SACRAMENTO, Calif., February 5, 2019 – The Sacramento region’s commercial real estate sectors are performing well, with some statistics even achieving or approaching record levels, according to Cushman & Wakefield’s year-end market reports for 2018, along with insight from the firm’s local experts. Overall, 2018 was a strong year for the Office market as net absorption (occupancy growth) tallied more than one half million square feet annually, vacancy declined further, and the average asking rate rose another 5%. Meanwhile, the Industrial sector posted strong occupancy growth to the tune of nearly 3 million square feet (msf) in 2018 complemented by decreased vacancy to sub 5% and rising asking rates.
Will Austin, Cushman & Wakefield’s Senior Market Analyst for Sacramento, said, “Overall office vacancy fell further into single-digit territory to 9.2% in 2018, the lowest point Cushman & Wakefield has recorded, while occupancy grew by 533,000 sf during the year.” He added, “Perhaps the best indicator for the office market is the number of new private sector tenants looking to either expand within or enter the region. Penumbra, a medical device company, relocated part of its operation from the East Bay Area, leasing 160,000 sf in Roseville, the largest new lease of the year. The deal marked the second consecutive year that Sacramento landed a new, large employer and speaks to the region’s talented work force and low-cost real estate.”
According to the report Sacramento’s Central Business District (CBD) led the market in office occupancy growth in 2018 with 187,000 sf of net absorption. Such strong activity has resulted in vacancy falling to just 7.4% in the CBD. Furthermore, asking rates for Class A space in downtown surpassed $3.00 per square foot full service, another first for the region. Austin noted, “This is an excellent vital sign of the health of Sacramento, whose office market has long been driven by suburban activity.”
According to the report, the region’s overall average asking rate for office space, grew at a healthy pace to $1.89 psf full service for 2018. Class A space rose to $2.35 while Class B space reached $1.83 psf. Class C space is $1.52 psf. The report noted Class A space is the most popular segment of the market, with only 8% vacancy, while Class B and C are at 9.8%.
Kevin Partington, Executive Director with Cushman & Wakefield in Sacramento, said, “Declining supply of Class A space, and resulting rent increases are pushing some tenants to Class A and B space in the suburbs with cheaper rent, free parking and more efficient floorplates.”
Meanwhile, the Sacramento Industrial market set yet another record-low vacancy, falling to 4.5% in the final period of 2018. This was a significant decline from a rate of 6.1% at the end of 2017.
Austin said, “With such low industrial vacancy, the market produced minimal occupancy growth in the fourth quarter, however, for the year, still amassed a strong 2.9 msf of growth in 2018. Annual net growth was led by West Sacramento (1.28 msf), Placer County (849K sf) and McClellan (560K sf).”
The report notes that robust levels of tenant demand have led to rapid growth in industrial asking lease rates, which ended the year at $0.66 per square foot per month on a NNN basis.
Ken Reiff, Managing Director with Cushman & Wakefield in Sacramento, said, “While this number is impressive it is most likely a statistical anomaly, as very little product is leasing at that number. With that said, the introduction of the cannabis industry was a dominant factor in reduction of vacancy and initial lease rate increases. However, growth from that sector has plateaued and current price increases are now being fueled by sustained levels of low vacancy.”
Reiff added, “This trend is expected to continue as the market has yet to reach replacement cost for smaller buildings (50,000 sf and less) that make up the majority of the market’s inventory and tenant demand.”
According to the report, the rapid increases in lease rates is one factor pushing developers to build speculative product on a large scale. Currently 956,000 sf of 97% of the total 987,000 sf of industrial product now under construction is speculative development—the bulk stemming from just two projects. The report notes these two largest projects underway hope to find large, high-cube tenants to take a majority, if not all of the buildings, and as result will likely be competing with lower-cost markets like Reno and the Central Valley in the process.
Austin noted, “Industrial leasing held strong in 2018, but with limited supply, we anticipate that much of the occupancy growth for 2019 will likely be tied to the future completion and leasing of new spec construction.”
On the Capital Markets front, while sales did throttle toward the end of the year, office investments exceeded the $1.0 billion mark for the third consecutive year, with nearly $1.14 billion in transactions. The 2018 figure represented the highest dollar volume on record for Sacramento’s office market. The largest sale of the fourth quarter was Seagate Properties’ acquisition of the Senator Office Building at 1121 L Street in downtown, at the end of December. The fourth quarter for Industrial investments, on the other hand, was the strongest of the year, totaling $163 million. Annually, figures reached $516 million which has only been surpassed by 2017’s total of $864 million. The largest industrial transaction of the quarter totaled 644,600 sf which was linked to a national portfolio acquired by Mapletree Properties of Singapore.
Austin concluded, “Sacramento’s economy remains robust with signs of continued growth across all major economic sectors. The unemployment rate declined 40 basis points over the past year to 3.7% as total employment increased by 12,400 jobs. There is little room in a market where, in many cases, there are more jobs than workers to fill them. With new companies entering the market, Sacramento is diversifying away from the traditional government employment base, a move likely to help mitigate the length and severity of any future economic downturn.”
CLICK HERE to access Q4 2018 Sacramento Office MarketBeat Report
CLICK HERE to access Q4 2018 Sacramento Industrial MarketBeat Report