MARKET DRIVERS
Sacramento’s office vacancy rate increased to 11.4%, marking a 60 basis points (bps) rise year-over-year (YOY) from 10.8% in Q2 of 2024. Although the vacancy rate sits at an almost 10-year historic high, it is still below the national benchmark. Specifically, Downtown Sacramento has been able to maintain a vacancy under 10% due to consistent demand, whereas many similar markets across the west have the highest vacancies in the downtown region.
The availability rate throughout Sacramento’s office market has hovered between 14-15% over the past couple of years. Q2 2025 experienced an increase in overall availability rates QOQ from 14.0% to 14.6%, but down from 14.9% YOY. Demand continues to be concentrated on the high-quality office properties, specifically focused on new inventory in recent quarters.
The average asking lease rate held steady at a record high of $2.21/SF for the second consecutive quarter since Q1. However, rent growth has slowed in recent years due to a consistent increase in vacancies and availabilities. With landlords continuing to offer elevated concessions, rent growth is unlikely to see improvement in the near term.
Total leasing activity dropped 12.3% QOQ and 29% YOY to 551K SF in Q2. Leases smaller than 5,000 SF have made up nearly 45% of total leasing activity over the past four quarters – the highest share recorded in the last five years. Additionally, slowing employment growth in the Sacramento market has resulted in smaller requirements for office users.
Sales activity the first half of 2025 trails behind that of last year, down 21% in sales volume when compared to the first half of 2024. With just 453K SF sold in Q2, this represents one of the lowest volumes in a 10-year span. After Q1 posted a 13-year low in sales price at $97/SF, Q2 reflected a slight increase at $118/SF, still hovering near record lows since last quarter. Shrinking deal sizes, coupled with increased distressed sales have directly impacted the market.
Office construction volume has been low, and new projects have been minimal over the last couple of years. With just 324K SF currently under construction, a 13-year low, the Sacramento office market may be positioned for a quicker turnaround than the great recession when overbuilding was prevalent resulting in excess supply and increased vacancies.
ECONOMIC REVIEW
The unemployment rate in the Sacramento MSA was 4.3% in May, down 20 bps from the month prior, but an increase in the year-ago estimate of 3.9%. This compares to California’s unemployment rate of 5.3% and 4.2% for the nation during the same period.
The return to office mandate for government employees was expected to begin July 1, but that has since been delayed another year as part of broader labor negotiations. Many anticipated the four days a week back in the office was going to help boost the local economy and foot traffic, especially in areas where there is a big presence by the state such as Downtown, South Natomas and Rancho Cordova.
NEAR-TERM OUTLOOK
Sacramento’s office market continues to face challenges, driven by rising vacancies and availabilities, particularly with government tenants vacating spaces until Q2 2025. However, the move-outs by the government leased spaces into state-owned office buildings prevent vacancies from reaching peak levels. Large sized transactions remain uncommon, but there has been a growing trend toward longer lease terms. While occupiers are not actively expanding, they now have a firm understanding of their long-term real estate needs and lease durations are gradually returning to pre-pandemic levels. Many continue to stay optimistic for a positive turning point in the near-term for the Sacramento office market as we continue to head into the second half of 2025.
Inflation and ongoing economic uncertainties over the past year have led tenants to closely reassess their expansion plans, with some opting to downsize as their needs evolve. At the same time, various proposed policies—such as tariffs, corporate tax cuts, and deregulation—remain undecided, making it challenging to forecast the market’s future trajectory. Once decisions are made about which policies will be implemented, clearer insights into their effects will emerge, allowing stakeholders to adjust their strategies accordingly.
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