The Bay Area’s Dark Horse: Sacramento Property Fundamentals Remain Steady Despite Pandemic as Other Submarkets Struggle

Newmark, Sacramento, WeWork, Natoma Pointe Plaza, Centene, Natomas
Courtesy of Wil Stewart

By Meghan Hall

For months, commercial real estate professionals in Sacramento were waiting for the contractions that were hitting other markets across the Bay Area to finally come their way. However, as 2020 passed by, fundamentals across multiple property types in Sacramento remained relatively stable. While the local office market only saw some fluctuations at the very end of the year, the submarket’s industrial sector continued its rapid growth. The end-of-year outcomes were surprising to some but ultimately fit well within the commercial real estate trends that have unfolded over the course of the past year.

“We were—candidly—from March and April until the end of the year, bracing for the wave of bad news that we’ve seen from many of the other offices in the Bay Area,” explained Chris Lemmon, executive managing director and regional managing director of Newmark’s Sacramento and Roseville offices. “We kept bracing for it, but it never came, or it came at the very last minute for us. But it was nothing that was very market shifting so far.”

Sacramento’s current office market, for example, totals about 70.6 million square feet. While the fourth quarter showed a slight increase in vacancy from 10.1 percent in the third quarter to 10.4 percent in the fourth quarter, the last time the local office market reported a quarterly increase in vacancy was in 2015 when vacancy rates sat at about 20.4 percent. Before the end of 2020, positive net absorption across Sacramento lasted 20 quarters. The local market was bolstered by Centene’s completion of its 511,800 square foot campus in Natomas, which will serve as the firm’s west coast headquarters. Two buildings totaling 40,000 square feet in Natoma Pointe Plaza also were brought to market fully leased.

“We were on a great trend,” said Lemmon. “Most of our negative absorption didn’t start happening until the fourth quarter.”

During the fourth quarter, 157,000 square feet of sublease space became available and depressed fundamentals. Moving ahead, the first quarter is also likely to see some slight softening, as WeWork places its 96,000 square feet at 660 J Street downtown back on the market. The city’s downtown core has been perhaps the slowest in activity, although its vacancy rate at 9.2 percent is still lower than Sacramento’s average.

Overall, the Sacramento office market has been fueled by smaller deals and has benefitted from its position as a less dense, more suburban market. According to Lemmon, Newmark is tracking about 1.5 million square feet of office requirements in the market, and more people are wanting to open offices in Sacramento than even ever before, even prior to the pandemic.

“[Assets] that are cheaper, have free parking, are more spread out, closer to home…that’s all doing quite well right now,” stated Lemmon. “That is Sacramento as compared to the rest of the Bay Area.”

Lemmon added, “And, if you’re going to leave California, [people are saying] Sacramento is a good in between before you go somewhere else.” 

But even as demand has increased, new supply in Sacramento remains low. According to Newmark’s most recent office report, no speculative office buildings are under construction within the submarket.  While there have been occasional speculative projects pursued, most office buildings built since 2007 in Sacramento were constructed with tenants in tow.

“That’s a big factor as to why I think we’re not getting hit hard as some of our other Bay Area colleagues,” said Lemmon. “It is because of the fact we didn’t have all of this extra inventory.”

While office inventory in Sacramento has increased at a nominal rate, the industrial sector is adding new space—and fast. The asset class remained active throughout the past year, similar to other markets in the Bay Area. In Sacramento, there is just shy of 160 million square feet of industrial space in the market. Even with all of the uncertainty caused by COVID-19, the vacancy rate sits at just three percent—amazingly low by commercial real estate standards. 

“That’s nothing,” said Lemmon of the vacancy rate. “It is obscene how low it is.”

A year ago, Sacramento had 1.4 million square feet of industrial in the construction pipeline. At the end of 2020, 5.9 million square feet of industrial was under construction. Lease rate growth ranged from 10 to 14 percent, depending on the location and product type, and new construction industrial buildings can garner anywhere between $0.55 per square foot and $0.65 per square foot in rents. One million square feet of net absorption was posted during Q4 alone. 

If anything, noted Lemmon, coronavirus has amplified a trend towards e-commerce and increased industrial uses already underway at the beginning of 2020, ones that carried through the rest of the year.

“The pandemic has made that happen much faster,” said Lemmon. “These industrial users are beneficiaries of that, and they’re chomping at the bit to get more space to keep up with the demand of online shoppers.”

The industrial sector’s growth is expected to continue through 2021, as ready to build, industrial-zoned land becomes scarcer in the Sacramento area. As demand grows with e-commerce and Bay Area relocations and expansions continue into Sacramento, the industrial sector will too—and bolster Sacramento’s overall commercial real estate market in the coming years.

West Coast Commercial Real Estate News