By Meghan Hall
Sacramento’s industrial market has seen an explosion of growth in recent years as occupier demand for space far exceeds available–and future–supply. According to a new report released by brokerage firm CBRE, the market is one of the fastest growing in the United States, based on year-over-year rent growth. Rent growth over the past year has hit 14.1 percent, and due to the current supply and demand imbalance, experts believe that rents will continue to climb for the foreseeable future.
““Despite the significant amount of Class A industrial development that is underway in Sacramento, the vacancy rate and net absorption figures are poised to hit record lows and the average asking rents have never been higher,” explained CBRE Vice President Matt Post. “Demand for space is simply outpacing supply. The market improvement in Sacramento has occurred organically over a number of years and all indications are that it will continue.”
CBRE reports that nationwide, five-year base rents on leases of 12 months or more grew by 9.7 percent year-over-year. Coastal markets, those who are near major population centers, or those with inland port hubs are experiencing the most growth. Topping the list of fastest growing rents included Northern New Jersey, who recorded a 33.3 percent increase year-over-year, and California’s Inland Empire, which saw rent growth of 24.1 percent. These two markets have some of the lowest vacancy rates nationwide, at 2.2 percent and 1.5 percent, respectively.
In Sacramento, vacancy for industrial product sat at just 3.7 percent, bolstered by 1.4 million square feet of gross absorption during the first quarter of 2021. The first few months of the year was the first time the market saw vacancy decrease below four percent since the third quarter of 2019. According to CBRE, the market is evolving from one that has historically catered to mid-size occupiers to one that is attracting major, large-scale tenants. Leasing transactions ranging in size between 100,000 square feet to more than one million square feet are beginning to become the norm.
The rent growth is significant because in these markets, taking rents are growing faster than asking rents, reflecting how eager occupants are to obtain space in such competitive markets.
“Occupiers are willing to pay more than landlords are asking as they struggle to find available space, particularly in the bulk warehouse category,” said John Morris, executive managing director and leader of CBRE’s Americas Industrial & Logistics business. “For many occupiers looking to expand or simply renew, the sticker shock for space has become an incredible challenge.”
In recent months, Ply Gem Pacific Window renewed and expanded its square footage at 3010 Ramco Street to more than 282,000 square feet. LKQ Automotive leased more than 150,000 square feet at 3520 Carlin Drive, while the State of California Emergency Medical Services Authority leased just under 148,000 square feet at 8670 Younger Creek Drive.
While 750,476 square feet of new deliveries were recorded during the first several months of the year, high levels of absorption left little remaining space on the market. As a result of tight vacancy, lease rates increased to $.068 per square foot.
Morris continued, adding, “There is some new supply in the pipeline, but not enough to significantly change the rental rate trajectory. For the foreseeable future, occupiers will have to strategize and plan for this scenario.”
As tenants compete for space, investors are also vying against one another for opportunities to enter the market. Capital markets activity “soared” during the beginning of 2021 in Sacramento, with more than 2.5 million square feet in investment sales volume. Invesco Advisers, Inc. purchased an eight-building portfolio from Blackstone for $130 million. Kimco Realty purchased a 508,000 square foot distribution building in a sale-leaseback with Rite Aid for $108 million.
With so much activity in the market, CBRE is certain such competition will continue.
“On the capital markets side, the demand imbalance is also present,” stated Post. “We are experiencing an insatiable buyer appetite from institutional and private capital players who want to own in Sacramento but are struggling to find enough product to acquire.”