Activity Picks Up in Q3; Occupancy Gains and Rising Rents
Overall, the Sacramento economy is gradually improving as we head into the final quarter of 2015. The region (defined as the Sacramento-Roseville-Arden Arcade MSA) employed a little over one million people at the close of Q3. After adding 25,000 jobs over the past year, regional employment has grown by roughly 2.5%. Unemployment has fallen a healthy 90 basis points since this time last year and now stands at 5.7%; significantly lower than the 12.8% reported in Q1 2011.
Industrial Vacacy: 9.3%
Vacancy in the Sacramento industrial market stood at 9.3% at the close of Q3 2015. This marks the third consecutive quarter of industrial vacancy under 10%. This metric is 130 basis points (BPS) lower than the vacancy rate recorded this time last year.
Quarterly occupancy growth was positive, reaching 1,290,548 square feet (SF) in Q3, which is a considerable increase over the previous quarter. Quarterly occupancy growth increased to a healthy 0.4% and surpassed recent averages.
Over the last two years, the market has averaged more than 630,000 SF per quarter. In fact, during this same period, the market has also averaged over 1.8 MSF of lease transaction activity per quarter. Deal activity in Q3 surpassed this average, reaching 2.0 MSF, with a greater share of deals comprised of new transactions and renewals resulting in growth compared to Q2.
South Sacramento Leads Region
Existing active user requirements and tenant touring activity will likely lead to continued occupancy growth in the near term. Nine of the region’s thirteen trade areas experienced occupancy growth in Q3 and all but one of these experienced growth in excess of 100,000 SF. South Sacramento lead the region, recording 378,000 SF of occupancy growth. This growth was primarily due to Macy’s occupancy of 385,077 SF at 6200 Franklin Boulevard.
Although vacancy in South Sacramento remains the highest in the region, currently standing at 26.4%, it is considerably less than the 36.0% recorded in Q2. West Sacramento also performed well in Q3, recording 296,000 SF of growth. Although its vacancy rate increased from 4.7% to 5.6%, more than 470,000 square feet of new distribution space was delivered and subsequently occupied by Nor-Cal Beverage, causing a net increase in occupancy.
Other Sacramento Submarkets
Natomas changed its course in Q3, recording 161,000 SF of net absorption, after posting four consecutive quarters in the negative. Positive absorption was attributed to a handful of small and mid-sized tenants taking occupancy in the quarter; the largest block of space being Oakland Packaging’s 64,000 SF warehouse at 4040 Vista Park Ct. Vacancy in the Natomas submarket fell 140 BPS to 9.6%.
The Woodland submarket saw the largest occupancy loss in the region at 385,000 SF, which drove up vacancy into double digits: from 8.1% to 10.7%. Vacancy is now significantly higher than the recent 6.1% low recorded at the beginning of the year. West Sacramento also experienced a notable occupancy loss, finishing the quarter at negative 179,000 SF. This increased the vacancy rate from 4.7% to 5.8%.
Looking Ahead: Continued Growth
Cushman & Wakefield Sacramento tracked 16 investment sales totaling 850,000 SF, with a total consideration of over $40 M. Investment sales volume was constricted on the supply side as there is a dearth of quality product for sale. Most of the sales involved small to mid-size properties, while three properties were larger than 100,000 SF. User sales activity was sparse. We tracked six user sales totaling 250,000 SF with a total consideration of over $7 M. Four of the six sales were less than 50,000 SF in size.
Construction activity has mainly consisted of speculative warehouse product. There were two properties delivered in Q3, both 100% pre-leased, totaling nearly 695,000 SF. El & El Wood occupied one of the buildings, totaling 220,000 SF, Nor-Val Beverage occupied the other.
A total of 965,000 SF has been added to the inventory in 2015, with only 155,000 SF remaining vacant. Looking ahead, we expect continued growth in occupancy in the near term, coupled with tempered rent increases. Vacancy is anticipated to drop to the 9% range by year’s end.