By Jack Stubbs
The Sacramento industrial market looks set for a strong year ahead, if the beginning of the year is any indication of what the coming quarters might hold. Colliers recently released its “Sacramento Industrial Market Research & Forecast Report” for first quarter 2022, which found that Sacramento’s warehouse/distribution market is currently experiencing unprecedented growth.
This activity is primarily fueled by strong tenant demand and minimal available inventory, with vacancy rates at an all-time low and rental rates poised to increase in the coming quarters, which will also likely see a competitive sales market for the foreseeable future.
In terms of key findings from the report, several metrics indicate a relatively healthy industrial market as of first quarter 2022, according to Bob Shanahan, research manager in Colliers’ Sacramento office. “I think the first major takeaway [from the report] is that our warehouse and distribution vacancy rates fell 100 basis points year-over-year, and it’s now down to an all-time low of 3.7 percent,” he said. “And that’s in spite of the delivery of over 800,000 square feet of available new speculative supply that hit the market during the first quarter.”
Quarterly net absorption of 1.42 million square feet likely signals accelerating demand, which was further boosted by 952,000 square feet of occupied space at recently-delivered properties.
“After a record year of occupancy gains last year [in 2021], with the net absorption [in first quarter 2022], we’re still seeing a lot of strong demand in our market,” Shanahan said. “This was all kind of helped by newly-occupied spaces at newly-delivered properties. And we’re still seeing a lot of tenant activity in those new buildings being delivered.”
Rental rates, also, bode well for the relative health of Sacramento’s industrial market as of first quarter 2022. Average warehouse/distribution asking rates set another record high, rising 16.8 percent year-over-year to 68 percent per-square-foot on a triple-net basis, with low vacancy rates subsequently placing upward pressure on asking rents, according to Shanahan.
Sales activity for industrial assets was relatively muted at the beginning of the year; but, taking into account the significant sales activity in 2021, such a pattern was somewhat to be expected, thinks Shanahan. “On the sales front, we kind of got off to a slow start to the year. But this was after a record year for sales volume in 2021. We had almost $133 million worth of sales volume in Q1 2022. Pricing continues to rise and is now at an all-time high.”
According to the report, quarterly sales volume of $132.6 million was the lowest quarterly total since Q2 2020. However, the rolling 12-month average warehouse/distribution sale price of $132 per square foot set a record high and increased by 34.5 percent year-over-year.
Some of the notable industrial investment sales from the first quart included Rising Realty Partners’ purchase of the nearly 148,000 square foot Alpine Industrial Park in the Power Inn submarket from Massie and Company for $21.89 million, roughly $148.26 per square foot, and LBA Logistics’ acquisition of a 144,000 square foot warehouse – located at 8372 Tiogawoods Drive – for $16 million, or $111 per square foot, from Ethan Conrad Properties.
Meanwhile, some of the larger industrial owner-user sales included Intermountain Lock & Security Supply’s $6.6 million (roughly $106 per square foot) acquisition of a 62,288 square foot warehouse located in the Richards submarket from Sutter Capital Group, and Golden State Lumber’s sale of a 18,320 square foot warehouse in the Marysville/Yuba City submarket to TLS Auto Recycling for $3.9 million, or just over $212 per square foot.
Looking ahead to the next few quarters, a robust development and construction pipeline hints at an active time ahead for the Sacramento industrial market. There are just over 3 million square feet under construction, which was 10 percent leased at the end of the first quarter. Notably, Kubota Tractor’s new $60 million, 701,000 square foot Western Distribution Center broke ground in the first quarter of this year. New supply during the first quarter – totaling 931,000 square feet – was only 12 percent leased; however, new spec developments are expected to be leased up in the months ahead.
In general, the overall perception is that the strong market fundamentals of the first quarter this year reflect the desirability of Sacramento’s industrial market in the year ahead, thinks Shanahan.
“Developers are still really bullish on our market fundamentals and are breaking ground on new projects to bring new inventory to tenants for those looking for more modern, more efficient space that comes with these new-construction properties,” he said.
Although the future of the region’s industrial and other real estate markets remain uncertain – not least of all because of the ongoing impacts of the pandemic – the immediate horizon looks bright for those looking to capitalize on Sacramento’s industrial market.
“Since mid-2020, we’ve really seen a record amount of activity in our market. So if anything, the pandemic has really spurred a lot of additional demand from occupiers, especially in the e-commerce and third-party logistics sectors,” Shanahan said. “We’re still seeing a lot of interest from investors who have historically overlooked the Sacramento market. They’re really interested in placing capital in our region now.”