MARKET DRIVERS
The direct vacancy rate rose 190-basis points (bps) since 2Q23 but fell 20-bps since 1Q24 to 5.5%. The South Sacramento Submarket remained the submarket with the highest direct vacancy rate at 26.5%. Conversely, the Marysville/Yuba City submarkets had the lowest direct vacancy rate at 1.3%.
The total availability rate climbed 140-bps since 2Q23 to 7.7%. The Natomas/Northgate and Auburn/Newcastle submarkets retained their positions as having the highest and lowest availability rates, correspondingly, standing at 13.4% and 2.3%.
The asking lease rate increased 1.2% from $0.83/SF in 2Q23 to $0.84 in 2Q24. Following the pattern from the previous quarter, asking lease rates remained highest in the East Sacramento submarket, reaching $1.44, and lowest in the Davis/Woodland submarket, at $0.56. Moreover, Flex properties commanded the highest asking lease rates at $1.09, while Warehouse & Distribution properties recorded the lowest asking lease rates at $0.76.
Total leasing activity for 2Q 2024 reached 1.1M SF marking a 35.4% decrease from 1.7M SF in 2Q 2023. Similarly, the sales volume decreased by 25.2%, dropping from 1.5M SF in 2Q23 to 1.1M SF in 2Q24.
Direct net absorption fell from 1.3M SF in 2Q23 to 564.8K SF in 2Q24. A strong rebound from the -577.3K SF recorded in 1Q24. Since the beginning of the year, Roseville/Rocklin has recorded the largest negative net absorption at -230.7K SF, the Sunrise submarket had the largest positive net absorption total at 158.4K SF.
ECONOMIC REVIEW
Unemployment rates in Sacramento County rose by 80-bps over the past year but fell by 70-bps from the previous quarter to 4.5% in 2Q24. Similarly, California’s unemployment rates increased by 70-bps over the past year and decreased by 10-bps from the previous quarter.
The trade, transportation, and utilities sector and the manufacturing employment sector decreased by 500 jobs from the previous quarter, as well as a decrease from the previous year in Sacramento County.
Conversely, construction employment in the region rose by 3.1% compared to the previous year and saw a rise of 1,900 jobs compared to the previous quarter. The Industrial sector employment for Sacramento County increased both from the previous quarter and the previous year because of these additions.
NEAR-TERM OUTLOOK
Project costs, including rising material expenses, labor shortages, and regulatory hurdles, pose significant barriers for industrial developers. These challenges have been further exacerbated by inflation and disruptions in the supply chain. Consequently, securing financing for projects has become increasingly difficult. However, developers are actively seeking solutions through government assistance and streamlined entitlement processes. Regardless of these obstacles, industrial developers remain undeterred. The sustained demand for industrial buildings, particularly those equipped with amenities to attract a youthful workforce, fuels optimism for the future of industrial projects. Although sales transactions in the industrial market have slowed, the sector is still expected to remain resilient with continued participation from public and institutional capital. Sales volume is projected to increase slightly in the near future due to industrial property values remaining steady compared to other asset classes.
The industrial market in Sacramento shows signs of cautious optimism, driven by significant activity from major players like Amazon. Although the national industrial real estate sector has cooled, Amazon’s movements suggest potential growth. Amazon recently acquired 84 acres in Rancho Cordova for $23.6M to develop a 600,000+ square foot distribution center, a project valued at over $85M. This development is part of the broader Rio Del Oro master plan and reflects Amazon’s strategic expansion amid a softer market. With e-commerce and supply chain demands continuing to influence the sector, Amazon’s investments could signal a positive outlook for industrial real estate in the Sacramento region.
With new developments for small to mid-sized spaces not keeping up with demand, some tenants are looking at taking matters into their own hands. One such story is Eagle Welding services, who were running into problems with finding space when they were looking to move from their 5,000 SF space due to company growth. The space they landed in met size requirements, but outside of that, was a major letdown. This led the company to work with Spanda Industrial, which owned an undeveloped plot of land that they were willing to sell once developed to Eagle Welding’s needs. After 2 years of development and $2.2M in investments, Eagle Welding landed in a space that fit all their needs. With construction being mainly focused on larger spaces, there is still a demand for new spaces that meet small to mid-sized needs, and developers and tenants alike are working to meet those needs.
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