Sacramento Value

Amazon HQ2 Takeaways

Amazon Moving to Sacramento?  No, but other Unicorns will!

Last year, 238 Bidders for Amazon’s 2nd headquarters submitted proposals to induce Amazon to locate 50,000 employees in their regions.  Everyone I am certain had reasons but according to CCIM’s chief economist, K.C. Conway,  only 50 bidders met the base criteria.  If it were not for California’s onerous regulatory environment, employment law and taxation, Sacramento would have had a shot.

I think it is idealistic, to say the least, to think that California is going to remove the weights from Sacramento’s saddle, but this doesn’t mean that we cannot compete on a Statewide level – against and in conjunction with – the Bay Area.  Sacramento has to focus on its strengths and choose its battles wisely.  For Sacramento, the Amazon Bid was an essential part of the growing process, a battle worth fighting.

Back to the Amazon RFP.  The HQ2 RFP illustrated trend in relocation decisions:  It is not all about costs.  It is about: Workforce, Quality of Life and Corporate Culture Fit.  The Study reviewed also lists the top municipalities that bid for Amazon, and a large percentage of the top bidders are located east of the Rockies. Take a look at the report here:   ttps://bit.ly/2ra9koy

So what is Sacramento going to do about it?

Greater Sacramento Economic Council (GSEC) headed up by Barry Broome quickly determined that you can’t fight it, but you have to acknowledge the handicapping the State of California puts on Sacramento.  I bet the Serenity Prayer would come in handy here.  What GSEC has done is shift the focus to our strengths while acknowledging our weaknesses, our realities.  And let’s face it, the job is getting a little easier for Sacramento.  When compared to a decade ago, Sacramento’s value proposition is night and day.  Take a look at GSEC’s latest PR:  https://bit.ly/2HGTddu

Sacramento’s office market and you?

Sacramento consists of about 110 million square feet.  The market is made up of about 20 sub-markets.  Each of these sub-markets have a different value proposition.  If you happen to be a building owner or developer in a sub-market still looking for a value proposition, you can most likely learn something from Amazon’s H2Q RFP – How can I create a better experience for a tenant’s employees?

If you are a Tenant, looking at locations you need to ask which location will create the most productive environment for my peeps?  Enhanced productivity compensates for higher rents.  Even if you are not looking at alternative locations you should always be asking yourself how to make your workplace a better place.

Want a copy of the H2Q report?  Just send me an email at tom@baconcre.com.  I will send you the PDF.

Aerial Downtown Sacramento

News Break:  Sacramento Office Market Banned for Taking Performance Supplements

For decades, Sacramento has been considered a secondary or tertiary market.  For those who bought-in 3 to 5 years ago, they are now reaping the benefits.  Now that the office market has reached equilibrium, it is only a matter of a couple years until we will see meaningful uptick in construction of speculative office product. 

Before the end of the year the most significant private sector deal was announced. Centene bought Health Net and immediately expanded in the Prospect Park submarket (Highway 50).  But the biggest deal – that was put together through the efforts of multiple public and private sector players including the City of Sacramento, The County and GSEC – is Centene’s projected 1.25 Million expansion into the North Natomas Market. 

Rolling into the End of 2017, the overall Sacramento Office Market had just recorded three positive quarters of net absorption.  While the 1st quarter was negative 138,000 square feet, the 2nd quarter was positive at 158,000 square feet, the 3rd quarter at 644,000 square feet and the 4th quarter at 106,000 square feet. Net Absorption is defined as: The net change in occupied space over a given period of time.   The biggest submarket winner is Highway 50 at positive 208,000 square feet.  2nd place was the Natomas submarket at 141,000 square feet and rounding out the top 3 is the Roseville Rocklin market at 74,000. 

New construction:  For 2017, we had 670,000 of office space under construction.  It was not long ago that less than 20,000 square feet was under construction.  The majority of this new construction is pre-leased; for example in Roseville Adventist Health is building 242,000 square feet, Kaiser is building 194,000 square feet and in Sacramento Dignity Health is building 68,000 square feet.  The biggest and most notable speculative project is The Ice Blocks development at 16th and R Street in Midtown Sacramento. The Ice Blocks Development is definitely raising the bar for Sacramento by delivering an awesome urban infill project that includes several cutting edge retailers and market rate housing.   First tenants will be moving in around May.  Heller Pacific is the developer who has added to the Midtown vibe with developments like MAARS located at 20th and J Street.

The overall vacancy factor for office space inched closer to single digits (10.3%) and the central business district is currently hovering around 9.1% (it was 8.6% going into the 4th quarter, but we saw negative absorption of 95,000 S.F.)  Markets with the lowest vacancy factor are:  Midtown and East Sacramento (about 5% combined), Folsom at 7%, Roseville and Rocklin at about 8% (which by the way was sitting at over 15% just three years ago. 

Overall Market Rents at the end of the 2017 averaged about $1.80 per square foot.  The CBD asking rent was at approximately $2.90 for class A space and the overall average asking rent is $2.45.  So, when you are looking at buildings in and around downtown with rents below $2.00 and in some cases lower that $1.65 these properties could be a great value for tenants and value add investors.  Midtown Sacramento is another market with huge upside as properties are renovated and rents increase. 

Sales in the Sacramento region really accelerated in 2017, particularly for class A properties.  In the CBD, three Class A properties in excess of 50,000 s.f. with an average price per square foot of $224 per S.F. Comparatively, in 2016, 400 Capitol Mall and 520 Capitol Mall sold for $343 and $340 PSF respectively.  For additional insight into “who owns what” take a look at: https://sacramentobacon.com/who-owns-sacramento/

And in the first week of January, 621 Capitol Mall sold for about $420 a foot.  Institutional Investor Shorenstein was the buyer, and this purchase is its first buy in Sacramento.  This is national news that adds to Sacramento’s momentum on the national and international stage. 

In South Natomas, the submarket immediately north of downtown,  the Evergreen Company paid $55MM ($174 a foot) for Natomas Corporate Center (2485 and 2495 Natomas Park Drive).  This is a bargain for the iconic project. 

2018 should be another very positive year with continued growth in Healthcare, Insurance, Education, Energy and Technology.  Who knows where our next new companies will come from, but I bet we will begin to see a steady increase of migration from the Bay Area combined with organic growth. 

 

It’s Just a Matter of Time

I attended a Panel Discussion Moderated by Randy Getz of CBRE at the Sutter Club in Downtown Sacramento this week.  Chuck Trainor, Managing Partner of Trainor Fairbrook, introduced David Taylor.  David Taylor humbly recounted his first development projects. Taylor has arguably had the most impact on Sacramento’s Skyline, developing The Sheraton, 1201K Street, 1215 K Street, Sacramento City Hall, 621 Capitol Mall.  But David doesn’t just build buildings; he creates a sense of place.

David highlighted some interesting facts that illustrate how far Sacramento has come.   Notable points include:

  • In 2015 Bloomberg ranked Sacramento #6 as the most affordable fun city.
  • Before counting the expense of the arena, in the recent past, over one billion dollars has been spent downtown on new developments, of which 58% are privately funded.
  • Since 2014, 25 properties have traded hands valued at over $538 million.
  • Of 900 people surveyed, 1/3 say they would like to live downtown, and 2/3 of the millennials surveyed want to be in the Grid.

Following Taylor’s introduction, a diverse group of panelists came up on stage.  The panelists included:  Denton Kelley, Partner with LDK Ventures, oversees the Railyard Development; Sandy Sharon, SVP and Area Manager for Kaiser; Ron Vrilakas, a prolific Central City Architect; and finally Ali Youseffi, Vice President of CFY Development.   Randy Getz led an insightful and interactive discussion with an audience of about 150 commercial real estate experts.  Each panelist shed light on their optimistic view of downtown Sacramento’s future and the developments that they have been involved with.

Downtown Sacramento is the Ultimate Corporate Campus

What surfaced from all the comments is that the game – and the players – have changed.  Downtown’s value proposition has risen (Sacramento Delivers, Private Sector Grows), with an abundance of new amenities including health clubs, bars and restaurants.    And all the development would not be sustainable without the good paying Jobs being created downtown (Kaiser Hospital took down 18 acres in the Railyard for a future hospital and they bought 501 J for a new medical office building.)

With this momentum, it is just a matter of time until companies like Facebook, Salesforce or Linkedin establish a presence in Downtown Sacramento.  Just this week the Bay Area Tech Company, Support Pay, announced it was moving into Sacramento.  SupportPay expects to grow in Sacramento, in a big way.

As David Taylor said in closing, Downtown Sacramento is the Ultimate Corporate Campus with everything right there for employees to work and play.  It’s just a matter of time.

Sawyer

Sacramento’s Big Man is just getting started.

How About Those Sacramento Kings?  The Kings won last night without their Big Man, Cousins.  Frankly, they looked like a whole new team, with contributions from everyone, with six players in double digits.  Willie Cauley-Stein had a career high 29 points.

Would the Downtown market be on such a winning streak without its Big Man? I don’t think so. Property is selling in the Midtown and Downtown Markets (THE CORE) for prices that are justified by increased demand for housing in Core, the Arena (The Big Man) and a multitude of other developments. Believe it or not, the demand for properties is going to increase and sustain itself, so long as the trend for migration into the Core continues. Another factor bolstering values is the replacement cost for commercial properties has increased by over 30% in the last 5 years. This is due to increased labor and material costs.

When the Arena was announced, overnight, property values in the vicinity of the site went up at least 25%. Buildings like 555 Capitol Mall, 501 J Street, The Travelers Hotel Office building and the former Greyhound Bus Station are just a few examples. For Sacramento, the Arena changes everything; consider this blog post comparing The Golden 1 Arena to San Diego’s Petco Park: For Sacramento, The Arena is the Cake

Midtown hasn’t needed the Arena to take off. For many years rents have been suppressed in this market, and as new developments come on line, the rents will be commensurate with Midtown’s value proposition and Vibe. All the new residential development, coupled with the new Sutter Hospital and the Ice Blocks are a few of the projects making it happen.

Below are a three comparable sales that demonstrate the viability of Commercial Property in the Core.

Sale #1: 831 L Street. This site consists of a 27,200 s.f. parcel with a 44,000 s.f. building with over 50 parking stalls on the site. The price was 5,000,000 which amounts to about $113 foot for the building and a land value of about $184 a foot. I see this property having two lives, one for the next 5 to 10 years as a leased building.  In its next life, the property will make way for a new development that maximizes the site.

Sale #2: 910-930 K Street. These vacant buildings sat on the market for at least 5 years, and sold about 2 years ago.  Total site consists of 20,909 s.f of land with 31,600 S.F. of buildings. PRICE: $5,300,000, that pegs the underlying land value at $250 a square foot and $167 a foot for the vacant buildings. To put this in perspective, just one block away 770 L Street, a 169,000 square foot (90% occupied) class A office building sold for $173 a foot before the Arena was announced.

Sale #3: 2020 I Street. This 9,500 S.F. building sold for $2,802,500 ($295 / SF). This building is home to Trumpette, a specialty childrens clothing store. The property sits on a relatively large lot with great parking. Wouldn’t be surprised to see some “alley activation” here.

The sales listed above are notable examples of properties that have sold at exceptional values, values that reflect where the Core is heading. This doesn’t mean that a property worth a $100 a foot is going to immediately sell for $150 a foot, but it certainly builds a solid case for optimism and positive momentum.

Golden 1 Center Arena

Sacramento’s Golden One Arena Makes Almost Everything Better

The Sacramento Kings staying in Sacramento was great, but the Golden One Arena and its profound ripple effect  is the biggest game changer since the Gold Rush. Other cities (San Diego, Denver, San Francisco, etc.) have developed new arenas and the impact on their economies have been great. However, in relative terms, Sacramento’s Arena will probably turn out to  be far more significant.  We have already seen an appreciable uptick in investment activities. Hotel development is happening with more to come, office buildings are selling and Landlords are feeling pretty good.  For  both retail and office tenants (and this is where the “almost” comes in) the future is complicated; On one hand you have an evolving Core with added amenities, then on the other, you have spiking rents and diminished choices.

When compared to other cities, the reason why The Sacramento Arena project is more significant in relative terms is because Cities like San Diego and San Francisco already had a lot going for them: international destinations, corporate support, and natural beauty.

For this discussion, let’s take a look at San Diego and the impact of Petco Park. The total project cost about $450,000,000. Petco Park was competed in 2004. Since then, there has been over a $2 billion in development around Petco Park. The development consisted of 3,500 residential units, 957 Hotel Rooms, and 610,000 square feet of office space. Since 2004, the assessed value of real estate tripled. Petco Park created 19,200 jobs.

But the Boom in San Diego is like adding an extra layer of frosting on an already amazing chocolate cake. For Sacramento, the Golden One Arena is the cake. The Arena combined with the potential expansion of the convention center is going to change our whole community. There will be more hotel rooms, restaurants and housing. The tax revenues are going to increase commensurately, and the City of Sacramento will realize a solid return on its investment. According to the San Diego Business Journal, the City realized an annual return of 7.6%.

By 2021 I predict that we will see the addition or renovation of 1,000 hotel rooms (The Sawyer adds 250 rooms and there are rumors of about 300 rooms near the Tower Bridge in West Sacramento.)

The CBD office market will tighten considerably, and there probably won’t be more than 500,000 square feet added to the inventory in the next 5 years.  There are several sites, but the cost of construction requires rents the market is not quite ready for.  Plus we need more tenant demand in the private sector.  Certainly Kaiser Hospital Helps.

The Arena (like Bacon) makes everything better.  If you are looking to make a move in the office sector (whether you are looking to develop buy or you need to renegotiate your lease or find a new location) Please contact me at (916) 761-1202.  tbacon@kiddermathews.com.

Sacramento’s CORE: Par, Birdie, Eagle. Albatross next?

Sacramento’s Core (Midtown and Downtown) is not very sneaky. In fact the whole world has taken notice.  One thing I didn’t now about Core is this:  Core recently took up golf, and in 2015 made the PGA Tour.    In a matter of months, Core has risen to the top of the money list!  At the  2016 Player’s Championship, Core was interviewed after a remarkable 3rd Round, and he shed some light on his success.

Reporter:  So Core, how do you feel about your round today?

Core:  Well, I gotta tell you, I don’t think I can hit the ball much better.  The first day, I played alright, but I was still working out the kinks, you know, past few years have been tough.

Reporter:  I noticed that.  Your first round you scraped it around and managed to keep yourself in the hunt.  But then you really turned it on.  What do you attribute to your resiliency and significant bounce back?

Core:  Well before I picked up my new coach….

Reporter:  Your new coach?

Core:  You know, they call him (pause) The Golden One.  (smiling) I call him GO.

Reporter:  How could I forget?  He has been a big part of your rise to the top of the money list, huh?

Core:  No doubt.  I was making progress with my trainer, HDR, and my previous coach, Trend..  But when GO showed up, things really started to click.

Reporter: So what do you see for the final round tomorrow?

Core:  I can’t imagine going as low as I did today, heck, I only had 16 putts.  But I feel pretty good. I am looking forward to solid final round.

Reporter:  Thanks, Core.  Good Luck Tomorrow!

With the exception of some notable deals, like the sale of the Wells Fargo Center, it doesn’t take a brain surgeon to note that values are up in Midtown and Downtown.  In looking at the statistics (Costar) for 2014 through 2016 here are the basics:

Commercial (non residential) properties sold for an average of $99 a square foot in 2014, $151 in 2015, and in 2016 the average price per square foot increased to $205 a foot.

Multifamily properties sold for an average of $95,000 per unit in 2014 with a GRM of 10.92. In 2015 the price per units edged up to $116,000 per unit with the GRM jumping to 13.15. In 2016 the Price per unit increased to $150,000 per unit with a GRM of 13.32.

Land sold for an average of $94 per square foot in 2014. In 2016 the average increased to $131 per square foot.

nwc-11th-and-k

The Ransahoff (11th & K)

This survey is only for properties selling between $1,000,000 to $10,000,000.  The price increases are not surprising given the development of the arena and the trend of people wanting to live in the Midtown and Downtown area.  However, I think you can say that a 50% increase in the price of Multifamily (price per unit) from 2015 to 2016 is more of a spike than a bump.  Notable: the Gross Rent Multiplier (GRM)increased nominally between 2015 and 2016.  This means rents escalated significantly in 2016, nearly in step with the values.

Many of the commercial properties sold (non-residential) in the midtown area were to users.  For quality properties with parking, the prices exceeded the median significantly.

Land sales have picked up considerably as well, and values are up at least 5o% from 2014.

ice-blockexterior-cropped

R Street’s Ice Blocks

For detailed Sales and leasing information including sales comps for 2016,  contact Tom Bacon at 916-761-1202 or tbacon@kiddermathews.com.

sacramento at night

Greater Sacramento Economic Council – Sacramento’s CEO

The Greater Sacramento Economic Council (GSEC) invited a select group of commercial real estate brokers over to their office last night.  Barry Broome, President and CEO, laid out GSEC’s game plan.  The first step, which seems to be coming to a close, has been to get organized and get a lay of the land. GSEC understands the political landscape better understood and they acknowledge the challenges and as well as the appeal of Sacramento.  For example, we are in California, the greatest state in the country.  Part of the reason it is such a great state is because there multiple regulations to maintain the environment and provide services.  But with regulation comes costs that make it difficult for companies to locate certain components of their enterprises here.  Barry pointed out that the costs (relative to employee salaries) to develop back offices, like a call center, are too expensive in California.  So, guess what?  GSEC will not be spending a lot of time trying to attract back offices to Sacramento.  Their focus is on higher paying jobs such as engineering, IT and Life Science.

The Sacramento Region is adorned with an outstanding educational system that is producing a terrific labor force with higher paying jobs in IT, engineering, Life Sciences and Agriculture.  The problem, as Barry noted, is that the outside world still considers Sacramento a Cowtown.  Well you know what I say? “More Cowbell!”  GSEC has commenced an aggressive multi-media marketing campaign that is transforming Sacramento’s meaning to the outside world.

The other key take away is that GSEC is not just a promoter of the Sacramento Region, it is a collaborator with the Bay Area to compete as a “Mega Region” to keep and attract jobs in California.  This is a huge paradigm shift in thinking.

And while GSEC is working with the Bay Area Economic Council to promote our Mega Region, GSEC is coordinating a cooperative effort with all the municipalities in our region.  Unifying the the region to compete and make it a more business friendly place to be.  The first initiative is to reduce the time and expense to get something built.  There is no reason it should be difficult open up shop in Sacramento.  Let’s lay out the red carpet, and let the the world know that Sacramento is open for business.  With the Greater Sacramento Economic Council, this message is clear and beginning to reverberate, everywhere.

So if you are interested in the region and need some information about commercial real estate, I would be happy to help!

Sacramento Delivers, Private Sector Grows

Jeff Randle of Randle Communications stated in his December 2015 editorial, “I believe 2016 will determine Sacramento’s future. Decisions made by our leaders plus choices made by residents will set a course for generations to come.” See the editorial from the Business Journal: Key issue of 2016: private-sector growth

Of course, I completely agree, but in addition to decisions, I think the leaders have to stay out of the way and help accelerate Sacramento’s growth of prominence in California, nationally and worldwide.

As a commercial real estate professional, I deal with companies from all over the region. Over the last couple of years, we have seen more and more companies from outside of the Sacramento region acquire major real estate assets, and we have seen companies from outside of the region establish or expand their presence in the region. When companies expand from other markets into Sacramento, that means Private Sector Growth.  Consider the stats:

According to Bureau of Labor Statistics Data, Sacramento is evolving and becoming less dependent on public sector job growth. For example, in 2010, 29% of the region’s non-farm workforce was government. As of December 2015 that number stood at 25%. So in 2015 of the 927,000 non farm jobs, 695,000 were private sector. In 2010, of 830,000 non farm jobs, 589,000 were private sector. Net increase in private sector, non farm jobs: 106,000. Nice!

It is no surprise that we are seeing accelerated private sector growth.  Sacramento has so much to offer.  It goes without saying that companies need a quality work force.  Sacramento is home to two major college campuses, Sacramento State and UC Davis. In addition, University of the Pacific’s McGeorge law school and MBA programs contribute. More and more companies are choosing to expand into the market than ever before, and a big draw is the trained labor force our superior college institutions deliver.

In the past, many of our graduates would seek greener pastures in big markets.  Now, Sacramento is rivaling these big markets with a diversified and progressive offering in the entertainment, sports, arts and restaurant arenas.  The country is taking notice.

In October 2016, the Golden One Arena opens up with Maroon 5. In 2017 The NCAA Basketball Tourney will be here. Events like these combined with the Kings improved performance in the league, will contribute to Sacramento’s Brand growth. I wouldn’t be surprised if the sale of a Kings player’s jersey breaks into the top 10 by 2017.  I think this is a solid economic indicator.

Last year, the Del Paso Country Club hosted the US Senior Open, eating up hotel rooms and fine food from local restaurants. According to Steve Hammond, CEO of the Sacramento Convention & Visitors Bureau, “There isn’t enough money in our budget to purchase that level of promotion, not just nationally, but the grandeur of this event and the international exposure.”

All these events are the byproduct of a great city growing up.  Throw in other great Sacramento offerings like the Crocker, the Mondavi Center, B Street Theater, and a burgeoning restaurant market, and you have a place where Millennials and Boomers want to be.   Anyone have an extra ticket for the Farm to Fork dinner?

It’s not the Gold Rush but for Sacramento, it may be the next best thing

It’s not the Gold Rush…….Sacramento Commercial Real Estate Update

Gradual Value Appreciation? I think not. Property is selling in the Midtown and Downtown Markets (The Core) for prices that are justified by increased demand for housing in Core, the development of the Arena and a multitude of other developments (see this October 14 Post on Urban Land Value. Believe it or not, the demand for properties is going to increase and sustain itself so long as the trend for migration into the Core continues.

When the Arena was announced, overnight, property values in the vicinity of the site went up at least 25%. Buildings like 555 Capitol Mall, 501 J Street, The Travelers Hotel Office building and the former Greyhound Bus Station are just a few examples. For Sacramento, the Arena changes everything; consider this blog post written over two years ago comparing The Golden 1 Arena to San Diego’s Petco Park: Sacramento Kings Arena.

Midtown hasn’t needed the Arena to take off. For too many years rents have been suppressed in this market, and as new developments come on line, the rents will be commensurate with Midtown’s value proposition and Vibe. All the new residential development coupled with the New Sutter Hospital and developments like Whole Foods at 20th and L Street. Land is selling, and more land is sure to trade hands in an accelerated pace the next three years.

Below are a three comparable sales that demonstrate the spiking values of Commercial Property in the core.

Sale #1: The half Block of 9th and S Street, home of Insight Coffee and former HQ of Murray Industrial Supply. This property sold for about $70 a square foot. Two years ago, this property may have fetched $35 a foot.

Sale #2: 910-930 K Street. These vacant buildings have sat on the market for at least 5 years. Total site consists of 20,909 s.f of land with 31,600 S.F. of buildings. PRICE: $5,300,000, which pegs the underlying land value at $250 a square foot and $167 a foot for the vacant single story buildings. To put this in perspective, just one block away 770 L Street, a 169,000 square foot (90% occupied) class A office building sold for $173 a foot.

Sale #3: 915 Broadway. This 15,400 S.F. building sitting on 1.8 acres sold for $2,600,000. Land Park residents will be pleased once The Kitchen opens up here. The Kitchen has been located off of Hurley Way for decades, and is now moving into the Core.

These sales listed above are notable examples of properties that have sold at exceptional values, values that reflect where our Core is heading. This doesn’t mean that a property worth a $100 a foot is going to immediately sell for $150 a foot, but it certainly builds a solid case for optimism and positive momentum.