MARKET DRIVERS
The direct vacancy rate fell for the first time in two years to 5.8% in the second quarter, down 10-basis points (bps) from last quarter. The vacancy rate has gradually increased over the last several years and is now at its highest level in nearly a decade. The South Sacramento Submarket had the highest direct vacancy rate at 23.6%, while the East Sacramento submarket posted the lowest direct vacancy rate of 0.6%.
Market wide availability reached its highest rate since 2017, an increase of 150-bps YOY posting 8.8% at the end of Q2. The Natomas/Northgate and Elk Grove/Laguna submarkets retained their positions as having the highest and lowest availability rates, correspondingly, standing at 13.8% and 0.9%.
The average asking lease rate fell QOQ and YOY to $0.80/SF in Q2. Although the current rate is still near the record high rate of $0.83/SF NNN from 2023, rent growth over the past
couple years have been some of the slowest in the past decade.
After a slow first quarter of the year, total leasing activity rebounded in Q2 to 1.79M SF, a 52% increase QOQ and the highest level recorded in the past year. This provided some positive momentum for absorption, which posted positive 171K SF for Q2. Although interest from large users has been minimal in the past year, there were several large deals and expansions in Q2 over 200K SF that helped drive leasing volume.
Similarly to leasing, sales activity in Q2 recovered QOQ posting 982K SF in volume, a 50% increase from Q1. Overall demand is projected to grow, with investment sales likely to increase as interest rates are expected to stabilize or decline modestly over the next 12 to 24 months.
ECONOMIC REVIEW
The unemployment rate in the Sacramento MSA was 4.3% in May, down 20 bps from the month prior, but an increase from the year-ago estimate of 3.9%. This compares to California’s
unemployment rate of 5.3% and 4.2% for the nation during the same period.
Sacramento’s industrial economy is marked by strength and increasing diversification, driven by core sectors such as agribusiness, manufacturing, and an expanding tech industry. The region’s strategic location, competitive lease rates, and solid infrastructure continue to make it an appealing destination for businesses of all sizes.
NEAR-TERM OUTLOOK
The market outlook remains broadly positive, supported by its affordability, strategic location, skilled labor force, and strong infrastructure—all key drivers of future job growth and industrial demand. With a slowdown in speculative development, newer facilities should have time to be absorbed, helping vacancy rates stay stable and below the long-term average of 9.4%.
Vacancy rates have gradually increased over the past few years, but the current rate is still on trend with the 10-year average. An influx of new construction coupled with leaner demand over the last few years has driven much of the rise in vacancy rates in the Sacramento market. However, as the pace of new construction slows and as larger space requirements begin to return, big-block leasing activity could gain momentum, contributing to vacancy stabilization and supporting rent growth.
The wave of new supply over the last few years has significantly slowed in the past year and construction starts have been almost nonexistent in the past year. Most of the delivered space in 2025 is Amazon’s 630K SF distribution center in Sunrise. Furthermore, developments currently under construction are all projected to complete by year end. Developers have responded cautiously to the surplus of available new space and slower large-box demand, which is evident in the recent decline in construction starts. It is expected that construction starts remain minimal in the coming year which will help in reducing the risk of oversupply.
Click here to subscribe to Kidder Mathews market research.