Comstock's magazine 0419 - April 2019 - Page 78

| 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 78 | April 201 9 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