SACRAMENTO-Sacramento market conditions have begun to stabilize over the past 12 months; however an imbalance between supply and demand still leaves tenants with enhanced leverage in the market. That is according to a recent Skyline report from Jones Lang LaSalle.

According to the firm, regional payrolls increased by 1.5% over the past 12 months, or 10,500 jobs. Total employment hit 936,500, up 1.7% from the same period 12 months ago. The unemployment rate remained unchanged at 9.8% in December. Over the past 24 months, the unemployment rate has dropped three percentage points from 12.8% to 9.8%–“a strong indication that the region’s job recovery is taking hold.”

Three of the five largest sectors in the region continued to add jobs on an annual basis, says the report. “Professional and business services expanded by 2,200 jobs helping bolster private-sector leasing activity in the downtown office market through the end of 2012. Federal and State government employment steadied at 222,200 jobs, unchanged over the 12-month period. The resolution of California’s budget through proposition 30 will likely lead to the expansion of several State agencies, and bring added job growth to this sector in 2013.”

Gains among office-using employment sectors in the past 12 months contributed to overall leasing activity and positive net absorption in 2012, says the report. Leasing activity within Sacramento’s Skyline, the prime Class A office assets in the Central Business District, tallied 826,000 square feet, nearly 90% of all Downtown leasing activity by volume. By comparison, the Skyline represents just 66% of the total office footprint within the Downtown submarket. Increased leasing activity drove vacancy rates down 110 basis points to 14.2% in the fourth quarter of 2012. “Although vacancy remains above the historic average of 9.6%, it has realized significant gains in recent quarters and now sits 200 basis points below the 36-month average of 16.2%.

“Notwithstanding the relative occupancy gains realized in recent quarters, asking lease rates for Skyline office space were relatively unchanged over the past 24 months and are 12.7% below levels reached during the peak of the market,” says the report. “As a result, tenants will continue to face minimal barriers to entry over the near term. Conversely, now may be the right time for investors to position themselves for potential acquisitions knowing lease rates could gain 10 to 12% over the next three to five years.”

See the graphs below for more from the report on the local market.