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Marketbeat Office Snapshot – Sacramento Valley Q4, 2015

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Sacramento Closes Year with Substantial Growth
Job growth remained on a healthy path through 2015. In December, total nonfarm jobs for the Sacramento region climbed to 927,400, surpassing the previous high of 924,700 set in June 2007. Over the past year, nonfarm jobs are up by 22,900 or 2.5%. The leisure & hospitality sector recorded the largest year-over-year increase – up by 11,400 positions or 12.5%. Private sector office jobs climbed by 0.6% while the all-important government sector was up by 0.7%.

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Vacancy Rate: 12.6%
The Sacramento office market ended the year with a vacancy rate of 12.6%, declining 130 basis points (bps) in Q4 from the 13.9% rate recorded in the previous quarter. One year ago this figure was 14.1%. This represents a new low for office vacancy seen since the Great Recession. The market recorded 675,703 square feet (sf) of occupancy growth in Q4, by far the largest increase in 2015 and significantly more than the 193,363 sf recorded in the previous quarter. More than 1.1 msf of vacant space was occupied this year.

Trending: Occupancy Gains in Most Submarkets
Fifteen of the nineteen submarkets in the Sacramento region recorded occupancy gains in Q4. Net absorption totals in excess of 20,000 sf occurred in seven submarkets this quarter, compared to three submarkets posting gains of that significance in the third quarter. Downtown Sacramento recorded positive net absorption in Q4 to the tune of 67,000 sf. East Sacramento experienced the greatest amount of expansion in Q4, posting occupancy growth of 4.4% as vacancy fell from 10.1% to 5.7%.

The Highway 50 / Rancho Cordova submarket recorded 370,000 sf of net absorption in Q4. Vacancy currently stands at 12.9%, which is down from the 15.1% rate recorded last quarter. The Folsom submarket gave back space in Q4, posting 36,445 sf of negative net absorption and bringing it to negative 64,703 sf for the year.

sacto stats cushman 2No New Construction
There were no new construction deliveries in 2015 and there is very little new office construction underway in greater Sacramento. Just over 300,000 sf is scheduled for delivery in 2016 distributed throughout five projects and all of that has been pre-leased. Another five projects are in the proposed stage – ranging in size from 110,000 sf in the Roseville/ Rocklin submarket to 367,000 sf Downtown.

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Office Leasing
Office leasing activity slowed yet again in Q4 – there were 693,448 sf of lease transactions compared to the 874,368 sf tracked in Q3. Year to date gross absorption finished the year at 1.3 msf. We tracked seven new lease transactions and two renewals larger than 10,000 sf in Q4; all were located in Non-CBD submarkets. There were only two new leases signed greater than 20,000 sf. By far, the majority of transactions continue to be signed by small to mid-sized tenants. State government departments and health care companies remain the leading industries in absorbing space in Sacramento. Looking ahead, regional office demand is robust, with a total of 2.5 msf in requirements in the market; one third of those in the government sector.

 

Investment Sales
We tracked 18 investment sales in Q4 totaling over 1.5 msf and
just over $241 million in sales volume. The most significant sale of
the quarter was Pappas Investment’s purchase of the 252,000 sf
Farmers Market I & II buildings located at 1801 30th St in Midtown
Sacramento. Pappas purchased the property from a joint venture of Americus Real Estate Investments and PM Realty Advisors.

The majority of sales transactions have generally been properties
under 50,000 sf over the past six months. There have been a few
exceptions such as 1601 Exposition Boulevard (a 133,370 square
foot single-tenant property) which closed for $180 psf and Folsom
Corporate Center (a 148,000 square foot property) which closed
for $190 psf.

Buyers have generally been local; Sacramento has yet to see a large influx of capital from outside the region.

The average asking rate for office space is currently $1.72 per
square foot per month (psf/mo), on a full service basis. This
number stood at $1.68 psf/mo a year ago which translates to a
2.4% increase throughout the year. The trend has been more
impressive for class A space; the Q4 average asking rate
increased 4.4% year over year and now stands at $2.15 psf/mo.

 

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