill attainment in the East Bay to help more residents reap the benefits of the prosperous Bay Area economy. E AST B AY DEMOGRAPHICS / QUALITY OF LIFE concerted effort from diverse partners to address this issue. Local Workforce Development Boards, for example, have been working with employers to host job fairs for targeted populations to secure work in tech environments. Community colleges have been acquiring skill set requirements from industry representatives to better prepare their students for jobs. Local philanthropists have been supporting community efforts to introduce low- income youth to tech careers and coding skills, and businesses have been opening their doors to introduce these youth to workplaces that require STEM (Science, Technology, Engineering & Math) education6. In the long run, one of the best ways to ameliorate the poverty problem in the East Bay is through improved education and skill attainment. Only 4% of East Bay residents with bachelor’s or higher degrees were living below the poverty line in 2015. Degrees in STEM fields are especially valuable given the increasing labor demand from tech companies in the Bay Area. Continued private sector support for STEM education at the primary and secondary levels, including on-site internships and job shadowing opportunities, will greatly benefit residents of the East Bay. 6 http://news.theregistrysf.com/east-bay-stem-career-awareness-day-inspire-next-generation-scientists-innovators/ 7 http://www.prnewswire.com/news-releases/bayer-usa-foundation-awards-75000-grant-to-connect-and-engage- northern-california-communities-in-stem-300376640.html Poverty by Educational Attainment, 2015 (Population Age 25 and Older) Educational Level California East Bay San Francisco San Mateo Santa Clara Less than High School Graduate 24.7% 19.8% 22.6% 19.1% 18.1% High School Graduate (Includes Equivalency) 15.0% 12.6% 17.1% 9.4% 10.9% Some College or Associate's Degree 10.6% 9.4% 13.3% 6.8% 5.9% Bachelor's Degree or Higher 5.2% 4.1% 5.8% 3.3% 3.8% Source: American Community Survey King Park in Brentwood photo by: Sean Stieper “You, Me, We Oakley!” monument photo by: City of Oakley Continued private sector support for STEM education at the primary and secondary levels, including on- site internships and job shadowing opportunities, will greatly benefit residents of the East Bay. Bay Street Emeryville photo by: Madison Marquette This report was supported and prepared in partnership with 1221 Oak Street, Suite 555, Oakland, CA 94612 www.EastBayEDA.org