MARKET DRIVERS
The direct vacancy rate reached 5.8% in 4Q 2024, 90-basis points (bps) up YOY. The South Sacramento Submarket had the highest direct vacancy rate at 26.6%, while the Marysville/Yuba City submarket had the lowest direct vacancy rate at 1.3%. Although vacancy is increasing throughout the market, it remains relatively tight and is below the 10-year average of 6.2%.
Total availability rate jumped 190-bps YOY to 8.6%, the highest it’s been since 2017. The Natomas/Northgate submarket continues to record the highest availability rate at 16.6%. In contrast, Elk Grove/Laguna posted the lowest availability at 1.9%.
The average asking lease rate fell YOY for the first time in 5 years to $0.81 at year-end. With vacancies and availabilities on the rise, rent growth has slowed in recent quarters but is still hovering around record high rates.
Total leasing activity for 4Q 2024 posted 1.2M SF, bringing the year-end total to approximately 7M SF, the lowest activity seen in 10 years with the exception of 2019 which posted 5.6M SF. Similarly, sales activity experienced a 20% decrease in volume (SF) dropping from 4.8M SF in 2023 to 3.8M SF in 2024. Again, this number is one of the lowest recorded in 10 years apart from 2019 when only 3.7M SF sold.
With two quarters of negative net absorption in 2024, direct net absorption for the year posted negative at 324K SF, the first time in 10 years that the market experienced an annual negative net absorption. Interest from large users have dissipated in the past year, as many occupiers are focused on maximizing the efficiency of their existing space rather than relocating or expanding. The market’s strength traditionally lies in tenants between 50K SF and 150K SF, however, the moveouts this past year have been concentrated in these spaces which further complicates the market space.
ECONOMIC REVIEW
The unemployment rate in the Sacramento MSA was 4.8% in November, unchanged from the month prior, and 30 bps above the year-ago estimate of 4.5%. This compares to California’s unemployment rate of 5.3% and 4.0% for the nation during the same period.
Year-over-year, the Construction and Manufacturing sector recorded the largest losses in the region, 4,700 jobs and 1,500 jobs respectively. On the upside, Trade, Transportation, and Utilities sector gained an estimated 3,600 jobs month-over-month from October to November.
NEAR-TERM OUTLOOK
Over the past 12 months, Sacramento’s industrial market recorded just less than 100 transactions, totaling $440M, a notable decline compared to the five-year average of $620M. With rising vacancy rates and lack of rent growth, sales activity has slowed since the second half of 2022 and has yet to rebound. High interest rates continue to put pressure on property owners who are looking to sell at a top dollar price but with limited economic incentive to sell, sales activity has stalled and is not projected to recover until well into the new year.
Although vacancy rates have increased over the past couple years, it is still below the 10-year average of 6.2% and the market remains relatively tight. Additionally, the bulk of the supply wave is over as 2024 only saw 1.5M SF delivered, roughly half of the new inventory compared to 2023. With only 2.1M SF currently underway, the lowest total since 2018, it’s expected to decrease the upward pressure on vacancy rates. The slower pace of development in the past year will help push rent growth back up but is expected in the longer term.
The Federal Reserve lowered interest rates in 2024 and has signaled additional interest rate cuts throughout the new year in 2025. This rate reduction may stimulate the industrial real estate market by encouraging capital markets to invest in properties at more favorable rates. Concurrently, commercial mortgage-backed security, or CMBS, data shows an increasing number of Sacramento’s industrial properties with active loans coming due in 2025. With the recent decreases in interest rates, property owners with maturing debt in the coming year may have more options to refinance or sell their properties. Near term outlook is positive, and many are optimistic that activity will increase in the new year, as lower debt costs could signal improved property values.
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