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SACRAMENTO NEWS
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Sacramento Office and Industrial Market Snapshot

8/01/11

Here is a brief overview of the Sacramento office and industrial markets during the second quarter of 2011. This summary was provided to us by the Sacramento office of Grubb & Ellis.

Office

• Vacancy in the Sacramento office market increased to 21.5 percent during the second quarter of 2011, a 40-basis-point increase from the first quarter.
• The CBD’s vacancy rate increased to 17 percent in the quarter, up 370 basis points from the previous period. Vacancy in the Roseville, Rocklin, Auburn submarket increased 210 basis points to 31.1 percent during April through June.
• The region posted approximately 75k sf of negative net absorption in the second quarter, bringing the year-to-date total of negative net absorption to 261.7k sf.
• The Class A property sector accounted for all of the negative absorption, with 228.4k sf of vacant Class A space put back on the market. The Class B and C property sectors experienced positive net absorption, posting 21.3k sf and 132.2k sf, respectively.
• Quarter-to-quarter, average asking rental rates for Class A space declined $0.02 to $2.02 per square foot per month, while average asking rental rates for Class B space fell $0.01 to $1.62 per square foot per month.
• Roughly 96k sf of sublease space was taken off the market during the second quarter, lowering the total of available sublease space to approximately 574k sf.
• Three downtown buildings were added to the list of distressed office properties during the second quarter, including the Senator Office Building located at 1121 L St., 1 Capitol Mall and 501 J St.
• At the close of the quarter, 59.2k sf of space was under construction, including the 54k sf speculative building located at 400 Sunrise Ave. Construction resumed on the building during the second quarter and is expected to be completed in December 2012.

Analysis and forecast: Although the Sacramento office market was previously dependent on the cushion provided by leasing activity from entities of the State of California, recent cutbacks in state employment have taken this security away. The second quarter showed the market is in a hold period, waiting for activity to help it stabilize. An increase in leasing activity and a potential decrease in vacancy may be on the horizon as a result of the drop in unemployment the Sacramento-Arden-Arcade-Roseville area experienced during the three-month period ending May 2011, when it fell 100 basis points to 11.7 percent. Looking forward, rental rates are expected to decline throughout the remainder of the year, stabilizing in 2012. Speculative construction is expected to remain light to non-existent.

Industrial

• The Sacramento industrial vacancy rate decreased to 13.3 percent during the second quarter, down 50 basis points from the previous quarter.
• The industrial market experienced 532.3k sf of positive net absorption during the second quarter, offsetting the 486k sf of negative net absorption posted in the first quarter. Year-to-date absorption was positive 46.3k sf at the close of the three-month period.
• The primary driver of the positive net absorption was Olam Tomato Processors Inc’s move into 300k sf of warehouse space in Woodland.
• The monthly average asking rental rate for R&D/flex and warehouse/distribution space remained unchanged from the first quarter at $0.77 and $0.30 per square foot, respectively, during the second quarter. Asking rental rates for general industrial space increased $0.01 to $0.46 per square foot per month.
• The last building under construction, 5251 Brace Road, a 36k sf speculative warehouse/distribution building, was delivered to the market during the quarter unoccupied.

Analysis and forecast: The Sacramento industrial market experienced positive net absorption during the second quarter for the first time in the past four quarters. Increased leasing activity continued to drive positive absorption during the quarter and should help the market moving forward. However, since the market is showing signs of improvement, landlords are not as willing to sign five-year leases. This means that although many tenants are touring the market, deals could take longer to negotiate, or they will be held until landlords, or tenants, are willing to meet in the middle for pricing. With the improvement in the market, rental rates should eventually be driven upward and landlords want to have the opportunity to maximize on them when they do. Additionally, the lack of speculative construction deliveries in the pipeline supports the consensus that vacancy will likely decline, with rental rates eventually moving up. As a result of solid tenant demand seen in the market over the past several quarters, the industrial market could see stabilization in late 2011 or in the beginning of 2012, earlier than previously predicted. Overall improvements in the economy should help industrial users and market investors regain their confidence, which in turn will help continue to increase leasing and sales activity.






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