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4/17/23
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This report provided by real estate services firm Kidder Mathews
MARKET HIGHLIGHTS
Average asking lease rates are $0.80/SF.
Direct vacancy rates increased YOY from 3.5% to 4.4%.
Sales transactions decreased by 22.7% YOY from 1.2 msf to 963k sf.
Direct net absorption fell YOY from 1.4 msf to 316k sf in 1Q23, a 279k sf decrease from 4Q23.
Market Drivers
The direct vacancy rate was 4.4% in 1Q23, higher than 4% and 3.5% from 4Q22 and 1Q22, respectively. The highest direct vacancy rate was in the South Sacramento submarket at 22.4% and the lowest direct vacancy rate was in Auburn/Newcastle at 0.7%.
The total availability rate increased 19.6% YOY from 5.3% in 1Q22 to 6.3% in 1Q23 with the highest rate at 13.8% in the Natomas/Northgate submarket and the lowest rate at 1% in the Auburn/Newcastle submarket.
The asking lease rate increased from $0.77 in 4Q22 to $0.80 in 1Q23. This was a $0.08 increase from 1Q22. The asking lease rate was highest in the East Sacramento submarket at $1.55 and lowest in the Marysville/Yuba City submarket at $0.58.
Total leasing activity saw a YOY 22.7% decrease from 1.2 msf to 962k sf in 1Q23, and there was a 31.9% decrease YOY in total sales volume from 1.1 msf to 723k sf in 1Q23.
Direct net absorption decreased 76.8% from 1.4 msf in 1Q22 to 316k sf in 1Q23. The largest negative total was in the Davis/Woodland submarket at negative 130k sf and the largest positive total was in the West Sacramento submarket at 309k sf.
Economic Overview
Sacramento County unemployment rates increased from 4% in 4Q22 to 4.3% in 1Q23. This is down from the 4.8% unemployment rate from 1Q22.
Industrial sector regional employment has been between stagnant and poor in an otherwise strong jobs report. Trade, transportation, and utilities lost 100 jobs, manufacturing added 700 jobs, and construction most significantly lost 4,200 jobs of their 75,800 reported jobs since February 2022. To put this into context, the other sectors added a combined 31,900 jobs, and construction was by far the biggest loser.
On a month-to-month standpoint the story becomes more muddied; Construction added the most jobs out of any sector since January 2023 with 4,300, and trade, transportation, and utilities lost 1,400 jobs by far the most of any sector, while manufacturing stayed flat.
One explanation for these wild changes could be these industries regressing to the mean; Construction beginning to recover from a rough end of 2022, and trade, transportation, and utilities coming back to earth after a strong end to the year.
Total Goods Producing and Manufacturing jobs are up 4,300 since last month, but still 4,200 lower than this time last year.
Near-Term Outlook
The recent collapse of Silicon Valley Bank is the largest bank failure since 2008. This development, coupled with the negative economic sentiment and increasing interest rates, is causing concern for Sacramentos Industrial market. This will lead to stricter underwriting criteria, limited short-term demand for office space, and hindrances to the growth of new and existing start-up companies. It is important to note, however, that the collapse of SVB does not necessarily indicate future bank failures, especially among large national banks that are less susceptible to the same issues that led to SVB's downfall. In fact, First Citizen's Bank is poised to acquire SVB, adding to the more than twenty bank acquisitions that have taken place since the 2008 financial crisis.
Asking lease rates are increasing despite decreases in transactions and rises in vacancy and availability. This has led institutional buyers like AT Industrial and Rising Realty Partners to purchase properties such as the Croydon Business and Mercantile Industrial Parks respectively. These institutional investors feel the industrial space is a safe space for their money, and the proof is in Blackstone, who sold the Croydon Business Park to AT Industrial for twice the value they bought it for in 2017.
The high demand stems from a lack of supply, which is not being helped with the interest rate hikes followed by the SVB closure. Despite hiccups like this and the recent LogistiCenter project being denied City Council approval, there are new plans being proposed such as the Metro Air Park which is looking to build over 300k sf of warehouse space over the next two years.
This report provided by Kidder Mathews Director of Research Gary Baragona. Sources include: bls.gov, labormarketinfo.edd.ca.gov, bizjournals.com, sacbusinessreview.com
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