Kaiser Permanente has canceled its $900 million headquarters project in Oakland, in a huge setback for the local economy at a time when the city can ill afford it.

The health care giant scrapped plans to build a 1.6 million-square-foot office tower that would have been Oakland’s biggest commercial project. The Chronicle was first to report Kaiser’s decision.

“Delays and increasing costs related to this project caused us to reexamine the feasibility and focus on renovating our current buildings,” Kaiser Permanente said, adding that the decision was not related to the coronavirus epidemic.

The move is a sign that the Bay Area’s booming office market may be weakening as companies look to cut costs. Construction prices have soared amid a shortage of workers and tariffs on some building materials, making large developments like Kaiser’s project harder to finance and complete. Housing projects around the Bay Area have also been stalled by rising costs.

Kaiser, Oakland’s largest private employer, would have consolidated 7,200 employees from seven East Bay offices into a new 29-story tower at 2100 Telegraph Ave. Real estate experts said the move would free up substantial office space for smaller tenants to occupy, leading to a boost in city employment.

“It’s a pivot for Kaiser, and one that makes sense for their organization and members at this time,” Mayor Libby Schaaf said in a statement. “They’re reinvesting and improving their existing sites across the city, so the most important fact is that they’re staying rooted right here in Oakland. In the meantime, this is an incredible project that will attract an incredible new tenant,” Schaaf said.

Lane Partners, a developer that planned to sell part of the project site to Kaiser, declined to comment.

Kaiser has endured numerous challenges in the past year. Longtime CEO Bernard Tyson died in November, and 4,000 mental health workers held a five-day strike in December. A shortage of face masks sparked a protest last week by Kaiser nurses in San Francisco over safety standards. Kaiser said it is complying with government guidelines.

Kaiser’s project was expected to generate an estimated $23 million in one-time taxes and fees and another $15 million in annual taxes.

“It’s a real blow to Oakland. The headquarters would have been a major development for the downtown,” said Councilman Noel Gallo.

The cancellation affects about five times as much office space as Uber’s 2017 decision to scrap its Oakland office at Uptown Station, which is just a few blocks south of Kaiser’s project. Square has leased that building and had begun moving workers inside over the past month, before the new coronavirus forced most office workers home.

Kaiser owns three Oakland office buildings at 1950 Franklin St., 1800 Harrison St. and 2000 Broadway, and also leases the Ordway Building, 2101 Webster St. and 300 Lakeside Drive in Oakland, along with 1451 Harbor Bay Parkway in Alameda.

Another major Oakland office tenant, BART, confirmed Tuesday that its headquarters move to 2150 Webster St. is moving forward.

Roland Li is a San Francisco Chronicle staff writer and Phil Matier is a San Francisco Chronicle columnist. Email: roland.li@sfchronicle.com, pmatier@sfchronicle.com Twitter: @rolandlisf, @philmatier