Q2 2012 Sacramento, California Apartment Market Trends

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Q2 2012 Sacramento, California Apartment Market Trends

Unusual. The waves of new apartment development seen virtually nationwide in the recent period are not evident in Sacramento. The resurgence of demand that has generated the nation’s new construction trend, however, also is part of the Sacramento scene. No market-rate units completed construction metro wide last year, alongside 1,464 units of positive net absorption. No units completed during the first half of 2012 either, even as net absorption ran at 496 units. And no market-rate projects will complete construction anytime this year. Indeed, the 84 units under way per the date of this report, all in the East End Gateway project at 16th and O streets downtown—the market-rate total under way metro wide—will not complete construction until July 2013. This dearth of activity is quite unusual alongside current national trends. The Sacramento Business Journal, citing Trulia in a September report, offers a possible explanation: “home prices and interest rates are so low that it is 39% cheaper to buy a house than to rent the same size property in the Sacramento region.”

While Reis expects about 500 market-rate units to deliver all told in 2013, start dates had not been specified for any additional projects as of late September. Indeed, recent and current construction has been led by a few small subsidized/low-income and senior citizen housing projects. In the former category, the $25 million, 81-unit La Valentina apartments from Domus Development, described by the Sacramento Business Journal as “one of the city’s most ambitious infill developments,” delivered in late August on 12th between D and E streets.

Nor is high vacancy an impediment. Reis puts the second-quarter rate at just 4.3%, down 110 basis points year-over-year, an indicator of a tight market; vacancy this low typically would be an incentive for new development. Indeed, the second-quarter vacancy rate stands as the lowest on the firm’s records for this market since 2002. And other factors contributing to favorable rates of rental demand—low confidence in the local economy and ongoing declines in single-family home values, as cited by Marcus & Millichap in its third quarter 2012 report on the local market—remain in place. Positive rent growth, moreover, has been a factor since 2010; the losses in average rents generated by the recession had been redeemed by the end of first quarter 2012. At $950 and $913 per month, second-quarter average asking and effective rates were up 0.8% and 1.0% from the quarter before and were up 1.2% and 1.8% since year-end. Indeed, all the factors for a firm market recovery seem to be in place—except the return of market-rate construction. This makes for a relatively comfortable climate for landlords, for the time being. Investment activity, meanwhile, has increased. See the Transaction Analytics section of this report for more information.

July brought no notable changes: 15 units of positive net absorption, no movement in the vacancy rate, and gains of 0.1% for both average rents.

Reis expects demand to remain strong over the remainder of the year; the 2012 net absorption total currently is forecast at about 1,250 units. Year-end vacancy is projected at 3.5%. Gains of 2.9% and 3.9% are expected for the asking and effective rents for the year. Lower vacancy and higher rates of rent growth should follow in 2013 as development remains subdued.