Steady Office Vacancy Declines Continue Through Q3
The Sacramento economy is improving at a steady pace. 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. This trend of moderate employment growth is anticipated to continue for the near term and is reflected in recent occupancy gains and has subsequently tempered rent growth.
The Sacramento office market completed Q3 2015 with a vacancy rate of 13.6%, which reflects a modest decrease from the 13.7% rate recorded in the previous quarter. A year ago this figure was 14.1%. This is the lowest office vacancy rate the region has seen since the second half of 2008.
The market recorded 108,894 square feet (sf) of occupancy growth in Q3, nearly 30% higher than the 85,026 sf of positive net absorption from Q2. This is still below the 261,809 sf that this market experienced in Q1 of this year.
Overall, more than 455,000 sf of vacant space has been occupied so far this year. Sacramento is on pace to absorb around 600,000 sf in 2015. However, this number could trend upwards, based on existing tenant requirements and tour activity.
The majority of the region’s submarkets recorded occupancy gains in Q3, with two thirds posting growth, albeit at a decreased volume compared to Q2. Net absorption totals in excess of 20,000 sf were concentrated into three submarkets this quarter, whereas six submarkets posted gains of that magnitude in the second quarter. Positive net absorption was focused in the non-CBD submarkets, while Downtown Sacramento recorded the highest level of negative net absorption.
Roseville & Rocklin
The Roseville/Rocklin submarket experienced the greatest amount of expansion in Q3, posting 54,196 sf of occupancy growth as vacancy fell from 14.7% to 14.2% (the lowest vacancy rate this trade area has seen in nearly a decade). The Natomas/Northgate submarket also posted strong positive net absorption this quarter, gaining 35,643 sf. Vacancy here currently stands at 17.8%, which is down from the 18.3% rate recorded last quarter.
The Downtown Sacramento submarket registered negative net absorption in Q3, although it remains positive year to date at 20,790 sf. Office leasing activity slowed in Q3 – there was 687,541 sf of lease transactions compared to the 976,410 sf tracked in Q2. Year to date gross absorption now stands at 2.5 million square feet (msf). Regional office demand is currently robust, with a total of 2.7 msf of requirements in the market; one third of those in the government sector.
Cushman & Wakefield research tracked 12 new lease transactions larger than 10,000 SF in Q3; of those, seven were located in non-CB submarkets, while the remainder were signed in Downtown Sacramento. The far majority of transactions continue to be signed by small to midsized tenants.
Monthly Average Asking Rate: $1.75 PSF
The average asking rate for office space is currently $1.75 per square foot (psf), on a monthly full service basis. This number stood at $1.70 psf a year ago and registered a modest 2.9% increase throughout the year. Growth has been slower for class A space; the Q3 average asking rate increased 1.9% year over year and now stands at $2.15 psf. The current trend of moderate rent growth should continue with no significant increases until vacancy falls below double digits. We anticipate continued occupancy growth and declining vacancy in the near term going into 2016.
Vacancy should end the year in the low 13% range. Cushman & Wakefield research tracked 18 investment sales in Q3 totaling over 1.1 msf and just over $135 million in sales volume. The most significant sale of the quarter was Swift Realty Partner’s purchase of the 172,366 sf Senator Hotel Office Building located at 1121-1123 L St in Downtown Sacramento. Swift purchased the property from special servicer LNR Properties.
In another notable transaction, The Landmark Business & Financial Center, located at 1750 Howe Ave, sold to Colony Capital. Colony purchased the 185,859 sf class A office building from Bank of America as part of a portfolio of assets located throughout California.