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1/08/24
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This report provided by real estate services firm Kidder Mathews
MARKET HIGHLIGHTS
• The average asking lease rates climbed to $0.85/sf, an increase from $0.77/sf in 4Q22.
• Direct vacancy rates rose from 3.9% to 4.6% QOQ.
• Sale volume saw a 24.6% QOQ increase, from 902.0k sf to 1.1 msf.
• Direct net absorption declined YOY, from 595.8k sf to -643.6k sf in 4Q23.
Market Drivers
• The direct vacancy rate reached 4.6% in 4Q23, up 70-bps from both 3Q23 and 4Q22. The South Sacramento submarket had the highest direct vacancy rate at 25.7%, while the Davis/Woodland and Elk Grove/Laguna submarkets had the lowest rates at 0.5%.
• The total availability rate rose 60-bps YOY, rising from 6.1% in 4Q22 to 6.7% in 4Q23. The Natomas/Northgate submarket registered the highest rate at 14.2%, whereas the Elk Grove/Laguna submarket had the lowest rate at 1.6%.
• The asking lease rate increased from $0.84 in 3Q23 to $0.85 in 4Q23, this was a 10.4% increase from 4Q22. The East Sacramento submarket had the highest asking lease rate at $1.55, while the Davis/Woodland submarket had the lowest at $0.64.
• Total leasing activity experienced a YOY decrease of 40.5%, falling from 2.6 msf to 1.4 msf in 4Q23. Additionally, there was a 2.4% YOY decrease in total sales volume, dropping from 1.2 msf to 1.1 msf in 4Q23.
• Direct net absorption saw a significant decrease from 595.8k sf in 4Q22 to -643.6k sf in 4Q23. The Power Inn submarket recorded the largest negative total at -343.9k sf, while the West Sacramento submarket had the largest positive total at 575.6k sf.
Economic Review
• The unemployment rate in Sacramento County remained steady at 4.5% from 3Q23 to 4Q23, however this is a 90-bps increase from rate recorded in 4Q22.
• The regional employment in the industrial sector has shown growth over the last quarter. The trade, transportation, and utilities sector added 4.5k jobs, while manufacturing saw a small dip of 600 jobs lost, and construction added 2.1k jobs.
• On top of the strong performance last quarter, Construction jobs are also up 5.1k jobs since this time last year. This increase which is much larger than the increases to trade, transportation, and utilities, and manufacturing which are up 1,600 and 300 jobs respectively in the same period.
• The construction industry is well-known for its cyclicality, underscoring the importance of YOY figures for obtaining an accurate assessment of its trajectory. The newly added jobs this quarter have reached their highest point since this time last quarter and could reach new heights as the year closes. Although they didn’t grow significantly, sectors such as trade, transportation, utilities, and manufacturing are showing resilience during these economic challenges which is a great sign in the face of interest rate hikes.
Near Term Outlook
• In the resilient Sacramento industrial market, sales have surged, particularly in the multi-tenant sector. Turo Partners capitalized on the demand for smaller spaces, successfully closing a deal on two Rancho Cordova buildings totaling 43k sf for $5.5 mil. Despite a slower commercial real estate market and challenges such as interest rates and business issues in California, the 90% leased buildings exemplify the enduring appeal of the industrial real estate asset class, fueled by e-commerce and warehousing demands. Meanwhile, Graceada Partners demonstrated strategic acumen with the $30.5 mil acquisition of a three-building property in Elk Grove, emphasizing their focus on the high-demand 12k sf – 25k sf multi-tenant industrial range. The well-maintained property eliminates the immediate need for capital improvements, and Graceada plans to proactively address below-market lease rates. These acquisitions highlight the demand for smaller spaces and were significant drivers in the sales volume increase seen this quarter.
• Increased asking rates for leases has also pushed some tenants to explore going the route of becoming owner users. Cable Cisco was facing a planned rent hike but elected to purchase a 36k sf building for $4.55 mil instead. This move, amidst a competitive market where demand for smaller industrial spaces is high, underscores the lengths businesses are willing to go to secure their operational needs. The purchase also involved negotiating an early move-out with an existing tenant paying below-market rent. Cable Cisco's decision aligns with the trend of companies strategically navigating challenges in the industrial real estate market.
• In a significant development, Buzz Oates is gearing up for its first major project in Placer County, the Placer Commerce Center. Spanning 393 acres, the project is expected to host up to 6.4 msf of industrial space. While trends indicate a preference for smaller buildings, the Placer Commerce Center plans include structures ranging from 162k sf to over 1 msf. Despite a shift in industrial leasing interest towards smaller spaces, Buzz Oates remains optimistic, attributing the slower activity in 2023 to the robust industrial real estate market in 2021 and 2022. The company views Placer County as a promising trade area due to its availability of large contiguous land, positioning it strategically for future industrial development.
The information in this report was composed by the Kidder Mathews Director of Research Gary Baragona and Kidder Mathews Research Group. Data sources: CoStar, www.bls.gov, www.labormarketinfo.edd.ca.gov, bizjournals.com, sacbusinessreview.com.
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