| ACRE / BOMA |
vs. environmental consciousness. “PG&E
has recently filed for bankruptcy and has
also sought permission from the California
Public Utilities Commission to increase
utility rates by double digits.”
Though a younger
workforce with urban
preferences
likely
will shape the market
in the near future,
Danny Kapic, regional
manager at Marcus & Millichap, points out
that Sacramento remains a government
town, where government jobs account for
approximately a quarter of the workforce.
“Sacramento is unique in that it is
home to the State Capitol, with a majority
of the largest State of California agencies
and departments headquartered there,”
Kapic says, though he cites the region’s
proximity to the Bay Area and relatively
low median home price as factors adding
to “a slow but healthy diversification tak-
ing place.”
WILL LOW RENTS AND INCREASING VACAN-
CY SPELL TROUBLE FOR SACRAMENTO’S
MARKET?
Put simply, “While rates continue to climb,
we are still well below the market rates
needed to outweigh the exceedingly high
cost of construction,” Garrett says.
“Our rents have not
recovered prior to
2007 and 2008,
and because of that,
most of Sacramento’s
buildings’ rent does
not justify building new buildings,” adds
Chris Lemmon, executive vice president
of Newmark Knight Frank. “You’ve got to
be pretty confident to build in Sacramento
right now, and really no one is doing it un-
less they have build-to-suit,” adding that
the region’s top three housing markets —
downtown, Roseville and Folsom — have
no large commercial spaces available on
the market.
“There’s nothing more than 40,000
square feet available in any of those three
markets, and you can’t attract a huge user
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to come to town without a new building.
On the open market we can get a $2.25
rent, but if you build a building, it’s going
to be closer to $2.85-$3.15 per square
feet.”
In other words, demand could soon
outpace supply.
“We have an inventory problem that is
going to be happening in the next year or
two. We’re going to get sub 11, 10 percent
for all Sacramento office vacancy, and
that’s really low,” explains Lemmon.
According to Anvary, that means
available office space isn’t exactly cream
of the crop. “Sacramento region’s overall
‘stock’ of office space is getting quite dat-
ed and could quickly become functionally
obsolete,” she says. “From 1998 to 2007,
there were nearly 27 million square feet of
office buildings added to the region, but in
the decade since 2008, there have been
just a little over 3 million square feet of of-
fice added.”
And with rising construction costs al-
ready straining speculative building in the
region, Kapic says that reconstruction in
areas impacted by California wildfires are
pulling construction away from the region,
potentially exacerbating costs.
Despite problems with vacancy, Gar-
rett says U-Haul metrics ranked Sac-
ramento as the No. 1 destination in the
country for one-way trips in 2018. “[With]
a relatively low cost of living, Sacramento
continues to be an attractive place to live
as well as to invest,” Kapic says.
WHAT WILL THE MARKET LOOK LIKE GOING
FORWARD?
“In reality,” says Lemmon, “I think we’re
poised to have another good year — 2018
is the best year we’ve had in a decade for
Sacramento as a whole, and we forecast
rents to go up related to the fact that no
new inventory has been built.”
Though there has been no new specu-
lative construction in Sacramento, four of
the five interviewees point out the one ex-
ception that proves it can be done.
“With exception to [Heller Pacific’s]
Ice Blocks project on R Street, which