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Rotary is not Just Lunch

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Rotary Is Not Just Lunch

Sacramento Rotary currently has about 300 members. Worldwide there are over 1.2 million Rotarians. Rotary International is tackling Polio, helping impoverished villages in third world countries build irrigation infrastructure and teaching children to read.  In Sacramento, since the 1920s, Rotary has been helping many deserving charities. Today we are in the midst of a significant fundraiser for the Sacramento Children’s Home Crisis Nursery. The Crisis Nursery has been helping families in distress since 1867. Here is a story about one family the Crisis Nursery helped:

“Brittany”
“Brittany called the Crisis Nursery in desperation. She had come to Sacramento to make a fresh start only to have her housing fall through. None of Brittany’s friends in the area were able to take her or her two young children in. Thankfully, the Crisis Nursery was there to give her kids a safe, nurturing place to stay while she worked to better her situation. The kids especially enjoyed playing outside, riding in the wagon, and drawing with chalk. Brittany visited her children often while she searched for permanent child care and a new home, spending quality time with her kids whenever she could. Meanwhile, Crisis Nursery staff put Brittany in touch with vital community resources to help her find safe, stable housing. At the end of the kids’ stay, Brittany was overjoyed to have the children come to their new home. She was ready to begin her new life in Sacramento, and she thanked the Crisis Nursery staff for taking such good care of her children in her time of need.”

Not everyone can join Rotary, but I am amazed how many people contribute to Rotary’s causes, particularly the Crisis Nursery. On October 6th Sacramento Rotary is hosting The Sacramento Century in Downtown Sacramento. All the proceeds are earmarked for the Sacramento Children’s Home Crisis Nursery. If you would like to contribute, it is not too late to sign up for the ride. If you are not quite ready to hop on the bike, you can contribute to the cause by clicking on this link: Donate to the Crisis Nursery

While Rotary is not my day job, I really enjoy helping disadvantaged youth, sharing lunch with many of Sacramento’s leaders and participating in a variety of fun events that Rotary sponsors.  Rotary is a daily reminder how lucky we all are, and Rotary gives us the opportunity to help others that may not be so well off.

See you October 6th!

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Sacramento Office Market – The Tale of two Sub-markets

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What keeps you up at night?  Your kid’s latest Instagram post or their curfew violation?  How about Croatia’s upcoming match versus England?

For me it is Sacramento office leasing and sales.  Last week I got up around 3:00 AM with the question: How have office values behaved in Midtown and Downtown over the last 3 years?  While the criteria for each sub-market is different – Midtown’s office market is much smaller with much smaller deals – I think you can glean some insights and uncover some opportunities. Before I get into the data, I have a recent experience that is relevant.

In March, 2017 I listed a 6400 s.f. office building located at 1419 21st in Midtown Sacramento; the initial pricing was $1.8 Million. The asking price was high – this is known as Unicorn pricing.   Let me make this perfectly clear: Unicorns – like the Loch Ness Monster and Big Foot- are a myth. If a broker begins to tell you that they can sell your property for 30% more than anyone else (without any basis) be wary.

With this being said, the owner still wanted to find the Unicorn, but we agreed that we would not wait too long.  So, within 45 days we reduced the price to $1.5 million. Then after 12 months and three escrows, the building sold for $1.2 million ($185 a foot.)  Given the building’s location, parking and lack of available alternatives, you would have thought the building would sell for more. However the property sold for less because the cost to rehab the building exceeded $65 per square foot.

While Midtown and Downtown are adjacent, they differ in many ways. However, one difference that I thought was odd – but explainable – was the appreciation of values since 2015.

Office Building Sales:

Midtown (buildings over 1,500 SF)             Downtown (buildings over 25,000 SF)

Year                 $/S.F                                        Year                 $/SF

2015                $195                                        2015               $180

2016                $248**                                     2016               $181

2017                $194                                        2017               $224

2018                $185                                        2018               $378

** For Midtown, 2016 was a frenzied year where interest rates were very low and certain brokers really pushed values up with no real logic behind the escalation. There were a few properties acquired by Bay Area Unicorns at relatively high prices.  Midtown’s 2016 price levels raised seller’s expectations, and there are properties still on the market that remain unrealistically priced.

In Midtown, sales comps under 5,000 Square feet averaged $40 a square foot higher.

For Downtown, 2018 started of with a record sales price of $421 a square foot for 621 Capitol Mall. This leads us to the odd but explainable: Why is the appreciation of values in downtown that much greater than midtown? The answer is simple: Sacramento is now on the radar of institutional investors, and Downtown is where they are looking. Midtown lacks institutional product – both from a quality level and from a project size.

Over the years, I have seen that if you have a quality project in a market where lots of inferior properties exist, there is always a flight to quality. We have seen this in the residential arena with market rate housing setting records for rents and sales prices. On the office side, Mike Heller and Mark Friedman have substantiated this theory with projects like Ice Blocks, 2600 Capitol and the mixed-use development where Mikuni’s is located.

So If you own, or you are looking to own, property in Midtown Sacramento, what is the play?

  • As an owner user, I think that if you can pick up well located assets where you are all in (after rehab costs) for less that $250 a foot you will benefit from a steady appreciation and protection from probable rent escalations. Since it can cost anywhere from $25 to $100 a square foot to stabilize a property, the price point is anywhere from $150 to $225 a foot.
  • As an Investor, Midtown is a good place to invest if you buy buildings that are not functionally obsolete, are well located, and have parking.  Depending on hold time and buying motivation (say 1031), I think higher prices can be rationalized.
  • As an owner, you can systematically invest in your property and enhance the value, knowing that the market dynamics support the investment.
  • If you are a seller, then with the right marketing program and with a proactive broker representing you, you can sell your property for a good price by emphasizing the market dynamics, to in essence, “sell the dream.”  However the dream has to be substantiated.

While we are bound to see a downturn in the overall economy, I think that the Downtown and Midtown markets will, in the worst case, flatten out.  The reason for this is Sacramento’s new Value Proposition.

If you are looking to buy, sell or lease commercial property or you are just looking for some objective input,  feel free to call me at (916) 761-1202 or email me at tom@baconcre.com.  Happy to share the underlying comparable information as well.

Sacramento Rent Control?

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Sacramento Midtown Multifamily

The Costa Hawkins Repeal & Rent Control

There has been a lot of talk lately about repealing the Costa Hawkins Rent Control law that was passed in the 1990’s. Costa Hawkins essentially curtailed a jurisdiction’s capacity to impose rent control.

Now Unions and Tenant organizations are seeking to repeal Costa Hawkins (CA). What is puzzling about all this, is that while the cities are looking to reduce the cost of housing, they are doing very little to make it easy or less costly to develop new housing. By imposing rent control laws without corresponding relief in development costs, jurisdictions like Sacramento are probably going to worsen the rental market for both the Tenants and the Landlords. Property values will go down, the incentive to build new units will diminish and property management regulations will increase.  Ultimately as property values go down, so does property tax revenue – that funds education and local services (police).

  • Cities such as Sacramento and Santa Cruz are looking at rent control policies to impose in the event the repeal of CA is successful this November. Richmond and Mountain View have recently passed rent control laws.
  • When Richmond instituted rent control it was retroactively applied. For example, the rent control policies went into effect November 2015, but the rents were retroactively controlled to July 21 levels. In other words, even if the Landlord raised the tenant’s rent after July 21, When the Rent Control went into effect, the rent was rolled back to what the tenant was paying prior to July 21st, 2015. If a tenant moves into a building after rent control is imposed, the rent the landlord charges will be based on a formula established by the city or jurisdiction.
  • If this 2018 Ballot initiative passes in California, this will open the door for rent control in many neighboring communities and ultimately statewide.

Here are some key takeaways if Costa Hawkins is repealed:

  1. Rent Increases could be tied to an index such as a CPI, so landlords cannot increase rents based on market demand or what a tenant is willing to pay. Landlords will be subject to the whims of the governing body.
  2. It will be very difficult for landlords to evict a tenant without cause, even if a tenant is month to month.
  3. Tenants will not want to move and – like in San Francisco – a tenant can sublease their apartment unit out to a friend at the below market rent just to keep the unit.
  4. To evict a tenant the Landlord will have to provide a reason for the eviction other than the desire to raise rents. So, even if a tenant is on month-to-month, and the landlord has a tenant willing to pay a lot more rent, the Landlord cannot evict the tenant.
  5. It is possible that the new rent control laws will include a provision that if the owner of an apartment building decides to sell, the seller may have to pay each tenant a fee in anticipation that the tenant might be displaced when the new owner takes over. For example, if the building is sold to an investor who wants to renovate certain units, the tenants affected will have received the displacement fee from the previous landlord.
  6. The Costa Hawkins Repeal is heating up for this November’s ballot. If repealed, all multifamily (including the possibility of single family homes) will be subject to rent control laws.
  7. The California Apartment Association has received $4 million from donors to fight the repeal initiative.
  8. Unions (Tenant Unions and Labor Unions) are orchestrating -and or- backing the effort to repeal Costa Hawkins.

Historically, Landlords have been able to work around rent control, but the new rent control measures will dramatically limit the landlord’s ability to work around the laws. What landlords have done in the past include:

  • Evicting tenants to get new ones and charge higher rents
  • Converting apartments into condos
  • Converting residential units into retail or office where rent control doesn’t come into play.

If Richmond is any indicator, a repeal of Costa Hawkins will not be good for landlords. In fact, some landlords I spoke with said that the City of Sacramento could create even more draconian policies. Plus with any new governmental intervention like this, new layers of government will be created to enforce the new rules. These layers are not free, and I suspect the entire financial burden will be placed on the property owner.

For additional information related to the Repeal of Costa Hawkins check out the links below.

Sacramento City Beat

Santa Ana

Tenant’s Together

Stanford Study – San Francisco

San Diego Tribune

Richmond

East Bay Times

Opposition of the Repeal

 

“If you don’t know where you are, you don’t know who you are”

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Uptown Studios HQ, Broadway Corridor, Sacramento

“If you don’t know where you are, you don’t know who you are” – Wendell Berry

When negotiating a lease, you have to pay attention to the bottom line, but you cannot forget about your team.  No longer is it just about price and how many cubes you can fit in a phone booth.

In the iconic Christmas movie, “The Grinch,”  the slathering, big, green Grinch is bounding his sleigh to Whoville when he hears all the Who’s singing.  This infuriates the Grinch, and he exasperates, “All the Noise! Noise! Noise!”  While an open office environment may not work for the Grinch (or for all the Whos) it is great for many company functions, particularly where collaboration is needed.  But many other functions, say engineering, design, coding, writing,research and stealing Christmas,  an open environment may not the best solution.  In an August 2012 article of Forbes, this topic was discussed and the opinions differed considerably.

  • Dr Vinesh Oommen concluded, “In 90 per cent of the research, the outcome of working in an open-plan office was seen as negative, with open-plan offices causing high levels of stress, conflict, high blood pressure, and a high staff turnover.”
  • Craig Knight suggests that traditional office environments may increase individual wellbeing by 32% and office productivity by 15% (The Secret Life of Buildings.)
  • Professors Anne-Laure Fayard and John Weeks point out in their article, “Who Moved My Cube” (Harvard Business Review, July 2011), “Some studies show that employees in open-plan spaces, knowing that they may be overheard or interrupted, have shorter and more-superficial discussions than they otherwise would.”

Recently, Facebook looked at the office environment this way:

For Facebook’s new office design to actually foster the right kind of interactions, it must provide sufficient privacy so that their engineers can talk in private and work without interruptions. Fayard and Weeks suggest it comes down to: Proximity, Privacy and Permission.

  • Proximity: Give people plenty of space between each other, but facilitate traffic patterns that result in “run-ins” at shared resources like restrooms, entrances/exits, snack rooms, elevators, etc.
  • Privacy: Work stations need to be designed to offer visual and acoustic privacy; a cardinal rule is that workers should always be able to see if someone is approaching them.
  • Permission: The corporate culture dictates what is “permissible”; workers need to know to what degree is informal socializing accepted or encouraged, and what is acceptable or not when it comes to interrupting someone who is working.

For now we’ll have to wait to see if Facebook engineers will “like” working in the “largest open floor plan in the world” or whether it will cut their productivity and job satisfaction.

Employee productivity is enhanced by thinking about the day to day routine of the employee.  Can they walk to lunch?  How about shopping?  Parking, Transit, Banking?  Anytime you can provide the employee the time and convenience to tend to personal matters like errands, the employee will be more effective in the office (as long as they deal with personal matters on their breaks and lunch hour.)  Frankly, I believe many companies foster an empowering approach where as long as an employee is “getting it done” there are no defined breaks or lunch hours.  Labor laws tend to get in the way, but there are ways to navigate around the law, while complying.

Employee Turnover is reduced significantly when putting employees well being first.  If you have ever had to hire a new employee or deal with a disgruntled former employee you know how costly it can be.  Spending a little extra to make the workplace special and a welcoming environment results in an excellent ROI.  Inc. Magazine discusses this https://bit.ly/2yltstj .

“An individual is not too distinct from his place. He is his place” – Gabriel Marcel

If you have questions about your lease, I can help.  If you need design advice, I can send you in the right direction.  Please feel free to call me at (916) 761-1202 or email me at tom@baconcre.com.

Sacramento Value

Amazon HQ2 Takeaways

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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.

Sacramento’s Emerging Boulevard – Broadway

When I moved from Manhattan Beach to Sacramento in 1991, my new bride and I arrived behind the wheel of a Uhaul at 9:00 PM.  We had a 800 S.F. rental lined up on Harkness in Land Park.  We had no keys to the place, so we had to call the owner.  He staggered out of his car about an hour later speaking incoherently.

We got into the place and decided to grab a bite to eat.  At 10:00 PM there was literally nothing open other than a Burger King.  When we got back to the place with our Whopper, Fries and matching crowns, my wife Joanne stared at me in disbelief, started to cry, and then said, “I can’t do this.  I cannot live here.”  Well that was then, and besides the divorce (which was percolating from that first bite of the Whopper) there are probably 50 new restaurants in the Core (Downtown and Midtown) that did not exist.

And  in case you didn’t notice, the Broadway Corridor is not-so-sneakily emerging as the next popular destination in Sacramento.  Broadway has always been a destination for many going to Tower Theater, Tower Cafe and several ethnically diverse restaurants including, Mexican, Chinese, Thai, and Ethiopian cuisine.  One restaurant trail blazer on Broadway is Bill Taylor who opened Willie’s Burger in 1991- and later – Flat Iron on Broadway.

The Broadway Renaissance has been awakened with several notable developments from the east to west:

Selland’s Cafe and Bike Dog Brewery at 9th and Broadway.  Selland’s opened up in early 2017, and since then, there has always been a line to order up lunch or dinner.  Selland’s features a special dinner for two with a bottle of wine for $25.  If you get tired of the wine you can go checkout Bike Dog next door for your favorite brew!

Selland’s and Bike Dog Brewing rounding out the west end of Broadway

Broadway’s Redux  by Indie Capital, a niche developer that develops smaller infill residential projects, is building a few homes along the north of Broadway between 9th and Riverside.  They also just closed on some additional land in the vicinity.

Indie Capital’s Broadway Redux at 1015 Broadway

Noah’s Bagel with Pete’s Coffee, Sour Dough Bread Co. and Chipotle is currently being developed next to Willies Burgers on 16th and Broadway.  For several decades the northeast corner of 16th and Broadway was a parking lot that served as parking for Tower Records (Now Dimple Records).

Hoppy Brewing and the Real Pie Company at 24th and Broadway.  The Hoppy is moving from 65th and Folsom and they should be open any day now!  The Real Pie Company is already open, but the sign on the door said Open Wednesday!

Real Pie Company and Hoppy Brewing moving to 24th and Broadway

The Mills A residential development project at 5th and Broadway.  The Mill’s Development is situated on the former Setzer Lumber Mill.  Homes range from around 750 Square feet to about 2,000 S.F.

401 Broadway Then there is the resurrected Developer, Sotiris Kolokotronis in partnership with Grupe, who is planning to build a four story 59 unit apartment project  https://bit.ly/2JOua5n .  Grupe acquired this site several years ago, and now the market is ready for it; rents have risen to support new apartments and houses.

So, if you are looking for some good food or a contemporary place to live close to Downtown, Land Park with easy parking and great access, then you need take a look at Broadway!  If you are looking to buy or sell or lease real estate – or you just need a little market insight – call or email me at (916)761-1202 or tom@baconcre.com.

Calpers HQ - Sacramento CA

Go Green or Go Home

Go Green or Go Home!   Being from California, going Green is not longer optional. From 1978 for residential – and 1980 for non-residential – the EPA has gradually accelerated the energy regulations around new construction. These regulations are Title 24. The Code for all the regulations is Title 24 http://www.energy.ca.gov/title24/

The original intent of Title 24 was to conserve energy, but not to save money. As the years have gone by, the Code has evolved to dramatically increase the cost of construction. Why does California need Standards? Energy savings comes to mind, and for commercial buildings (office, industrial, tech etc,) the two biggest components for energy consumption (potential savings) are HVAC and Lighting.

Many of the regulations, while innovative, may not pencil for developers. And when things don’t pencil either rents go up or things don’t get built.   For example when planning a tenant space, Title 24 calls for “Light Harvesting” which mandates that all lighting is calibrated to turn off when no one is in a portion of the space. Take it a step further, you have to consider the orbit of the earth; based on the position of the sun (consider the afternoon sun shining on your windows) HVAC and lighting can be adjusted to turn off or throttle down.

You may remember the 2000/2001 energy crisis in California. Since then, the Energy Commission has placed more emphasis on energy consumption. Building components that Title 24 covers is all encompassing – from the envelop – to the guts of the building. The other goals for Title 24 are:

  • Comfort- Efficient buildings are more comfortable for the occupants and the delivery of light, heating and cooling is much more consistent throughout your premises.
  • Economics- In the early years much of Title 24 was a nuisance and big energy saving improvements didn’t really pencil. That has changed dramatically as technology, particularly in Solar, has improved.
  • The Environment
  • Curtailment of greenhouse gases

Many tenants considering new locations will give environmentally friendly, energy efficient buildings “points” in their property selection matrix.  It just feels good, and potential employees and clients take notice.

If you are a tenant looking at moving into a new location that needs significant Tenant Improvements within previously occupied space be aware: If the building you are looking at is older, it is possible that it may not be in compliance with current ADA or Energy codes. So, when the Landlord goes to pull a permit for the construction of the tenant improvements, the City Planning Department could require the Landlord to comply. This can be costly since it adds to the scope of work. Sometimes, as much as a Landlord wants a new tenant, the Landlord may decide to pass on a tenant that requires significant tenant improvements. They will just wait for a tenant that doesn’t need tenant improvements. So, it is better to figure this out in the initial stages of a negotiation rather than waiting until you are about to sign a lease.

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 tom@baconcre.com.

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. 

 

Who Owns Sacramento?

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Sacramento is on the radar of the world’s investment community. With Properties selling for $600 to over $1,000 a square foot in top tier markets like San Francisco, Sacramento’s class A office properties selling for $250 to $425 a foot seem like a pretty good value. In the last 5 years, several of Sacramento’s CBD office buildings have sold. Most recently, 400 Capitol Mall sold to Starwood for about $340 per square foot. Some other notable buildings in Sacramento’s CBD that are owned by out of town entities include:

  • 980 9th Street (Park Tower) Bought by Hines in 2017 for about $220 a foot.  This building is probably worth $300 a foot today particularly when you consider the great parking capacity and Class A quality.
  • 300 Capitol Mall, aka the Emerald Tower is owned by Sterling Investments out of New York. Home to the Department of Insurance and the State Controller. The Asset manager is Hines.
  • The Senator Hotel office building, located across the Street from the State Capitol was acquired in 2015 by Swift out of San Francisco for $198 a foot. When they bought the building it was about 40% vacant. Currently the building is about 8% vacant.
  • 621 Capitol Mall, aka The US Bank Tower, was Developed by David Taylor Enterprises and the Lewis Trust out of the UK. The Property sits on a City block across the Street from the Golden 1 Arena. In January 2018, Shorenstein bought the building for over $420 per square foot.  This purchase doesn’t include the half block next to this building that could be developed into a hotel, office building or how about Condos like the ones planned 10 years ago?
  • 501 J Street was bought by Kaiser and the 200,000 s.f. building is going through a considerable (complete) renovation. Kaiser will be occupying the building by the end of 2017.
  • 1325 J Street is owned by Princeton Holdings out of New York. The 2014 acquisition was part of a 5 property portfolio and 1325 J was valued at approximately $305 per square foot.
  • 801 K Street sold to GPT Property Trust out of Maryland for about $235 a foot in early 2016. The Renaissance Tower sits on a multi-level parking structure just 2 blocks from the east entrance of the Golden 1 Arena or DOCO (Downtown Commons).
  • 770 L Street was picked up in August 2013 for about $178 per square foot by AMP Capital out of Australia. Shortly after acquisition the State of Ca leased up about 25,000 s.f. Then shortly thereafter, the Golden One Arena was announced, located just just two blocks from 770 L Street. College Hoops commentator Dick Vitale exclaimed, “Serendipity Baby!” Rumor has it the building is in contract with an institutional buyer.
  • 915 L Street is owned by Government Properties Trust located in Massachusetts. Predominately occupied by the State of California (Finance).
  • 925 L Street San Francisco based Soma-Capital Partners bought 925 L Street in November 2017 for $278 a foot.  Home to the Legislative Counsel.

While we haven’t seen a lot of capitol flowing in from China or other international investment circles, it shouldn’t be too long before we see the international capitol flow quicken and surge. For additional commentary on Sacramento’s CBD, check out the article here: It’s Just a Matter of Time .