Business is booming in Sacramento CA
Business is booming in Sacramento, CA. Yes, many business owners are selling and the owners are moving out of California. That’s a normal and healthy part of the capitalist system.
How do I know business is booming in Sacramento CA?
There is a need, however, to talk about is the businesses that are growing and doing well based on the observations of David Newman, MAI who is commercial property appraiser with Paradigm Property Advisors based in Roseville, CA.
Here are some of David’s observations from reviewing the commercial real estate market in the 4 counties around Sacramento, that is, Sacramento County, Yolo County, Placer County and El Dorado County.
Office real estate market
- For the past few years, Sacramento Rent Growth has been just above 4%. Compare to the national rent growth which is just above 2%.
- Demand is still catching up to the 12 million Square Feet that was added from 2005 to 2009 as only 2 million Square Feet have been added since 2010. However, 3 ½ million Square Feet are proposed to be added over the next 4 years.
- The current vacancy rate is slightly below 10% compared with historical vacancy rates which average above 12%.
- For very good news, 120,000 jobs have been added since employment last declined in 2011.
- Office sales have topped $1 billion for the past few years while average rents are below those of 2007.
Medical Office Development
- Kaiser Permanente added 200,000 Square Feet property on Riverside Avenue in Roseville, CA.
- Adventist Health added 240,000 Square Feet property on Douglas Boulevard in Roseville, CA.
- Kaiser Permanente added 200,000 Square Feet in property in downtown Sacramento.
Industrial real estate market
- The level of vacancies in 2010 were near 14%; however, current vacancy rates are near an all-time low in Sacramento at 5%.
- Rent growth for the industrial real estate sector is seeing some of the strongest in the nation over the past few years. It is currently above 10% Year Over Year due in large part to E-commerce, logistics, and Cannabis legalization. With the low vacancy rates in the metropolitan areas, rents are significantly up in nearly every sub-market.
- Rent growth is outpacing the nation by 250 to 450 basis points over the past two years.
- Amazon built the most notable industrial development this cycle with its first fulfillment center in Sacramento, near the airport.
- Absorption in our region has been strong with over 2.5 million square feet annually from 2013 to 2016 and more than 5 million square feet in 2017 alone.
- The legalization of cannabis has led to rent spikes in the city of Sacramento, which in turn has pushed traditional tenants into outer regions of the market.
- New supply has been relatively constrained in this cycle at about 5 million square feet from 2010 to 2018 while over 8 million square feet were added from 2005 to 2009.
- CoStar projects between 6 to 7 million square feet of new real estate being added over the next four years.
- Industrial rents are near the peak that was being achieved in 2007.
Retail real estate market
- Vacancy rates have compressed over the past several years due to a lack of significant development and is currently near 6%.
- Rent growth has been near or above the national average over the past three years.
- Once again there has been limited construction in this cycle.
- About 9 million square feet of inventory was added from 2005 to 2009 while about 5 million square feet was added since 2010.
- CoStar projects about 3 million square feet of new retail space being added over the next four years.
- Unanchored strip centers and malls continue to struggle to attract tenants. This is primarily due to demand from online shopping. However, in the last real estate cycle there was too much and so the retail real estate market is still adjusting. In fact, there are still spaces in many strip retail centers in affluent areas such as Rocklin and Elk Grove that have never leased or are achieving rents well below $1.50 square foot triple net.
- Retail rents, in general, are still well below the peak in 2007.
Multi-family real estate market
- Sacramento has experienced a population growth of over 185,000 people during the past eight years, but new home and apartment supply has not kept pace.
- New home supply since 2010 has averaged about 5,000 units annually compared to approximately 20,000 per year in the boom times of the 1970s, 1980s, and 2000s.
- Multifamily supply has been nearly non-existent over the past decade with less than 3,000 new units delivered. According to website, Site-to-do-Business (STDB) the Sacramento population is projected to grow by 130,000 people over the next five years. CoStar is projecting approximately 6,000 new apartment units over the next four years.
- Mega commuters from the Bay Area continue to re-locate to Sacramento as they did in the previous real estate cycle. The median income in our region has not kept pace with home price appreciation, which has also caused multifamily vacancy to decline as more people cannot afford single-family homes.
- Sacramento’s apartment rental growth over the past few years has led the nation and investors from outside the Sacramento region have taken notice. Rental growth rates in many submarkets have eclipsed 10% annual increases. Vacancy has been below 5% for several years with many submarkets at or below 4%. Davis has some of the tightest vacancy, which is less than 3%. The University of Davis continues to add thousands of students but there has been virtually no new supply in housing for over a decade.
- Per unit sales prices in Sacramento have increased from 50% to 75% over the past 5 years in many submarkets.
- The majority of deals still trade in the $1 to 4 million range.
- The multifamily market is the only one of the four presented today that has rents well above those achieved in 2007.
What does the future of the Sacramento, CA real estate markets look like?
The big variable going forward is interest rates. The consensus is that the Federal Reserve Bank is going to increase interest rates.
Is that good news of bad?
If interest rates are going up it’s a sign the economy is doing well. If the economy is doing well then there is no reason real estate values will decline. An event must happen to correct the market and with the US economy in one if its longest bull markets on record, something has to happen.
At some point the market must slow but it is expected any slowing will not be a repeat of the Great Financial Recession that started in 2008.
Like all things though, if you own a business and/or commercial real estate, whether you sell, or hold will be the right decision.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information, please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.