Golden 1 Center Arena

When an Office Building Sells, Tenants Pay

Sacramento CA: About a week ago, 621 Capitol Mall sold for $161,000,000. This amounts to $439 per square foot; nearly $100 a square foot more than what Wells Fargo Center sold for 14 months ago. 621 Capitol Mall (aka US Bank Tower) was built in 2008 and is home to Downey Brand, US Bank and Nossaman LLP. KP Public Affairs is moving into 16,000 square feet in March.

This sale is a significant validation for the Sacramento commercial real estate market because the price is significantly higher than the average, and this is Shorenstein’s first purchase in the Sacramento Market. Shorenstein, based in San Francisco,  is one of the country’s most prolific, opportunistic institutional investors.

When an office building sells for a price significantly higher than its assessed value, the Property’s tax basis goes up. In this case, the previous assessed value was $122 million – soon to increase to $161 million.

The tenants are responsible for increases in expenses over and above its Base Year, and this includes property taxes. The Base Year is typically the year a tenant’s lease commences. With this recent sale, the assessed value increases by approximately $40 million. Property taxes are approximately 1.15% so the property tax bill will go up by $460,000 or $1.25 a foot per year. Therefore every tenant in 621 CM will pay 10 cents a foot more in rent to cover this increase in property taxes.

Unless you are a special tenant (special meaning: large, Fortune 100, or the public sector) you are probably going to pay more rent when your building sells. So when looking for a new property, consider the ownership’s goals for the building. For example, if they have owned the building for 3 to five years and the market has appreciated considerably, there is a chance that the owner will sell the building during your lease term. And if it sells for a big number, you are probably going to be picking up a bigger portion of the tax tab.

If you have specific questions about your current lease, the assessed value of the building you are in and what your possible exposure is, I can help.  Please feel free to call me at (916) 761-1202 or email me at

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:

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. 



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.

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.


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.


R Street’s Ice Blocks

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


Renewal or New Lease? Don’t Go Naked.

How long would a snail survive without its shell; a porcupine without its quills; a skunk without its spray? As a commercial real estate broker representing occupiers in their commercial real estate dealings, I strongly encourage retaining a broker when dealing with a renewal or new lease.

Certainly, you are capable of finding space; there are numerous data providers like Costar and Loopnet. An exceptional broker is your interpreter and guide. An exceptional broker knows which landlords are well capitalized and which landlords are not. An exceptional broker orchestrates your transaction in such a way that you will be assured that you are making the best deal possible, and that you will experience minimal downtime in your business. An exceptional broker anticipates issues and navigates you through the deal process. An exceptional broker knows what a good deal is (if you are unrepresented, you may not know a good deal when you see it, and negotiate too hard, or more likely, you will leave money on the table or forget to address critical lease language issues).

Most important, an exceptional Broker represents you, not the landlord.

Tenant Rep Broker, Generalist or Dual Agent? A broker that represents buildings, represents landlords. There is a different mindset when you represent the Landlord. There is one goal: get the space leased up! In addition, and probably most important, the Landlord’s broker has a fiduciary obligation to the Landlord.

But lets be realistic. In small markets, most brokers cannot make a living just representing users. They are Generalists. They represent buyers, sellers, landlords and tenants. A Generalist has a broad perspective that can come in handy.

Effective January 1, 2015 (SB 1171) new legislation requires brokers and agents to provide extensive disclosures in leasing transactions as to who they represent. The law went so far as to suggest that there is a conflict even when your agent’s firm represents a building (even though your agent is not associated with the building.) Practically speaking if you are looking to pick an agent and you are concerned about a conflict of interest (dual agency) see what properties the agent represents. Frankly, you can ask the agent to disclose what properties they represent. If they don’t represent any buildings you would consider, then I would say that you will be in good hands, so long as the agent is experienced and has the expertise to get the job done.

Brokers that represent only Tenants (Tenant Reps) are very effective and supposedly have no conflicts. Even if an agent (or their firm) represents no buildings, they can still have a conflict. For example, what if the Tenant Rep represents a tenant looking for similar space in the area you are looking? That certainly would be a conflict, particularly in a tight market with limited options.

What if you don’t want to move, you just want to renew your lease? Should you still retain an agent to represent you? Of course! The agent will create a competitive environment that you cannot create on your own. I just finished up a negotiation where the tenant acknowledged there is no way they would have gotten as good a deal on their own, and this is a client that negotiated their previous renewal on their own.

If the Landlord’s agent is doing their job, when the time is right, the agent will approach you about renewing your lease. You may have developed a good relationship with this agent, but the simple fact remains, they represent the landlord. So when the Landlord or its agent approaches you regarding a renewal, let them know you have an agent or you plan on retaining one. In most renewal negotiations, the landlord will happily pay your agent’s fee, in fact it is usually in landlord’s budget. When a landlord pays a commission, that means they finalized a renewal, and the tenant is staying. A commission is always less costly than filling up a vacancy.

There is conflict inherent in the business everywhere. As a broker, the critical tenet is to do the right thing, treat people fairly and look out for the interests of the party you represent. As the Occupier, when hiring an agent, look into the potential conflicts and hire an experienced – and exceptional – agent where the likelihood of conflict is minimized.

Talk is Cheap. Downtown and Midtown Sacramento Have the Walk to Back it up!

While the Sacramento commercial real estate market seems white-hot, with property flying off the shelf, most buyers of commercial properties (not to be confused with multifamily) are deliberate and sensible.

Recent sales in Midtown and Downtown certainly show that values are up, and the sales demonstrate that the Arena effect is more than hype, it is real.  This being said, I think there is more to the story than meets the eye.

Long before the Arena, several larger projects were underway or far along in the planning stage.  So while the Arena has stoked the fire, market dynamics were already at work to make Midtown and Downtown dynamic and thriving.  The Arena just put gasoline on the fire.  Properties that were not moving, have moved, and values have escalated significantly.   Midtown was doing well in its own right, with the majority of new development happening there.  But for Downtown, the Arena catapulted it exponentially.

Recent sales to go down in the Midtown and Downtown Markets include:

  • 1234 H Street. A 2 story, 11,000 S.F. Office Building bought for $1,990,000 ($179 per S.F.) by a law firm (professionally represented by Tom Bacon) that will be occupying the top floor.  The building has 22 parking spaces on site.  The ground floor is available for lease at $1.75 a foot.  The prior asking rent was $1.95 a foot.
  • 2831 G Street. A 2 Story, 10,025 S.F. office building was bought by a user group for $1,925,000 ($191 per S.F.)
  • 1001 G Street, 15,500 S.F. on three floors was bought by Tim Taylor  for $2,880,000 ($180/S.F.)  This building has more parking than most buildings downtown and has about 4,000 S.F. available.
  • 1030 G Street is a 6400 S.F. building with covered parking that sold for $1,525,000 or $238 per S.F.

One thing that all the properties have in common:  Great Parking; it just makes life easier.

A comprehensive Comp Study is available.  Please contact Tom Bacon for your free copy,

Downtown Market Keeps on Rolling!

Downtown Sacramento Class A office rents have increased significantly over the last 6 months, and it seems that the expectations of most Tenant’s have adjusted in step. I think a big reason why most tenants have adapted (begrudgingly) to increased rent is because Downtown Sacramento is a different value proposition.

A client of mine owns 1029 J Street (the NWC of 11th and J Street), and while it is not considered class A, they are making plans to add class A amenities to the property.  These improvements include: on-site security, a state of the art conference facility that tenants can use, and a renovated lobby.  The ownership has a much easier time rationalizing these improvements because they are in a position to raise their rents.  Even after they raise their rents, the building will still be about 75 cents a square less than the class A buildings in the vicinity.

The Arena effect is becoming more pronounced.  Consider Kaiser’s purchase of 501 J Street (used to be the Home of Sacramento Commercial Bank and the Department of Corrections.)  This building is located directly across the street from the Arena.  Before the Arena, this building would have been lucky to fetch $140 a foot.  Kaiser paid nearly $200 a foot. I guess for Kaiser, 501 J is a good strategic buy since they have also committed to build a medical campus on the 243 acre Railyard site, just a couple blocks away.

A block to the east, at 6th and J Street, Vanir Construction is planning to start construction on a new office tower.  This tower would not even be on the back of a napkin, but as soon as they find a tenant for a significant portion of the building, they will be in a position to break ground.

At 8th and J Street, CIM’s apartment project, 800 J Lofts, sold for a smooth $57 million.  If my math is right, that works out to over $200,000 per unit (the project also has 20,000 s.f. of retail.)  There is no doubt that this property’s location went from a “B+” to A+ when the arena became a reality.

Immediately south of the Arena is 621 Capitol Mall.  Up until recently there wasn’t much space available, however Downey Brand recently negotiated a space reduction of two floors. The asking rate for the space is $2.90 to $3.10 a foot.  I toured the vacancy with a client last week; from the proposed offices we looked down on the site where the King’s practice facility is being constructed.  Pretty cool!

Within a couple blocks of the Capitol, there has been additional activity.  As I reported earlier, the Senator Office building sold for just over $200 a foot.  Other Sales include 1325 J Street for $90,000,000 ($250 / s.f.), the California Grocers Association paid about $3.1 Million for the Corum Building ($200 +/-) and the California Republican Party bought a floor at 1001 K Street for $1,500,000 (again, about $200 a foot).

If you are looking to buy anything around the Capitol, the options are minimal unless you want to buy 925 L Street which is up for sale, no price listed.  If you are looking to lease space, the options have also diminished considerably.

Commercial Property Owners Targeted in Effort to Change Proposition 13

Over 30 years ago, voters passed Proposition 13 in response to unpredictable tax increases imposed on property in this state.  Prop. 13 set a base rate of taxation and limited annual increases in assessed value.  This protection continues today for all residential, commercial and industrial properties.

Year after year, legislation is introduced to increase taxes on commercial and industrial property by amending Prop. 13 and requiring these properties be assessed based on current fair market value instead of acquired value.  This is referred to as “Split Roll” because it would raise taxes on commercial and industrial, but continue Prop. 13’s protection of residential property.

Year after year, these legislative efforts fail because they require a 2/3s vote in each house — a feat impossible to accomplish given Republican opposition.

However, proponents of “Split Roll” property taxation (mainly labor unions) are putting together a statewide initiative.  They believe the Presidential election in November 2016 will be their best chance to see its passage.  Younger (and more liberal) voters will be targeted in hopes of convincing them that Proposition 13 has been bad for California — taking funds from schools, roads and child care.

In response, opposition (mainly business) argues that imposing higher taxes on commercial and industrial property owners is discriminatory and unfair.  The change will lead to increased costs of doing business in this state.  Those costs will be passed on to the general public — including commercial property tenants, employees and consumers.

So when you are negotiating a lease, make sure you know the assessed valuation of the property and then negotiate accordingly.

The Senator will Rise Again

It looks like the iconic Senator Office Building is about to change hands.  The building consists of about 160,000 square feet on 10 floors, and has historically been a popular location for lobbyists and associations since it is directly across the street from the Capitol.

In 2010 CALHFA vacated the building to move into a shiny new space at 500 Capitol Mall.  When CALHFA moved out they left behind a significant vacancy, say about 50,000 square feet.  Up until CALHFA’s move, the building never had a vacancy over 5%; in fact, 5% would be considered high.

Currently there is about 50,000 square feet available about (30% vacancy) with spaces ranging from 500 to 15,000 square feet.  With new ownership this vacancy should lease up fast.

If you are a tenant looking for about 5,000 square feet near the Capitol, your choices are slim.  Class A space in the Capitol Close Micro market (excluding the Senator and 1130 K Street) is hovering under 7%.  So, once the leasing program gets going at the Senator, we should see the Senator’s vacancy back to where it should be.