MARKET DRIVERS
Sacramento’s office vacancy rate increased to 11.5% at the start of the year in Q1, marking a 40-basis points (bps) rise year-over-year (YOY) from 11.1% in Q1 of 2024. Vacancy rates have grown steadily since the start of the pandemic and now reaches an almost 10-year historic high. The availability rate throughout Sacramento’s office market has hovered between 14-15% over the past couple of years. Q1 2025 experienced a slight decrease in overall availabilities QOQ from 14.9% to 14.8%, but unchanged YOY. Smaller requirements, slowing job growth, and new supply from government-occupied spaces have put upward pressure on vacancy and availability rates.
The average asking lease rate remained at the record high rate of $2.20/SF in Q1 2025 which has held steady for the last four consecutive quarters. Rent growth has slowed over the past couple years as vacancies and availabilities have continued to rise year after year. In the current environment of elevated concessions given by landlords, rent growth will most likely not improve in the near-term.
Total leasing activity fell 39% YOY to 657K SF in Q1. Small leases continue to dominate office leasing throughout Sacramento with the average deal size approximately 2.5K SF in Q1. Leases under 5K SF accounted for almost half of the leasing volume last year in 2024, the highest proportion of the past five years and this trend continues into early 2025.
Sales activity in the new year started off slow, dropping 47% YOY in sales volume from 690K SF in Q1 2024 to 363K SF in Q1 2025. This is the lowest number the market has experienced in over 10 years, with the exception of Q3 2024 that posted 326K SF in volume. Additionally, the average sale price fell to a new 13-year low at just $83/SF, possibly a reflection of the increase in distressed sales over the past year.
Office construction starts have been minimal over the last couple years, currently at a 7-year low in volume and 65% less than YOY. Of the 835K SF currently in the development pipeline, a majority of that is set to complete this year and only 25% of the inventory is still available for lease. Due to the estimated delivery time of construction projects being by year’s end, this may likely cause vacancy to rise in the near term.
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.
NEAR-TERM OUTLOOK
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.
Challenges persist for Sacramento’s office market, driven by increased vacancies and availabilities as the move-outs by the government leased spaces continue until Q2 2025. However, the gradual increase in office utilization by other office tenants will help stabilize availability within the market. Tenants are committing to longer lease terms as they now have a firm understanding of their space needs post pandemic. Additionally, the lack of speculative projects in the past decade has positioned the region for a quicker turnaround and minimizes any further upward pressure to vacancy and availability rates. Many are optimistic for a positive turning point in the near-term for the Sacramento office market as we continue to head into the rest of 2025.
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