MARKET DRIVERS
The direct vacancy rate was 3.7% in 2Q23, lower than 4.1% in 1Q23, and at the same level as 2Q22. The highest direct vacancy rate was in the South Sacramento submarket at 23.5% and the lowest direct vacancy rate was in Auburn/Newcastle at 0.8%.
The total availability rate increased 17.8% YOY from 5.5% in 2Q22 to 6.5% in 2Q23 with the highest rate at 12.6% in the Natomas/Northgate submarket and the lowest rate at 0.7% in the Auburn/Newcastle submarket.
The asking lease rate increased from $0.80 in 1Q23 to $0.83 in 2Q23. This was a $0.10 increase from 2Q22. The asking lease rate was highest in the East Sacramento submarket at $1.55 and lowest in the Davis/Woodland submarket at $0.63.
Total leasing activity saw a YOY 59.0% decrease from 2.5M SF to 1.0M SF in 2Q23, and there was a 35.6% decrease YOY in total sales volume from 2.3M to 1.5M SF in 2Q23.
Direct net absorption increased 97.0% from 509.2k SF in 2Q22 to 1.0M SF in 2Q23. The largest negative total was in the South Sacramento submarket at negative 73.7K SF and the largest positive total was in the Natomas/ Northgate submarket at 398.7k SF.
ECONOMIC REVIEW
Sacramento County unemployment rates decreased from 4.5% in 1Q23 to 4.1% in 2Q23. This is up from the 3.8% unemployment rate from 2Q22.
Industrial sector regional employment has been between largely stagnant, with some bright spots. Trade, transportation, and utilities added 300 jobs, manufacturing added 300 jobs, and construction most significantly added 4,900 jobs.
Despite being the strongest performer compared to last quarter Construction jobs are still down 4.5% from this time last year. In contrast, trade, transportation, and utilities, and manufacturing are up 1.3% and 0.5% respectively in the same time frame.
Construction is known for being a cyclical industry, so YOY numbers are vital to getting an accurate picture on how the industry is going. The added jobs are not enough to offset losses from a year ago, indicating that this industry has been hit hard by the higher interest rates. With that said, it’s good to see trade, transportation, and utilities, and manufacturing staying afloat despite the increased unemployment rate and tough economy.
NEAR-TERM OUTLOOK
High inventory, especially in sublease space, hasn’t slowed sales transactions or efforts to further develop the Sacramento industrial sector. Investment groups have been keen on the industrial markets and have been buying properties when they are available. One owner, Ethan Conrad, was even able to sell his property despite it being 40% vacant at $152/SF. On top of success stories like this, there are many projects being reviewed for approval. The two biggest projects in the news this quarter are a 2 million-square-foot industrial park being reviewed by Roseville and a 2.6 million square-foot industrial space in Woodland that has received final approvals for design review.
Demand for buildings focused on distribution and warehousing has been surging with the rise of e-commerce. The ideal location for such centers is near residential areas, which has received backlash from Sacramento locals. Other industrial projects have been approved and built in areas zoned for industrial locations, but residents are concerned that these warehousing and distribution centers will increase traffic and pollution in local neighborhoods which is why they’ve begun to pushback on these projects. One neighborhood group has gone as far as to file suit against the approved 155,000 square-foot LogistiCenter project site at Rancho Cordova. Despite approvals and area demand, residents are hesitant with expansions and are looking for projects to be done in a way that doesn’t disrupt their daily lives.
Beyond the realm of e-commerce, there is more demand for warehouse and distribution space. U-Haul has recognized the Sacramento-Roseville market as one of the top two growth markets in the nation for three consecutive years. To further solidify their presence, the Phoenix-based moving company has acquired a 144,000-square-foot building on a 6.85-acre lot adjacent to their existing truck rental hub and storage site at 1324 Arden Way. While the initial plan is to utilize the space for storage and expand the production of “U-Box” containers, it also has the potential to serve as long-term storage for boats and RVs. U-Haul’s investment shows that they expect storage and moving to be key needs in the Sacramento area, and as the metro grows, so too will the storage and
distribution demands.
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