By Jacob Bourne
Thousands of people have been leaving the Bay Area in recent years seeking more affordable housing in other regions. While Portland, Seattle, Austin and Denver have proven popular destinations for migrants from San Francisco, nearby Sacramento is also gaining an influx of new arrivals, especially Millennials. According to Cushman & Wakefield’s Q3 2016 Multifamily MarketBeat report, Sacramento’s economic indicators look promising with increasing jobs in a variety of sectors and unemployment dropping by 10 basis points since 2015. This coupled with a lack of new apartment supply and growing population, has positioned Sacramento as the nation’s front runner in rent growth. In April 2016, Cushman & Wakefield had reported Sacramento’s rent growth at 11.4 percent. AXIOMetrics January 2017 Market Trends report showed a drop to 9.5 percent, but remained the highest in the nation.
“Sacramento has been leading the nation in rent growth for the last eleven months or so, mostly due to a combination of lack of new construction and overall strong market fundamentals,” said Jason Parr, senior director, multifamily advisory group, Cushman & Wakefield. “Compared to other markets like Seattle, Portland and Austin, the amount of product in the pipeline is very low in Sacramento. Additionally, a lot of Millennials are moving to Sacramento because they’ve been priced out of the Bay Area.”
Lacking a robust tech sector, Sacramento’s job market doesn’t compare to the Bay Area or Seattle, but according to Parr, employment is back well above peak levels prior to the Recession. Growth is being seen in education, health services, construction, professional and business services, government, hospitality and tech. Data from YARDI Matrix ranks Sacramento as fifth out of 32 markets in employment growth. This has led to the revitalization of Sacramento’s Downtown, further attracting younger demographics with restaurants and an emerging nightlife scene.
In light of these trends, demand for multifamily housing has grown; Q3 2016 vacancy was at 3.1 percent, which is forecasted to continue on a downward trajectory over the next year. As of that same quarter, 1,400 multifamily units were under construction in the region mostly in Downtown, but also Sacramento’s suburbs of Rocklin, Roseville and others. El Dorado currently has the highest asking rents in the region.
“The majority of apartment stock in Sacramento is relatively older,” Parr explained. “Nearly 90-percent of transactions in 2016 were Class B or Class C properties, prime for renovations. Sacramento didn’t have that wave of new construction seen in the Bay Area. Now with double-digit rent growth, projects are starting to make sense and we’ll see the construction pipeline begin to modestly grow.”
In terms of new construction, Sacramento’s Midtown and Bridge District are two neighborhoods with buzzing activity. Rents in these areas are now approaching $3 per square foot, which is a local record. Just north of Downtown and south of the River District, The Railyards is one of the largest infill projects on the West Coast, slated to add 10,000 housing units, a soccer stadium, Kaiser Permanente medical campus, hotel, and extensive office and retail spaces.
Cushman & Wakefield recently announced a multifamily investment up for sale. The property, 16 Powerhouse located at 1606 P Street in the Downtown core is touted as the most luxurious apartment asset in the city and has maintained 100-percent occupancy since it started leasing in 2015. It’s also the first Sacramento multifamily property to achieve $3 per square foot rents and higher on recent leases signed.
“Overall the amount of phone calls I get from investors looking to invest in Sacramento has increased five-fold over the past six months,” added Parr. “The number one property they’re seeking is 1990 or newer, located in a Class B or better location that they can add value to through implementing a renovation program. These investors are looking at the whole Urban Core including Midtown, Downtown and the Bridge District areas plus premiere suburban areas like Roseville, Rockland, El Dorado Hills and Folsom.”