By Ron Thomas, Executive Director, Managing Principal
Will Austin, Senior Research Analyst
Joshua Deale, Senior Communications Specialist
Sacramento, the capital of California, is fast-becoming a noticeable player across the board in the commercial real estate game. While more of a secondary market in the states’ northern region, located approximately 75 miles northeast of San Francisco, this market continues to experience strong economic and commercial growth and demand, and investors are taking notice. Most product types in Sacramento appear on their way to reaching their highest annual investment sales volume post-Recession in their respective class or among their highest.
As of mid-September 2018, according to data from Real Capital Analytics, office investments in the Sacramento Metro area totaled an astronomical $923 million, already well exceeding the first three quarters of any year since 2007 (prior to Great Recession) and at such pace 2018 is likely to surpass the $1.1 billion mark to make it the highest annual volume post-Recession. Industrial sales have also been lofty in 2018, totaling $510 million and should be one of the sector’s top grossing years post-Recession—notably, 2017 industrial sale activity nearly topped $1 billion. Retail sales have also been robust with $648 million as of mid-September, on a strapping pace to reach its highest volume since the Great Recession. Multifamily also remains hot standing at $871 million, which at continued stride would become its fourth consecutive year over $1.1 billion.
Cushman & Wakefield has recently brokered a variety of property sales which help further demonstrate the diverse investment demand coming into Sacramento—and there are certainly many more examples inside and outside our firm. San Rafael-based Seagate Properties recently acquired Creekside Oaks, a 178,694-square-foot (sf) Class A office complex for $32.2 million, while Walnut-Creek based Nearon Enterprises made its first entry into the Sacramento region, acquiring a 517,767-sf industrial portfolio fully leased to American Building Supply (ABS) for $34 million.
Kevin Partington, Executive Director, who co-brokered both portfolio sales, said, “Creekside Oaks represents one of the premier office projects in the desirable South Natomas submarket. Its dynamic tenant roster, combined with improving market fundamentals in this emerging submarket provided a durable in-place cash flow with significant rental upside.” He added, “And in the industrial sale, ABS has multiple locations throughout the country and considers Sacramento their corporate headquarters. Their continued growth in the area seems to represent their commitment to the region and speaks to the strategic location of the properties. I believe Nearon really saw the current and future value of these buildings which is why they selected them as their first regional acquisition.”
Partington added of local market conditions “Sacramento’s office and Industrial market fundamentals remain sturdy. Our local reports show office leasing activity was 1.3 million square feet (msf) in the second quarter, the fifth in a row above 1.0 msf. Meanwhile, industrial vacancy fell to a market record low of 4.4% in the second quarter.”
On the retail front was the recent sale of Woodland Crossroads, a grocery-anchored promotional shopping center that sold to a private capital investment group out of Southern California for over $18 million. Dan Wald, Executive Managing Director with The Wald | LeBuhn team, who co-brokered the sale, said, “Woodland Crossroads was ideally tenanted to thrive in the era of e-commerce, while the buyer recognized the synergy of the tenant mix as well as the economics. As such, they prioritized this suburban Sacramento offering over other shopping centers located across the entire state of California.”
And our second retail example consisted of a 17,700-sf, single tenant NNN leased investment property tenanted by Rite-Aid in Roseville that sold to a Bay Area investor for $8.85 million, serving as the upleg of the buyer’s 1031 Exchange. Ryan Forsyth, Executive Director with The Yuras | Aicale |Forsyth |Crowle Team who represented the seller said, “Sacramento and surrounding markets continue to be an attractive investment to 1031 Bay Area buyers. Yields are slightly more attractive than in the Bay Area and with a bit more choices in terms of supply, especially as it relates to new construction on long-term net leases. We expect this trend to continue as investors seek the stability and passive lease structure of net leased assets.”
In the multifamily sector, Cushman & Wakefield recently brokered the sale of a 240-unit and a 417-unit apartment complexes in Sacramento, both involving investors from outside the region (the Bay Area and Midwest). Jason Parr, who handled the two sales, said, “Over the prior 12 months, we saw 47 market rate multifamily properties with 50 units or more sold, while the region’s total cumulative sales volume over the same period hit over $987 million. In my 12-year career doing business in Sacramento, I cannot recall ever experiencing anything like what we are seeing now in terms of private and institutional investor interest from around the region and the U.S.”
He added, “Driving the in-migration resulting in tighter multifamily supply is a combination of limited new supply and that more and more people, particularly millennials, are being priced out of the Bay Area for housing and are choosing Sacramento for its proximity, affordability and quality of life – Sacramento is getting trendier by the month, with flourishing sports, arts and food scene, and a solid supply of jobs.”
Michael Mathios, Senior Director, added, “Sacramento remains a destination location for coastal investors seeking greater returns on their investment, and multi-family seems to be the vehicle of choice for many because of strong local market fundamentals leading to historical low vacancy and increasing rental rates. Like most municipalities across the great state of California, we have a housing shortage resulting in unprecedented demand in the rental market. Out-of-market investors see an opportunity through the trees, whereas a share of local investors consider the returns too prohibitive to pursue for the time being. Part of the added appeal of Sacramento to these non-local investors is because returns are higher here than what they might typically be able to achieve nowadays in their backyard.”