Report by Guest Blogger Travis Zeiler
Cushman & Wakefield Sacramento
Midyear is Here; Sacramento Still Going Strong
Widespread growth across many industries propelled the Sacramento Valley to a record total 932,700 nonfarm positions, an increase of 18,000 or 2% over the past twelve months. There have now been 113,000 jobs added since the post-recession low of 819,700 jobs in January 2011.
Year-over-year, the office sector recorded 2,700 new positions for an annual gain of 1.5%, while the all-important government sector was up 3,800 positions, for a 1.6% annual gain.
Healthcare remained a pillar of Sacramento job creation as well, with 4,600 positions added over the last year, representing a 3.6% increase. Meanwhile, the regional unemployment rate dropped to 5.0%, which is the lowest figure since the 4.6% recorded in December 2006.
The office vacancy rate for the Sacramento Valley has tumbled 120 basis points (BPS) since the second quarter of 2015, from 13.7% to 12.5%. Partially fueling that decline is the fact that the region has not produced any major new office product of 100,000 SF or larger size since the first quarter of 2013. All other quarterly deliveries since then have been for much smaller amounts of space.
Breaking down the change since the second quarter of 2015 by class, the overall vacancy for Class A space eased 30 BPS to 11.6%. Class B vacancy plummeted a sharp 220 BPS to 12.4% since the second quarter of 2015, for the biggest year-over-year change. This was due to three consecutive quarters from 3Q15 to 1Q16 of high net absorption in Class B space, totaling at 950,000 SF. Class C declined by 40 BPS since last year, to 14.0%, with mostly negative net absorption during that time period.
As the vacancy rate has declined, the average asking rents in Sacramento have been on the rise, albeit at a gradual pace. For all three classes of office space, the overall average rent increased by $0.02 per-square-foot-per-month (PSF) since first quarter of 2016, and climbed $0.04 PSF since the second quarter of 2015.
The Sacramento Central Business District (CBD) remains the most expensive, with the overall rental rate averaging at $2.27 PSF, up by$0.03 PSF for the quarter and $0.14 PSF from one year ago. Class A CBD office space rents ranged from $2.25 to $3.30 PSF in the second quarter.
In the Non-CBD submarkets, Midtown has overtaken Campus Commons as the second most expensive submarket. Average asking rents in Midtown rose 5.2% since the first quarter, moving from $1.94 PSF to $2.04 PSF, whereas Campus Commons climbed by just one penny over the quarter to $2.03 PSF.
Overall net absorption in the second quarter was a robust 155,000 square feet (SF), compared to the (177,900 SF) of net absorption seen last quarter and the (37,90SF) of net absorption in the second quarter of 2015. For the full year of 2015, Sacramento managed a healthy 1.38M SF of overall net absorption.
The top deal signed in the second quarter was The Office of Statewide Health Planning & Development, for 124,340 SF at 2020 West El Camino Avenue in the Natomas-Northgate submarket. This is compared to the largest deal of the second quarter of 2015, when Dignity Health leased 50,928 SF at 10901 Gold Center Drive in Rancho Cordova.
Portfolio sales made up the majority of the top sale transactions of the second quarter. The largest included Benvenuti Plaza at 1515 S St, a 350,000 SF Class B office building in the CBD, and both 10961 & 10971 Sun Center Dr – each 45,000 SF in size – for a combined 90,000 SF of Class B office space.
Hines REIT sold this portfolio to Oaktree for $79M in May, with the price-per-square foot breakdown of $169/SF for 1515 S St and $117/SF for 10961 & 10971 Sun Center Dr. The second largest portfolio sale of the quarter was for 2868 Prospect Park Dr 2890 Gateway Oaks Dr, which Hines & Oaktree purchased from A&B Properties for $30.3M, or $136/SF for 223,028 SF total.
Generally, leasing metrics are going in the right direction to spur this development: absorption is positive, vacancy is declining, and rents are rising (though modestly).
With several projects at least making it to the drawing board, it might not be that much longer until we see new office construction in the center of Sacramento to complement the new Golden 1 Arena and Downtown Commons (DOCODowntown Commons (DOCO), which both open later this year. Stay Tuned.
Travis Zeiler is a Research Analyst working out of Cushman & Wakefield’s Sacramento office. He is responsible for Sacramento market research and economic analysis as well as support for presentations, reports and periodicals. A Bay Area transplant, Travis lives in Midtown Sacramento and holds his BA in Marketing from UC Santa Cruz. He is a regular guest blogger for blog.cushwake.com. Check out Travis’ latest story on DOCO here.