MARKET DRIVERS
The direct vacancy rate rose 160-basis points (bps) since 1Q23 and 75-bps since 4Q23 to 5.7%. The South Sacramento Submarket remained the submarket with the highest direct vacancy rate at 26.1%. Alternatively, the Auburn/Newcastle and the Davis/Woodland submarkets had the lowest direct vacancy rates at 0.5% and 1.3%, respectively.
The total availability rate climbed from 6% to 7.9% in 1Q24, 190-bps since 1Q23. The Natomas/Northgate and Auburn/Newcastle submarkets retained their positions as having the highest and lowest availability rates, correspondingly, standing at 13.3% and 1.2%.
The asking lease rate fell 1.2% from $0.83 in 4Q23 and rose 2.5% from $0.80 in 1Q23 to $0.82 in 1Q24. Following the pattern from the previous quarter, asking lease rates remained highest in the East Sacramento submarket, reaching $1.62, and lowest in the Davis/Woodland submarket, at $0.55. Moreover, Flex properties commanded the highest asking lease rates at $1.07, while Warehouse & Distribution properties recorded the lowest asking lease rates at $0.74.
Total leasing activity for the first quarter of 2024 reached 950.1K SF marking a 64% decrease from 2.6M SF in the first quarter of 2023. Similarly, the total sales volume decreased by 23%, dropping from 965.8K SF in the 1Q23 to 743.5K SF in 1Q24.
Direct net absorption reduced from 563.8K SF in 1Q23 to -443.3K SF in 1Q24. In sharp contrast to the previous quarter, the West Sacramento submarket had the largest negative net absorption total at -167.6K SF and the Sunrise submarket had the largest positive net absorption total at 81K SF.
ECONOMIC REVIEW
Sacramento County unemployment rates rose to 5.2% in 1Q24, a 70-bps increase from the previous quarter and a 90-bps increase from the previous year.
The Industrial sector employment for Sacramento County decreased both from the previous quarter and the previous year. Both trade, transportation, and utilities and manufacturing employment decreased by 5.3K jobs and 700 jobs from the previous quarter.
Construction employment in the region rose by 4,200 jobs compared to the previous year but saw a decline of 3,200 jobs compared to the previous quarter. Despite being the sole industrial subsector to experience a year-over-year increase in jobs, Construction has exhibited greater vulnerability to economic change exhibited by fluctuations in employment numbers.
Deferred construction endeavors have become prevalent in recent years as developers await cost reductions and economic recovery. While the prospect of interest rate cuts may spur the initiation of new projects, the fiercely competitive labor market poses
additional hurdles. Developers now face the dilemma of either offering higher wages in a competitive labor market or extending project timelines.
NEAR-TERM OUTLOOK
The industrial sector, although still the top-performing commercial asset class, has been affected by the economic slowdown. Although construction projects for large distribution are ongoing, the surge in demand driven by the pandemic-induced e-commerce boom has subsided. Nevertheless, new construction projects have decreased to their lowest levels since before the pandemic, reducing the risk of oversupply. Smaller industrial spaces remain highly sought after but are challenging to find due to the absence of new industrial parks being developed. Rent growth in the industrial market stays strong due to low vacancy rates, resulting in tenants having less bargaining power for concessions. Yet, property owners are increasingly open to offering incentives to attract tenants compared to previous periods. 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.
Assembly Bill 1893 seeks to refine California’s builder’s remedy, particularly for the industrial sector, by prohibiting housing development on industrial land for environmental reasons. Projects with completed applications before April 1, 2024, are exempt from changes. Introduced by seasoned housing policymakers, the bill progresses through the legislature and could impact real estate development next year.
Sacramento’s River District is updating its 2011 master plan to convert aging industrial buildings to meet current needs. The plan will address financing, transportation, and mixed-use preferences. Community input and riverfront integration are crucial for setting a development vision, adapting industrial spaces to modern needs.
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