By Kate Snyder
Despite disruption in the capital markets, elevated inflation and rising construction costs, Sacramento’s industrial market saw an overall strong 2022, according to Colliers’ 2022 Q4 Sacramento Industrial Market Report. Data from the recently released report showed a robust industrial net absorption and leasing activity while also acknowledging that rent growth is starting to level off and sales activity is decreasing.
“While supply outstripped absorption in 2022, occupier demand for industrial space across the Sacramento region stayed strong throughout the year,” the report states. “There has been upward pressure on vacancy as a significant amount of speculative construction continues to come online.”
For two years, the vacancy rate in Sacramento’s industrial market has been recorded below five percent as 8.9 million square feet of new supply came on board since the start of 2021. According to the report, the unprecedented amount of new speculative construction occurring across the region has made the vacancy rate volatile in recent years. In 2022, 1.2 million square feet of new speculative supply hit the market, causing the vacancy rate to rise in the third quarter, but that increase was followed by a decrease in the fourth quarter because only one new build-to-suit project was delivered.
Meanwhile, average warehouse and distribution asking rents remained at a record high and increased 10.8 percent year-over-year – average warehouse asking rents specifically are up 24 percent over the last two years and 84.6 percent in the last decade.
Overall in 2022, the annual new supply of warehouse and distribution space surpassed net absorption. With tenant demand holding at an elevated level, the report notes that speculative construction starts totaling approximately 2.1 million square feet in the second half of the year is a herald of developers’ ongoing confidence that demand will continue in the year ahead.
Amazon accounted for 39 percent of last year’s occupancy gains, according to the report, and only occupied 602,516 square feet in the entire year, which allowed opportunities for other tenants to lease space across new developments. Out of the nearly 3.9 million square feet of new supply in 2022, approximately 65 percent of that space is already leased with additional leases in progress to be signed in early 2023. Out of the nearly 13.6 million square feet of new supply delivered in the past four years, 89.2 percent is now leased.
“Ongoing tenant demand from both new and existing tenants in the market should help keep absorption positive throughout 2023, but a possible recession could shake the market in a negative direction,” the report states.
The market’s recorded $168.2 million of sales volume in 2022’s fourth quarter was 45 percent below the quarterly average volume from 2021’s first quarter to 2022’s second quarter, according to the report. While the city saw a record year of $1.38 billion of industrial sales volume in 2021, last year was marked by a 44 percent decrease in sales volume to $774.3 million, though the annual average industrial sale price of $144 per square foot in 2022 was an 18 percent increase over 2021’s average.
One of the major sales transactions in the fourth quarter included a deal involving an industrial building that was purchased for $25.9 million, or approximately $175 per square foot, by Invesco, an Atlanta-based global investment firm. The seller was ROCP III LLC, which is affiliated with developer Ridge Capital, Inc. The 148,021 square foot building is located at 3095 Mary Place.
The report speculates that 2023 could be another successful period of time for Sacramento’s industrial market, though the current conditions might experience a shift as the year goes on. Sale prices are rising but could possibly be peaking, the report states, and cap rates might also begin to plateau in the next several months during a high interest rate environment.
“The new year should be another healthy one for the industrial market, but a possible recession could alter the market’s positive outlook,” the report states.
