By Kate Snyder
A recently released Colliers report on the Sacramento office market highlighted challenges the sector contended with – and in some cases continues to face – in 2022. The 2022 Q4 Sacramento Office Market Report detailed conditions such as a nine-year high vacancy rate, a steeply negative net absorption to end the year and a “remote work revolution” that is contributing to firms vacating or downsizing office space.
“The office market is undergoing a fundamental shift while the sector’s new normal appears to be unrelenting uncertainty,” the report states. “The overarching consensus of hybrid work appears to be placing steady downward pressure on tenant demand, resulting in rising vacancy and availability, as well as diminished sales activity across the region. In 2023, we will likely see more of the same, however, a normalizing labor market and possible recession could upend the trajectory in either direction.”
Leasing activity from 2020 through 2022 was approximately 41 percent below the pre-pandemic average from 2017 to 2019, according to the report, and though office-using employment is now above pre-pandemic levels, it is not equating to an increase in office space demand. Currently, most leases being signed are for tenants relocating to smaller spaces as most firms are reducing their footprints in this new age of hybrid work.
Additionally, the Sacramento region’s office market posted two consecutive quarters of significantly negative net absorption to end 2022. Annual net absorption in 2022 totaled -1.4 million square feet, which is roughly in line with 2021’s absorption total, and from 2020’s second quarter through 2022’s fourth quarter, more than 3.6 million square feet of vacant office space was added to the market.
In sales transactions, the year’s fourth quarter recorded only $51.9 million of sales volume, which is one of the lowest on record, the report shows. An annual sales volume of $480.7 million in 2022 revealed “cratering demand” for office assets in the region and was a decline of 40.6 percent compared to 2021. Since peaking at $1.5 billion in 2020’s first quarter, the 12-month rolling sales volume has been on a steep downward descent. The annual average sale price of $172 per square foot in 2022 declined 4.3 percent from 2021’s average price, and cap rates have been mostly flat. Both rising interest rates and a murky outlook for the office sector had significant impacts on sales activity in the region, according to the report.
“With minimal assets on the market locally and investors looking to other sectors like industrial and multifamily for safer investment opportunities, sellers of Sacramento office properties will face another challenging year in 2023,” the report states.
Overall, the report states that while the near-term future of work appears to be a hybrid model with employees seemingly set on going into the office three days a week on average, office utilization is on the rise and the labor market is starting to show some signs of cooling. The ongoing ambiguity surrounding the staying power of remote work – for every return to office mandate, there is another permanent remote work announcement – is creating opportunities for owners with access to capital but also giving investors pause. Sacramento’s overall trend of elevated vacancy and negative demand will likely persist throughout much of the new year, however there is still much uncertainty in the market.
“A recession in 2023 and rising unemployment could finally shift the pendulum back toward employers, which could aid in the return to the office or accelerate office space downsizing,” the report states. “Whatever happens, landlords and tenants need to treat their office spaces as destinations as opposed to obligations. The way we work has changed significantly and might not ever go back to the way it was.”
