Market Drivers
AMIDST falling demand and rising vacancies, direct asking lease rates have held steady at $2.05 FS in Sacramento for 2020. This represents a 6.22% increase over last year.
OFFICE AVAILABILITY increased 21.84% year-over-year in 2020 to 13.4%. Sublease availability rose 40 basis points YOY, standing at 1.1% at the end of 2020 for all class types.
LEASING ACTIVITY decreased 33% YOY from 4.1 million in 2019 to 2.7 million in 2020. The Highway 50 Corridor and the Roseville-Rocklin area were the most active markets for the year with 916,570 s.f. and 409,239 s.f. respectively. Sales volume has followed a similar trend, falling 31% YOY from 5.6 million in 2019 to 3.9 million in 2020.
DIRECT NET ABSORPTION dropped to negative 24,539 s.f. in 2020, breaking an eight year run of positive net absorption. The bulk of this shortfall happened in 4Q 2020 with negative 410,466 s.f.
THERE ARE currently 2.5 million s.f. of office development in the construction pipeline. Construction deliveries totaled 203,600 s.f. for 2020. Notable completions for 2020 include 511,800 s.f. in Centene Campus and 40,000 s.f. in Natomas Pointe Plaza. Both projects are in the Natomas area of Sacramento.
Economic Review
COVID-19 caused multiple business closures and company layoffs in 2020. Surviving companies adapted by letting employees work remotely. The pandemic prompted restrictions on non-essential businesses and retail properties, sharply dropping economic activity in Sacramento. California unemployment stood at 9.0% at the end of 2020, with the Sacramento – Roseville – Arden-Arcade Metropolitan Statistical Area reporting a 7.9% unemployment rate.
Near-Term Outlook
COVID-19 measures have reduced office demand in 2021 as companies allow employees to work from home. Direct asking lease rates are expected to hold firm, while tenants can hunt for deals amongst the growing amount of sublease space. Short-term leases become common as companies gauge how quickly the economy returns to normal.
Sources: Federal Reserve Bank of St. Louis; State of California Employment Development Department