Happy New Year!

How about the Kings? Last night they eked by the Utah Jazz. This seems to be a new way of winning for the Kings. I remember the Lakers in the ’80s with Magic Johnson running the offense; The Lakers won five championships in the ’80s. The Lakers found a way to win. It is premature to place the 2023 King’s roster in the same room as “Showtime” but I think we can say that the current roster would make the 2002 Kings proud. In 2002, The King’s lost to the Lakers in game 4 of the Western Conference Finals when Robert Ory hit a buzzer-beater “3” to tie the series at 2. Check out the Buzzer Beater: Ory for Three!

The Office Market  – Post-Pandemic – Too early to call

Well, 2022 is in the books. and a solid majority of office markets across the US are struggling. Heading the descent is San Francisco. The controller for the city of San Francisco published a memorandum highlighting the effects of the pandemic on the SF office market; it is pretty bleak.  Most office markets across the country have seen a dramatic reduction in office occupancy. While most office markets’ occupancy rates are around 50%, San Francisco is at 40%. The last I checked; downtown Sacramento was over 50%.

Prior to the Pandemic, employees worked about half a day a week from home. Experts forecast that employees will settle in at 3 days per week on average. I have a client that intends for all the employees to come into the office only two days a week – but they will be signing a new lease, and they are only going to occupy the space 40% of the work week. There has to be another way! So, if your company would like to occupy space only Monday, Wednesday and Friday, maybe we can work out an office sharing arrangement! 

Sacramento is going to be fine, it’s just a matter of time

Sacramento’s office market has been negatively impacted, but fortunately not as bad as San Francisco. Most CBDs across the country have felt more pain than their suburban cousins, and in the Sacramento region, this is also the case. There are exceptions. For example, the State of California is advising all agencies to look at their office space needs, and if an employee can work from home, they are encouraging requiring this. The largest suburban market in Sacramento, Highway 50 Corridor, has several State agencies. A few large blocks of space have been vacated and the vacancy factor will continue to increase as the State reduces its office footprint further. Fortunately, Companies from outside of the region have and will continue to fill these vacancies. Hopefully, downtown Sacramento will get some love as well. I think it will, it is just going to take a little bit longer.

I compared the office stats for the 4th quarter of 2022 and 2020. I looked at Sacramento CBD and Suburban submarkets and San Francisco. While it is not pretty, Sacramento shines when compared to San Francisco.

Sacramento CBD:       2020 –   7.6% | 2022 –   9%
Highway 50:                 2020 – 11.8% | 2022 – 14.3%
Roseville / Rocklin:     2020 – 10%    | 2022 – 11.8%
SF Financial  District: 2020 – 15%    | 2022 – 22.2%
SF So of Market           2020 – 12%    | 2022 – 23.6%


Office vacancies will increase as office leases expire.

It is still early to project where office vacancies will settle because we are in uncharted territory.  The demand side of the equation is still unclear, and who knows what the State of CA is going to do.  We are probably looking at three years for the office market to level off and get better. I think that Sacramento will get better faster, even if the State of CA doesn’t come back to the office, because Sacramento is just a great place to live! Just ask all the folks from the Bay Area moving here. I think that is why we are seeing investors buying office buildings in Sacramento.

As we have discussed in prior articles, If the State continues to move into state-owned properties (and the office projects that they are building) some office buildings the State vacates may not survive. A few of these office buildings are functionally obsolete and not great candidates to be repurposed into residential. So ultimately buildings will be demolished to make room for new high-density residential projects. Recent legislation (SB  6 and AB 2011) that will help make this happen.  I will touch on this in my next blog post.

The collateral damage has been significant. First, restaurants and other retailers that depend on daytime business are struggling. Second, the value of office buildings decline, and eventually, some office buildings will end up back in the hands of their lender. Third, As office values decline, the property tax revenues do as well. Property taxes pay for local services like Schools, Police, Fire, and Life Safety.