Sacramento Commercial Real Estate Market as of July 2020

First a word from my spiritual advisor.

The last 3 months have been tough. I am a deal junkie – and withdrawal has been rough. It’s one thing to be weaned off, say by driving Uber or taking over my son’s door-to-door leaf raking business, but Uber is out, and there aren’t any leaves.

The Carlaw- a masterful repurposing to Mixed Use on R Street.

When the going gets tough, the tough learn Neil Young songs like: Helpless, Like a Hurricane, and The Needle and the Damage Done. Having been in this business since 1984, 2020 will be remembered as one of the toughest years. For many (including me) it will be a year of authentication and personal growth. You can’t avoid introspection, but you can’t dwell on it either. You just must stay the course, and if necessary, pivot.

For many businesses – from your dentist to the local Thai place- pivoting is probably not the right word. Survive and evolve seem more appropriate. This is a time for pragmatic optimism, compassion and perspective.

So, what about the Sacramento’s commercial real estate market?

COVID 19 is a giant Pause Button. I have a big red “That Was Easy” button on my frig. I will not be pushing that button in 2021. Neither will Sacramento, but Sacramento will come back. The fundamentals were here in March, and they are still here, just buried. More and more companies are looking at Sacramento.

Shorenstein Development Condominium Development on Capitol Mall

Shorenstein Development Condominium Development on Capitol Mall

Employees that used to commute to the Bay Area haven’t had to for the last 4 months, and that is enough time for – employers and employees alike – to see that telecommuting on a larger scale can work for many businesses, or at least, segments of their business.

What’s happening with Office Leasing?

The transaction volume in Downtown and Midtown Sacramento is off by about 70%. I do quite a bit of leasing, but for the time being companies don’t want to make long term leasing commitments. Most Tenants are considering reducing the amount of space they lease. While tenants may not be able to make long term commitments, they still need help, and I have found that consulting rather than making deals is more fitting.

Micro units at 19th and J Street

Tenants are considering many variables right now. How do we phase back into the office? Should we integrate working from home (WFH)? Staggered shifts? Does it make sense to stay in Downtown or Midtown? Should we move to a suburban location? What do our employees want? Even the Department of General Services (California’s Real Estate Manager) has issued statements that they will be reducing their office footprint.

Sales Transactions are down, way down.

As of March 1, 2020, I had 5 sale deals in contract. Now: two of those deals are transitioning into Joint Ventures. Deal #3 the buyer walked from a $200,000 deposit. Deal #4 the buyer cannot get financing, so we are looking at seller financing. Deal #5 is looking good, but so much depends on getting a handle on financing. Until financing is available, it is going to be tough sledding. There is plenty of financing for Small Businesses (SBA) but for developments not so much. So for the owner/users or tenants that would like to own, it is a great time to be looking.

In times like these, we typically see a disconnect between seller and buyer expectations, so I think that in addition to financing, sales volume will be hurt by the disconnect in expectations.

Let’s take a quick look at Midtown.

MIxed Use Apartments over retail at 10th and U Street

MIxed Use Apartments over retail at 10th and U Street

Costar’s most recent market report states: “While Midtown has a thin Development Pipeline and few large leases set to expire, plus many tenants who are owner-occupiers, conditions that would typically forecast a stable near term vacancy rate, the future is uncertain as most nonessential activity across the U.S. came to a halt in March.”

Non-essential = Speculative development. So for the time being, many planned housing developments are considered speculative by banks. This will not last forever.

For Office, Retail and Multifamily here is my take:

  • Office demand will decrease, and rental growth will slow. Fortunately, Midtown is not overbuilt; unfortunately, until large floorplates are available (Like Ice Blocks) things will just percolate along. If the State starts consolidating and vacating space, that could create some interesting repurposing opportunities. Several Tenants I have spoken with have had a positive Work From Home (WFH) experience, so that could lessen demand as well.
  • Retail will eventually come back, but it is going to take time for businesses to adapt to the new normal, particularly restaurants. Rents will drop and sales prices will go down.
  • Multifamily is experiencing a huge supply boost with several large Midtown apartment projects totaling nearly 1,000 units coming online. Rent concessions and rent reductions are common right now. There are variety of smaller, High Density Residential (HDR,) for sale that are doing well. Values are being bolstered by low interest rates and lack of inventory.

Midtown Sales Activity is anemic.  According to Costar, In the first quarter of 2020, there were 17 sales.  In the second quarter there were three (3) sales.  I estimate that there were at least 10 sales in contract pre-covid that are now either dead or on a ventilator.  With this said, the long-term fundamentals for Midtown are strong and cool heads will prevail.

Downtown and Midtown’s appeal has been temporarily tarnished by the protests and retail closings.  But once there is a vaccine and consumer psychology has healed, Sacramento will gradually open, and before you know it, The Torch Club, Second Saturday, the Crocker, The Golden One and all the other great reasons to be here – will be back!

If you need the data that supports this conversation, please feel free to contact Tom Bacon, CCIM at (916) 761-1202. Also, Bacon CRE is happy to provide insights and perspective anytime, to anyone willing to listen.