Open Office

Despite high vacancies, Sacramento’s office market is full of potential

Back Article Apr 24, 2015 By Russell Nichols

Bad news first: Vacancies in the Sacramento office sector remain high, there were no new construction projects in 2014 and average asking lease rates stayed flat at $1.69 per square foot per month. But these stats are yesterday’s news, say real estate analysts.

Looking ahead, a more promising picture of the market shows the Capital Region’s office sector continuing to rebound. The building moratorium in Natomas could be lifted this year, and downtown, the new Kings’ arena coming in 2016 is expected to be a game-changer for real estate.

“Overall, it’s more of a general optimism,” says Nuriddin Ikromov, assistant professor in the College of Business Administration at Sacramento State. “This sense of revitalization makes the Sacramento area more attractive to businesses and companies looking for offices.”

Hints of this shift were evident last year. By December, office occupancy had reached a 6-year high, and there were more office tenants moving in than out in 2014. The Sacramento office market had a positive net absorption of more than 518,500 feet.

The region’s vacancy rate dropped to 19 percent, but this is still above the 13 to 15 percent equilibrium rate. Some markets, however, are higher in demand than others. Ikromov highlights Roseville and Rocklin, which have improved significantly with a positive net absorption of more than 180,000 square feet.

He also suggests that West Sacramento and midtown might be areas worth checking out for good deals. But in those markets, vacancy rates are low (around 10 percent), so finding a place for the right price could be a challenge.

“It’s good to be a property owner in midtown and West Sacramento because you won’t have too much empty space,” he says. “But to have a good deal, you also need to consider the price, and the prices in those areas are obviously higher.”

Highs and Lows

* For Sacramento, the average asking lease rates for office buildings in 2014 was $1.69 per square foot per month.

* Strongest Market: Downtown ( $2.16 )

* Weakest Market:Citrus Heights and  Orangevale ( $1.09 )

* The type of building plays a big role in determining lease rates. Buildings are categorized in three classes, A to C, depending on quality and location.

* In the Sacramento Region, class A buildings had an average lease rate of $2.05 per square foot. On the other end, class C buildings averaged $1.64 .

On the other end, markets struggling to lease office space include Arden-Arcade, where vacancy rates are between 26 and 29 percent, and North and South Natomas, in the mid-20s.

In pockets where demand is low, he says, landlords often use various tactics to entice potential tenants. For instance, rent might be $1.50 per square foot, but with a 5-year contract, the landlord might offer six months or less free, adjusting to the state of the market. These concessions, however, are not reflected in the lease rates, Ikromov says. Neither are the allowances landlords provide for tenant improvements, which decrease when the market is on the rise.

Despite the office market’s overall upswing, Sacramento still has a lot of space to fill. Analysts do not expect any speculative building in 2015 because supply is already so high. A real boost would need to come from an influx of tenants beyond the region, says Scott Rush, first vice president of office properties with CBRE.

“We have not seen an influx of tenants from the Bay Area,” he says, “and that’s what the Sacramento Region needs.”

Rush has noticed the trend of tenants moving back downtown from the suburbs. He cannot say whether this surge is a result of the planned arena or just because the bosses live there.

Consider the former Capital Wholesale Electric building at 12th and R streets. The building was purchased last year by Heller Pacific Inc. and its partner, Ridge Capital, but two tenants have already committed to move into the space.

Market One Builders, a construction firm, will relocate from Natomas. HGA, a national architecture firm, will be moving downtown from its regional office in Roseville.

“We really were fortunate and blessed to have two quality companies come to the building early, sign leases and commit to the project before we even submitted our application to the city for improvements,” says Michael Heller, president of Heller Pacific Inc. “That’s not the norm.”

Heller attributes this “flight to infill” to the forthcoming arena and the buzz surrounding it. He says more construction and design companies, especially suburban-based firms, are gravitating to the central city, where the action is.

“The arena has caught everyone’s imagination, and I think everyone wants to feel part of this dynamic shift happening in the city of Sacramento,” he says. “It’s contagious.” 

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