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.
Centene’s Expansion Changes the Game
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.
Strong Absorption Across Sacramento
Rolling into the End of 2017, the overall Sacramento Office Market had just recorded three positive quarters of net absorption. While the 1stquarter was negative138,000 square feet, the 2ndquarter 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. 2ndplace was the Natomas submarket at 141,000 square feet and rounding out the top 3 is the Roseville Rocklin market at 74,000.
New Development Returns to the Market
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.Most of this new construction is pre-leased. Adventist Health is building 242,000 square feet in Roseville. Kaiser is building 194,000 square feet. Dignity Health is adding 68,000 square feet in Sacramento. The biggest and most notable speculative project is The Ice Blocks development at 16thand R Street in Midtown Sacramento. The Ice Blocks is raising the bar for Sacramento. The project combines market-rate housing with several innovative retailers. First tenants will be moving in around May. Heller Pacific developed the project. The company has also contributed to Midtown with projects such as MAARS at 20th and J Street.
Office vacancy continued to decline. The regional vacancy rate reached 10.3%. The CBD ended the year around 9.1%. It entered the fourth quarter at 8.6% before posting 95,000 square feet of negative absorption. Midtown and East Sacramento have some of the lowest vacancy rates at roughly 5%. Folsom sits near 7%. Roseville and Rocklin are around 8%, down from more than 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.
Investment Sales Gain Momentum
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://lightblue-baboon-589702.hostingersite.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.