MARKET DRIVERS
The direct vacancy rate was 4.1% in 4Q22, higher than 3.7% and 3.8% from 3Q22 and 4Q21, respectively. The highest direct vacancy rate was in the South Sacramento submarket at 22.8% and the lowest direct vacancy rate was in Marysville/Yuba City at 0.7%.
The total availability rate increased 13.8% YOY from 5.6% in 4Q21 to 6.4% in 4Q22 with the highest rate at 13.1% in the Natomas/Northgate submarket and the lowest rate at 0.9% in the Auburn/Newcastle submarket.
The asking lease rate stayed flat at $0.77 from 3Q22 to 4Q22. This was a $0.07 increase from 4Q21. The asking lease rate was highest in the South Sacramento submarket at $0.93 and lowest in the Marysville/Yuba City submarket at $0.50.
Total leasing activity saw a YOY 19.2% decrease from 2.42M SF to 1.95M SF in 4Q22, and there was a 59.2% decrease YOY in total sales volume from 2.42M to 917k SF in 4Q22.
Direct net absorption decreased 74.7% from 948,980 SF in 4Q21 to 240,310 SF in 4Q22. The largest negative total was in the Davis/Woodland submarket at negative 225,451 SF and the largest positive total was in the Natomas/Northgate and Metro Air Park submarkets at 158,862 SF.
YOY SF deliveries demonstrated a decrease of 5% from 3,961,520 SF in 4Q21 to 3,763,350 in 4Q22.
ECONOMIC REVIEW
Sacramento County unemployment rates increased from 3.4% in 3Q22 to 4% in 4Q22. This is down from the 5.7% unemployment rate from 4Q21.
Industrial sector regional employment had mixed results with trade, transportation, and utilities adding 3.8k jobs YOY, while manufacturing added 0.4k jobs, and construction added 1.1k jobs in that timespan.
Companies looking for industrial workplaces have been up and down month to month; trade, transportation, and utilities added 3,700 jobs between October and November 2022, while manufacturing stayed flat, and construction lost 1,600 jobs.
Overall, there were 4,400 new jobs added in the Sacramento-Roseville-Arden-Arcade Metro area between October and November 2022, indicating that trade, transportation, and utilities is an industry that is doing well despite the marketplace.
Total Goods Producing and Manufacturing jobs were up 2,400 YOY, a 1.5% increase in the Sacramento-Roseville-Arden-Arcade Metro area.
NEAR-TERM OUTLOOK
The trend of vacancy rates staying low and asking lease rates rising appears to be continuing. Even though there is 5 million SF of development underway, new construction cannot outpace older buildings becoming obsolete.
Even if investment activity slows due to rising interest rates and record low cap rates, property values are not expected to dip because of the demand and increased costs of these new buildings due to construction and raw material price hikes.
An application has been submitted to tear down an older industrial site to redevelop the 2.26-acre site into 82 three-story townhomes. Proposals like this have also been made for office building in Sacramento and indicates that even when asking rates are going up and demand is high, there is still a need for housing in the area.
While some older industrial is being converted to residential, it does not stop industrial from taking over other sectors. For example, there is a project that to convert former retailer Fry’s site into a 155,000 SF industrial building in North Sacramento.
Industrial ranging from 10k SF – 50k SF with surplus yard should remain active due to continued construction activity and logistic firms that may need larger trailer yards.
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