OZ Development Site in Downtown Sacramento Hits the Market

Sacramento, Cushman & Wakefield, 1220 H Street
Courtesy of Downtown Sacramento Partnership

By Meghan Hall

Sacramento’s commercial real estate market has held onto its fundamentals despite the pandemic, solidifying its status as one of the region’s most stable markets. As the City continues to grow and attract both new companies and new tenants, an opportunity zone development site at the heart of the action has been posted for sale. Located at 1220 H Street, the property is fully entitled for a new multifamily development with up to 137 units.

The property totals about 19,200 square feet, or 0.44 acres. Under current plans, the proposed development would include a mix of studios and one-bedroom units. 1220 H Street is about half a mile from Sacramento’s Central Business District and a number of major employers and retailers, including the Aura Japanese and Korean Barbecue, Subway, Bangkok @12 Thai, Republic Bar & Grill, and more. Sacramento City Hall, as well as the SAFE Credit Union Convention are also nearby.

The project could be delivered in 2023. Guidance pricing for the asset was not immediately available, but industry sources familiar with the market noted that upon the sale of the asset, the property owner is targeting a mid-to-high 5 percent untrended return on cost with rents in the mid-$3.50 to $3.60 per foot range.

Cushman & Wakefield’s Northern California Multifamily Advisory Group, including Managing Director Jason Parr, Director Scott MacDonald, Financial Analysts Michael Bissada and Sydney Ladrech are marketing the property for sale. Cushman & Wakefield declined to comment on the potential guidance of the asset, citing that price discovery is still ongoing.

Downtown Sacramento’s multifamily market has seen a significant increase in demand in recent years. There, average rents have increased over 28 percent over the past five years. Rents are projected to grow an additional 16 percent through 2025.

“Sacramento’s rapid transformation has attracted renters-by-choice and driven tenant demand, making it one of the nation’s top performing rental markets,” states an offering memorandum obtained by The Registry. “1220 H provides the opportunity to invest in an infill development with embedded market upside and Opportunity Zone tax benefits.”

According to the memorandum, Sacramento has the nation’s third most resilient job market and has led the state in rent growth. The market is also a leader in apartment occupancy, and the fundamentals make the asset a solid investment for potential buyers. When the property comes online several years down the line, unit deliveries are expected to drop by 35 percent in 2021 and 39 percent in 2022. This reduces lease up risk and insulates the property from a concessionary market, states the memorandum. 

Over the last decade, apartment inventory in Sacramento has increased just three percent. With lack of available inventory, the market could 1.2 times the number of apartment units delivered through 2024, according to data from Costar.

Additionally, because it is located within an opportunity zone, investors can also defer capital gains, reduce capital gains liability by up to 10 percent, pay no capital gains tax, and potentially boost after-tax IRRS by between 150 to 300 basis points on the investment.

“The capital of the largest economy in the nation, Sacramento is California’s number one apartment market and remains one of the fastest growing and top performing markets in the nation,” notes the offering memorandum. “Attracting residents and employers from high-cost cities in California with its excellent quality of life and relative affordability, Sacramento has become a top destination.”

West Coast Commercial Real Estate News