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.

Porcupine

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.

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!

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, tbacon@kiddermathews.com.

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?

Owner User? Buy the Fundamentals

Don’t Buy the Hype, Buy the Fundamentals

I am the first to promote how all the trends and developments in Sacramento’s central core aka THE GRID are supporting significant increases in rents and property values. If rents weren’t going up, we wouldn’t have market rate housing like Powerhouse 16 developed. But if you are an office user that would like to buy an office building or office condo, don’t forget the fundamentals.

When advising an owner user client in the purchase of a property I recommend that my client, in addition to typical purchase decision items,  consider the following:

  • What is the exit strategy? If for some reason you need to move out of the building, will you hold the asset and lease it out, or will you sell it? Is the property single purpose, or will it appeal to a broad base of potential occupants?
  • What is the replacement cost? What would it cost to build the building from the ground up versus the total cost to buy and occupy? You might buy a building for what seems like a “deal”, but after you finish renovating, your total cost could exceed replacement cost. That’s OK if the property works for you; hopefully market forces will support the investment over the long term.
  • What is the Property worth as a leased investment? Just because you are an owner user doesn’t mean that you should pay an over market price for real estate. Certainly, as an owner user you can justify paying more than what an investor would pay, but be sure to consider what an investor would pay if the building was valued as a leased investment (at market rents.)

Owning definitely has it’s positives, but when the price gets too high, you might be better off as a tenant.  If you end up leasing, the owner gets to take care of maintenance, taxes, capital improvements and assorted management headaches. You can focus your energies on building your business!

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.

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.