Q2 2012 Sacramento, California Office Market Trends

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Q2 2012 Sacramento, California Office Market Trends

“An old-line Sacramento developer supposedly once said, ‘The only ugly building is an empty building,'” the Sacramento Business Journal noted in a late July report. “By that measure, the Sacramento region has a lot of ugly office buildings.” It’s an amusing piece of hyperbole but one that points as well to the market’s lingering weakness. Among its troubles, as described in Special Real Estate Factors, is the weakening of demand from the public sector, an effect of the state’s fiscal problems. (Sacramento is the California state capital and the seat of a very large government bureaucracy relative to the size of the city.) The weakness, however, extends to the private sector as well. “Sacramento is not only struggling with weak deal flow,” explains Cassidy Turley, “but that activity continues to be overwhelmingly focused on tenant consolidations, renewals and relocations that translate into little, if any, growth.”

Except for modest relief in 2011, the supply-demand profile has been notably weak. That weakness has again raised its head: net absorption through the first half of 2012 was negative 55,000 square feet (the total for the second quarter alone was minus 134,000). Vacancy ended the quarter at 20.2%, up 30 basis points for the quarter, up 40 year-over-year. Without showing substantial growth, rent growth has flattened. At $23.69 psf and $18.86 psf, second-quarter asking and effective averages were unchanged for the period and were up just 0.1% and 0.2% since year-end.

Modest improvement, however, may be in the works. “[W]e are currently tracking 350,000 square feet of new activity expected to close by year-end,” states Cushman & Wakefield’s second-quarter report. Along these lines, Reis reports 51,000 square feet of positive net absorption for July (with no new supply delivered). Vacancy had slipped to 20.0% by the end of that month. Additional positive net absorption is expected for the remainder of the year, along with additional declines in the vacancy rate. Each average rent, meanwhile, added a penny in July; additional gains are expected by year-end.

Construction remains subdued. Reis’ late September report on individual developments expects only one general purpose, multi-tenant office project to complete all told this year. The 60,000-square-foot office space component of the Palladio at Broadstone mixed-use property completed in March in Folsom. In addition, however, the 54,000-square-foot 400 Sunrise building in Roseville makes the firm’s under-construction list. Development of this “wedge-shaped” building began several years ago but was waylaid early on by foreclosure, the Sacramento Business Journal explained in a July 2012 report. Mourier Land Investment Corporation acquired the unfinished shell for $2.75 million in June. Far East National Bank was the seller.

Gradual recovery is expected. Modest positive net absorption over the remainder of the year should return the vacancy rate to sub-20.0% terrain. Rent growth slightly above 0.5% is projected for the year as a whole. “The good news,” reports Cassidy Turley, “is that the private sector has returned to the marketplace and is finally accounting for some growth.” Demand from health care, education, technology, and financial users is cited. The government sector, however, remains a weak spot.