Sacramento Region Maintains Strong Market Fundamentals
SACRAMENTO, Calif. – May 9, 2019 – The Sacramento region’s Office and Industrial real estate sectors are off to a solid start in 2019, according to Cushman & Wakefield latest market reports. The office market kicked off the year with a strong 171,000 square feet (sf) of net absorption, with vacancy falling to 8.6%— marking the first time for office vacancy to fall below 9.0%. Meanwhile, the Industrial sector added nearly a quarter of a million square feet of occupancy growth while vacancy hit yet another new record low of 4.4%.
Will Austin, Cushman & Wakefield’s Senior Market Analyst for Sacramento, said, “Sacramento now boasts the strongest office market fundamentals for the current economic cycle. Net absorption has exceeded 100,000 sf in nine of the last 12 quarters, while vacancy has fallen 300 basis points and asking lease rates have risen 12.9% during that time. These metrics combined with incoming private entities expanding in the region has resulted in the strongest office market in recent memory.”
After record-setting sales volume in 2018 of approximately $1.4 billion annually, office sales activity was solid to begin 2019 with $187 million in activity, a more than 17% quarter-over-quarter increase. The first quarter was highlighted by two significant transactions: a four-building medical office portfolio known as Parkway Corporate Plaza totaling 288,000 sf and a two-building office portfolio totaling 179,000 sf in Rancho Cordova.
New office construction activity is also becoming an intensified focal point. During the first quarter Bannon Investors broke ground on a three-story 87,000 sf building in South Natomas, while Centene continues work on phase 1 of their 517,000 sf build-to-suit in North Natomas, and the State is well underway on their two projects Downtown totaling 1.2 million sf.
Kevin Partington, Executive Director with Cushman & Wakefield in Sacramento, said, “The Bannon project marks the first true office speculative construction project of the economic cycle. Given the ongoing office market fundamentals and tightening supply, it will be interesting to see whether other developers may follow suit in the near term during this extended growth cycle.”
Partington also noted, “The Sacramento labor market continues to diversify away from the traditional government employment base, which will likely help mitigate the impact of any future economic downturn.”
On the industrial front, strong market fundamentals ruled the Sacramento market in the first quarter of 2019 led by a low vacancy rate. Net absorption totaled 238,000 sf to start the year and the vacancy rate fell another 20 basis points to 4.4%. Meanwhile, leasing activity was robust reaching 1.1 msf.
Austin said, “This was the 13th consecutive quarter that industrial vacancy declined, along with hitting new all-time low marks. However, despite good growth, limited industrial availability in the market is curtailing net absorption numbers with tenants having few options for either entering or expanding in the market.”
The report shows that low vacancy combined with continued high levels of demand have led to rapid growth in asking lease rates, closing the first quarter at $0.68 per square foot per month on a triple net basis (psf). The report does call out the lofty figure is likely inflated by landlord’s seeking out cannabis-related industries demanding higher rents due to any legal risk, but is also due in part to sustained levels of low vacancy.
Matt Cologna said, “With constrained supply, there is finally an uptick in new construction in the market. Currently there is nearly 1 msf of active projects, all of which are speculative and almost all scheduled to complete during the second quarter of 2019. Notably, these projects appear to be entertaining strong interest.”
He added, “One sector of the market that continues to be under-developed are small, multi-tenant industrial buildings where there has been significant demand with the issue being that lease rates for this product haven’t reached a point where a developer can justify a return based on the sharply higher cost of construction.”
According to the report, almost 1.7 msf of industrial properties sold in Sacramento during the first quarter, for nearly $121 million in total consideration. The largest single building sale was a 624,000 sf facility in West Sacramento.
Cologna noted, “While industrial sales volume is fairly consistent quarter to quarter, property values are increasingly steadily. Buildings sold for an average of $85 per square foot, up 6.6% quarter-over-quarter.”
Austin projected, “We find the industrial market to be poised for another good year in 2019. However, net absorption is unlikely to reach 2018’s near 3 msf level. Most new growth will likely be tied to the aforementioned construction completions.” He added, “Any risk for the industrial as well as office sector will come primarily from external, macro-economic conditions.”
CLICK HERE for Sacramento Q1-19 Office Report.
CLICK HERE for Sacramento Q1-19 Industrial Report.
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