MARKET DRIVERS
The direct vacancy rate rose to 5.9% in the first quarter, 20-basis points (bps) up YOY. The vacancy rate has slowly increased over the last several years and now sits at the highest rate in almost 10 years. The South Sacramento Submarket had the highest direct vacancy rate at 22.7%, while the Elk Grove/Laguna submarket had the lowest direct vacancy rate at 0.8%.
Total availability rate jumped 150-bps YOY to 8.9%, the highest it’s been since 2017. The Natomas/Northgate and Elk Grove/Laguna submarkets retained their positions as having the highest and lowest availability rates, correspondingly, standing at 14.1% and 1.2%.
The average asking lease rate increased slightly QOQ from $0.81/SF in Q4 2024 to $0.82/SF in Q1. With vacancies and availabilities on the rise, rent growth has slowed in recent quarters but is still hovering around the record high rate of $0.83/SF NNN from 2023.
Total leasing activity for the first quarter of 2025 fell short of 1M SF, reaching only 782K SF, a notable 64% drop from 2.1M SF in 1Q 2024, and a new quarterly record low since 2008. Similarly, sales activity marked a 50% decrease in volume (SF) dropping from 726K SF in 1Q 2024 to a low 362K SF in 1Q 2025. Again, this number is one of the lowest recorded in over 10 years since 2013.
Although direct net absorption posted positive 169K SF last quarter in 4Q 2024, the first quarter posted negative net absorption of 17K SF. Interest from large users have dissipated in the last year, with only a handful of deals over 100K SF, 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, recent moveouts 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 February, down 20 bps from the month prior, and below the year-ago estimate of 4.9%. This compares to California’s unemployment rate of 5.5% and 4.5% for the nation during the same period.
Although a loss of 1,300 jobs month-over-month from January to February 2025, the Trade, Transportation, and Utilities sector gained an estimated 1,700 jobs year-over-year. Conversely, construction and manufacturing sectors both experienced a loss month-over-month and year-over-year.
NEAR-TERM OUTLOOK
Although vacancy rates have steadily increased over the past few years, it is still in line with the 10-year average of 5.8%. A wave of new construction coupled with leaner demand over the last few years have driven much of the rise in vacancy rates in the Sacramento market. With only 920K 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 also help push rent growth back up in the longer term.
After a surge in new development over the past few years driven largely by the e-commerce boom during the pandemic, the influx of new supply and deliveries have significantly slowed in the past year. Most of the projects underway are still unaccounted for as the bulk of the spaces are available for lease. Construction starts are near zero and the majority of projects currently under construction are all projected to complete by year end. Interest rates and weak demand in the recent quarters has led to a drop in construction starts, as developers are cautious to the pullback in large tenant requirements, and it is expected that construction starts remain minimal in the coming year which will help in reducing the risk of oversupply.
Inflation and other economic uncertainties over the past year have forced tenants to carefully evaluate expansions and, in some cases, reduce space as their requirements change. Additionally, there have been several proposed policies such as tariffs, reduced corporate taxes, and deregulation. These policies have yet to be implemented, making it difficult to predict the future direction of the market. Once decisions are made about which policies will be enacted, there will be greater clarity regarding their impact on the market, enabling decision makers to respond accordingly.
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