MARKET DRIVERS
Sacramento’s office vacancy rate rose to 11.3% in 4Q24, marking an increase of 20-basis points (bps) quarter-over-quarter (QOQ). Additionally, the availability rate increased to 15.1% in 4Q24, demonstrating a YOY rise of 90-bps and a QOQ increase of 40-bps. The state government has been moving their agencies from leased office space into state-owned buildings as part of their 2019 plan. This new supply from government-occupied spaces and smaller requirements from other office tenants have put upward pressure on vacancy and availability rates.
The average asking lease rate has remained steady at the record high rate of $2.19/SF in 4Q24. Rent growth has slowed over the past couple years as vacancies and availabilities are on the rise. Although rents have held still at high rates, landlords have been increasing concessions and incentives considerably to attract tenants and secure deals.
Total leasing activity was up 13% YOY, ending the year with 3.4M SF in volume. Although the total number of transactions were lower than the past three years, the volume was more as market experiences some momentum from larger occupiers. Almost double the amount of transactions were inked with tenants in the 25K+ SF requirement than last year, but still remains rare for larger deals as small leases continue to dominate office leasing throughout Sacramento.
After a slow three quarters of 2024, sales volume picked up considerably in 4Q. Approx. 1.5M SF sold in just 4Q 2024 alone compared to a cumulative 1.4M SF in the first three quarters combined. This quarter’s figure helped drive the annual volume to 2.9M SF, up 4% from 2.8M SF year-end 2023. Additionally, three of the top five largest transactions of the year took place in 4Q which pushed the average sale price up to $191/SF, a 64% increase from $119/SF year-end 2023.
The direct net absorption posted -184K SF in 4Q24 but ended the year at 720K SF of positive net absorption cumulatively for the year. Despite the 15-year record high of new deliveries in 2024, it did not affect net absorption because the entirety of the square footage is attributable to the May Lee State Office Complex which will be occupied by seven state agencies.
ECONOMIC REVIEW
The unemployment rate in the Sacramento MSA was 4.8% in November, unchanged from the month prior, and 30 bps above the year-ago estimate of 4.5%. This compares to California’s unemployment rate of 5.3% and 4.0% for the nation during the same period.
NEAR-TERM OUTLOOK
The office market continues to face substantial challenges, driven by increased vacancies and the rising cost of debt. Many lenders are choosing to allocate more of their portfolios to more reliable sectors and steering away from this asset class. Additionally, the growing trend among tenants to embrace long-term hybrid work models has further intensified the oversupply issue within the office market.
Fortunately, large-scale office construction has been minimal in Sacramento over the past 10 years. 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. The past three years have held steady at the record high rental rate but rent growth has slowed. It’s expected that rent growth in real dollars will fall and continue through the end of 2025. As companies continue to scrutinize their space needs closely, occupancy remains below pre-pandemic levels and will likely continue to fall into the coming year.
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