MARKET DRIVERS
Office vacancy rates increased 6.38% year-over-year (YOY) from 10.1% in 4Q21 to 10.7% in 4Q22. This was also a slight increase from 10.5% in 3Q22.
The asking lease rate rose 2.99% YOY from $2.12 in 4Q21 to $2.18 in 4Q22 and only a 1% increase quarter-over-quarter (QOQ).
The availability rate increased 5.43% from 13.8% in 4Q21 to 14.5% in 4Q22.
Total leasing activity decreased by 67.24% YOY from 1,896,095 SF in 4Q21 to 621,150 SF in 4Q22. Similarly, sublease activity decreased from 128,318 SF to 83,233 SF YOY.
Total sales volume decreased 57% YOY from $1.16 million in 4Q21 to 533k in 4Q22 suggesting buyer caution in the current economy.
Direct net absorption reduced from 612k SF in 4Q21 to 102k SF in 4Q22 as lessors decreased their office space usage.
ECONOMIC OVERVIEW
The unemployment rate in Sacramento County was down from 5.7% in 4Q21 to 4% this quarter, but this is higher than the 3.4% reported in 3Q22.
The Sacramento Metro Area added 34,700 non-farming jobs since 4Q21. The largest gains were made in Education and Health Services which added 11.6k jobs. The next two largest gains made were 6.8k jobs added in Leisure and Hospitality, and 5.1k jobs added in the Government sector.
The average weekly wages of all industries in Sacramento County was $1,360. This is 5% higher than the national average of $1,294.
In November, total nonresidential building construction starts declined by 25% – encompassing sectors like offices, warehouses, hotels, and shopping centers.
NEAR-TERM OUTLOOK
Companies are continuing to realize they require less space with hybrid work options and are downsizing. Massive layoffs in the tech industry do not help with the stagnation of this market.
It is expected that commercial real estate leasing and investment activity will be significantly slowed by higher interest rates and the prospect of a recession.
Some borrowers will face hardship because of higher vacancy rates, pressure on rents, slower leasing activity, and loans maturing in an environment with relatively high interest rates. One such group will be lower-grade office buildings that could fail to receive refinancing.
Despite the downturn there are still opportunities in the market; mezzanine debt, bridge loans and project finance can help close the gap on refinancing. There also are instances of properties that were undesirable as a lease moving quickly once being offered to be purchased.
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