Vacancies at a 16-Year Low in Sacramento Office Market

SACRAMENTO—The Sacramento office market maintained its positive momentum in the third quarter of 2019, which is typically the slowest quarter of the year, according to Newmark Knight Frank’s third quarter research report. The office market posted 197,968 square feet of positive net absorption and brought the year-to-date total to a positive 621,605 square feet.

“This marks the 12th consecutive quarter of positive net absorption for the market. The overall vacancy rate also dropped to 10.8% from 11.2%,” according to Chris Lemmon, NKF executive managing director.

Downtown Sacramento led the quarter with 97,213 square feet of positive net absorption. This was largely due to the 96,300-square-foot WeWork lease signed at 660 J St. and the 23,380-square-foot lease with Delta Conveyance Design at 980 9th St. 50 Corridor East also had a solid third quarter with 65,136 square feet of positive net absorption, followed by Rocklin with 56,371 square feet of positive net absorption.

The leading submarkets at the end of the third quarter were Douglas Corridor of Roseville, Downtown and 50 Corridor East. To date, the Douglas Corridor of Roseville has posted 300,131 square feet of positive net absorption, while Downtown has posted 225,305 square feet, which combined makes up approximately 85% of the overall market’s positive net absorption year to date.

“Downtown Sacramento and 50 Corridor continue to see a lot of tenant activity from the state of California and Sacramento County, as both entities continue to expand in the market,” Kelly Dong, NKF Sacramento’s research lead, tells GlobeSt.com.

Roseville, though not a market that attracts much government use, continues to do well with non-government related uses, healthcare and private entrepreneurs growing footprints or looking for space. Given the amount of tenant activity in the submarket, NKF expects it to continue to do well in the fourth quarter. As previously noted, the Sacramento metropolitan region’s vacancy rate dropped from 11.2% in second quarter 2019 to 10.8%.

“The region has not seen a vacancy rate this low since 2003,” said Tom Heacox, NKF executive managing director.

West Sacramento led the area with a 4.6% vacancy, followed by Folsom with a 5.8% vacancy (after posting 44,386 of positive net absorption in the third quarter) and Rocklin with a 6.6% vacancy. Tenant activity continues to be strong. Other notable leaders are South Natomas at 6.6%, Elk Grove/Laguna at 6.6% and the Douglas Corridor of Roseville at 7.6%. As vacancy continues to drop, the lack of inventory will be felt in most of the top-performing markets and remain an issue for the foreseeable future. Healthcare, insurance, housing, state and local government, and engineering and technology continue to be market drivers.

“Investment activity remained strong in the third quarter. Investors in both the stabilized asset and value-add asset classes were very robust,” said Todd Eschelman, NKF executive managing director.

Overall, the third quarter continued the positive trends and reinforced the fundamentals of the Sacramento metropolitan market. Tenant activity has been continuous in a well-diversified number of fields, while both stabilized and investment capital continues to regard the region as a viable option for investment.

“Inventory remains low, which will give landlords confidence as they pull back on rental concessions, such as free rent and TI allowances, which are now approaching levels not seen since before 2008,” says Dong.

Both leasing and sales activity remain robust and have continued to encourage landlords to raise asking rents which are still below historical peaks in most submarkets. Although the market is not likely to top its total absorption total for 2018, it has enough momentum to put up good numbers and finish out the fourth quarter on a strong note, according to NKF.