If we looked at the most recent sales in Midtown Sacramento properties seem to be averaging around $100 a square foot.  This average includes sales that occurred in 2019.  During Covid, Sales were off considerably.    Virtually all the sales are for residential developments.  Six recent sales illustrate where Midtown land values are at.  

Recent Midtown Land Sales

• SPCA’s thrift store at 1509 E Street sold for $1.2 Million dollars.  This amounts to a land value of $94 per SF.  The owner is proceeding with development shortly.  
• Miry and Bardis acquired Sutter Senior Care’s building at 1234 U Street for approximately $80 a SF. Construction of 14 for-sale townhomes has commenced.  There is already a significant level of interest from home buyers and the development hasn’t even gone vertical.  
• 2700 V Street, a half-acre residential development site, sold for approximately $83 per SF. The seller had fully entitled the site before closing.
• A developer acquired 14th and H Street in December 2019 for $1.3MM, or about $100 a foot. The site is located a block from the Music Circus and just 3 blocks from the Convention Center. The owners are ready to develop the site because they secured entitlements for a 60-key hotel and retail space.  The owners are considering their options which includes selling the entitled site for a profit rather than develop the property.  Developing is the first choice, but financing is tough to come by for quasi-hospitality properties.  
• An infill developer from Oregon acquired 1208 Q Street for $3.4MM, or $78 PSF, in August 2020.The previous owner entitled the property for a 51-unit project. Plans to start construction mid 2021. Might keep auto shop garage as a parking garage.  
• 1301 V Street, a 25,600 SF site occupied by the Air Resources Board is supposedly in contract for $1.8MM to $2MM (about $75 a foot.) The building on the site is only 8,000 SF.  
• The owners listed the C2-zoned 18,000 SF lot at 16th and J for $206 a foot.
  Supposedly the property is in Contract (non-refundable) for close to asking price – Which would definitely be the highest land comp in the Midtown market. To make this price work, the developer will need to get entitlements for high density.  Since the lot is C2, there really isn’t a Height limitation. 

Why Developers Keep Buying

All the sales listed above are residential development sites.  For one developer it seems that the strategy is to buy, develop and sell as close to project completion as possible.  And as long as buyers keep paying 4% cap rates on stabilized investments, the formula works.  

There are a number of properties on the market, but pricing for some properties suggest that the target buyer is a Unicorn.  For example, 1608 T Street is on the market for a land value equivalent of $175 PSF.  You can’t fault the sellers for looking for the highest price, and if you aim high, you just might get close to it.  

What Could Slow the Momentum?

The demand for apartment investments is driving values higher, but rising construction costs are compressing returns. Sacramento is now firmly on the national radar, and developers continue to flock to the market because it still looks like a bargain compared to other California cities.

I tend to agree, and I believe there is strong support for continued residential development in the urban core. However, time will tell whether Sacramento’s core fully regains the momentum it enjoyed in 2019. Office and retail properties remain critical components of the overall commercial ecosystem.

If fewer office workers come downtown, there is less demand for retail, restaurants, and even housing. Consider the State of California. If the State continues reducing its office footprint, larger vacancies will emerge, and fewer businesses will be available to backfill the space. Less office employment ultimately translates into less demand for retail.

That should eliminate the paragraph length warning while improving readability.

As you can see, Bacon CRE is bullish about values of residentially zoned properties because of the lack of supply, low interest rates and demand from the Bay Area.   Have questions?  Need guidance and insight?  Therapy?  Contact Bacon CRE at (916) 761-1202.