SACRAMENTO OFFICE vacancy rates rose to 11% in 1Q23 from 10.2% in 1Q22 and 10.7% in 4Q22, a 7.8% YOY increase and a 2.8% QOQ increase, as the negative economic outlook has forced tenants to re-think space needs among other difficult business decisions.
THE ASKING LEASE RATE grew 2.8% YOY and remained stable QOQ at $2.18/SF in 1Q23.
THE AVAILABILITY RATE experienced a YOY increase of 7.3% and a QOQ increase of 9.6%. Specifically, the availability rates rose to 15.1% in 1Q23, up from 14.1% in 1Q22 and 13.8% in 4Q22. Company layoffs and reduced space requirements have led to ample sublease space on the market as leases come to term.
TOTAL LEASING ACTIVITY rose by 30.5% YOY from 729,140 SF in 1Q22 and by 18.5% QOQ from 802,968 SF in 4Q22 to 951,813 SF in 1Q23. Sublease activity decreased YOY by 6.1% but increased by 136.4% QOQ from 10,224 SF in 4Q22 to 24,168 SF in 1Q23.
TOTAL SALES VOLUME for 1Q23 had a 52% decrease YOY and a 38.3% decrease QOQ from 778,098 SF in 1Q22 and 605,340 SF in 4Q22 to 373,703 SF in 1Q23 indicating that buyers may be exercising caution in the current economic climate.
DIRECT NET ABSORPTION reduced to 228,209 SF in 1Q23 from 346,792 SF in 1Q22 and 98,830 SF in 4Q22, a 165.8% YOY decrease and a 330.9% QOQ decrease demonstrating the continued downsizing of space in the office market.
IN SACRAMENTO COUNTY, the unemployment rate increased to 4.3% this quarter, up from 3.5% in 4Q22. Additionally, California also experienced a slight uptick in unemployment, with the rate rising from 4.1% in 4Q22 to 4.3% this quarter.
OVER THE PAST YEAR, the Professional Business Sector in the Sacramento-Arden-Arcade-Roseville MSA gained 9,250 jobs, bringing the total to 149,750 jobs in 1Q23, compared to 140,500 jobs in 1Q22. However, on a QOQ basis, the sector lost 1,750 jobs, decreasing from 151,500 jobs in 4Q22 to 149,750 jobs in 1Q23. The reduction in jobs can primarily be attributed to recent layoffs as a consequence of the economic downturn.
DOWNTOWN SACRAMENTO’S PANDEMIC recovery has been difficult compared to other cities across the nation. Downtown Sacramento has an overall vitality index of 60.5 out of 100 which is measured based on several factors including office space trends. Even though Sacramento’s downtown office market has had a poorer post-pandemic performance compared to many of the nation’s larger cities, Sacramento has outperformed several bay area cities. Plus, Sacramento is recovering much faster in the travel and tourism sectors which will provide opportunity and hopefully revitalize the Sacramento economy.
WHILE SOME COMPANIES have accepted work-from-home as the new normal, many executives are planning on increasing office traffic by focusing on building quality and amenities. The desire for higher quality space and longer-term investments has caused great competition for Class A buildings which make up around 28% of Sacramento Office buildings. Class B buildings make up a much larger amount, about 51%, but many of these buildings need upgrades and other incentives to compete with the high demand for Class A buildings. On the other hand, Class C buildings may struggle the most to get leases, so investors may gravitate towards repurposing.
CONTINUED LAYOFFS, reduced leasing activity, higher vacancy rates, and interest rate increases have contributed to a negative economic outlook. Although loans are coming to term in this unfortunate economic environment, borrowers have time to make adjustments to protect their investments as loans come to maturity. One type of investment that may be less likely to receive bank assistance, such as refinancing, is Class C Office buildings.
FINANCE AND INSURANCE BUSINESSES are proving to be strong allies for the office market, as tenants from these sectors have been more aggressive with deals compared to tenants from other sectors. This can be attributed to their comparatively stricter work-from-office policies.
Click here to subscribe to Kidder Mathews market research.