Sacramento Office - Kidder Mathews

Sacramento Office - Kidder Mathews

Real Estate Market Review NORTHERN CALIFORNIA | Sacramento 1st Quarter 2017 Sacramento Office Market Forecast Trends Absorption Vacancy Rental Rat...

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Real Estate Market Review NORTHERN CALIFORNIA | Sacramento

1st Quarter

2017

Sacramento Office Market Forecast Trends

Absorption Vacancy Rental Rate New Construction

Notable Lease Transactions JLM Energy Inc. 3735 Placer Corporate Drive, Rocklin 39,869 s.f. Leased Department of Managed Health Care 980 9th Street, Sacramento 27,971 s.f. Leased Kaiser Permanente 906 G Street, Sacramento 17,037 s.f. Leased

Notable Sale Transactions Barker Pacific Group Olympus Corporate Center (3001-3013 Douglas Blvd), Roseville 191,248 s.f. Purchased for $33.85M or $177/s.f. Ridge Capital, Inc. Slate Creek Corporate Center (3300-3500 Douglas Blvd), Roseville 147,280 s.f. Purchased for $23.15M or $157/s.f. Ethan Conrad Properties One Capital Center (3100 Zinfandel Drive) Rancho Cordova 129,000 s.f. Purchased for $16.3M or $126/s.f.

After ending 2016 on a high note, with record investment activity and widespread absorption gains, the Sacramento office market relaxed slightly during the first quarter of 2017. Office properties marketwide saw 166,745 s.f. of negative net absorption, increasing total vacancies to 11.4%, though the downtown area held steady at 8.6%. Most large lease and investment transactions during the first quarter took place in suburban submarkets, as tenants searching for more space, on-site parking, and lower rents considered alternatives like Natomas, Point West, and Roseville. Asking rents averaged $1.78 full service in the first quarter, ranging from nearly $2.50 in the downtown area to the $1.30s in Rio Linda and Citrus Heights, and were up 2.3% year-over-year overall. The local economy remained strong, keeping unemployment around 5% throughout the quarter, and the October 2016 opening of the Golden 1 Center has also benefited downtown Sacramento office landlords. Ongoing investment activity, particularly from buyers based outside of the metro area, reflects confidence that the market will continue to grow over the coming quarters. This quarter’s 166,745 s.f. of negative net absorption was just a blip on the radar after the Sacramento market gained nearly 1.2 million s.f. of occupied office space over the previous two quarters. Natomas/Northgate was the first quarter’s positive absorption leader, picking up 39,937 s.f. as the Department of Human Assistance moved into 81,225 s.f. at 4450 E Commerce Way and the engineering consulting firm Cardno took over a 10,425 s.f. space at 2890 Gateway Oaks Drive. On the flipside, the Highway 50 Corridor dropped 218,416 s.f. this quarter, as Verizon Communications left 104,569 s.f. at 10730 International Drive in Rancho Cordova. Vacancies held at 8.6% in downtown Sacramento and ticked up to 12.1% across the suburban submarkets, though most remained tighter than they were at this time last year. Folsom, which was virtually unchanged with 6,393 s.f. of positive net absorption this quarter, has seen a 300-basis-point decline in its vacancy rate year-over-year. Leasing activity this quarter totaled 1,239,762 s.f. over 396 transactions, in line with the levels seen in recent periods, with suburban submarkets accounting for an increasingly large share of the pie. A lack of large-scale downtown availabilities has led bigger tenants to look toward alternatives like Natomas, Roseville, and the Highway 50 corridor, each of which saw more than 200,000 s.f. leased over the past three months. The solar energy Continued, page 2 1st Quarter 2017 | 1

Area Review Submarket Statistics Direct Vacancy Rate

Total Vacancy Rate

Total Available Rate

Q1 Net Absorption

YTD Net Absorption

Quarterly Leasing Activity

YTD Leasing Activity

Rental Rate

Submarket

Total Inventory

Downtown

19,774,239

8.50%

8.60%

9.40%

2,021

2,021

295,118

295,118

$2.49

Suburban

76,841,363

11.70%

12.10%

14.90%

(168,766)

(168,766)

1,044,644

1,044,644

$1.69

Auburn/Lincoln

1,677,359

5.60%

5.60%

7.30%

5,118

5,118

5,556

5,556

$1.65

Campus Commons

1,468,779

11.70%

11.70%

18.50%

7,941

7,941

13,380

13,380

$2.06

Carmichael/Fair Oaks

1,555,332

13.10%

13.10%

16.20%

(47,872)

(47,872)

17,207

17,207

$1.26

Citrus Heights/Orangevale

1,832,851

11.10%

11.10%

14.00%

14,772

14,772

17,107

17,107

$1.39

Davis/Woodland

2,508,984

8.50%

8.50%

9.30%

(11,146)

(11,146)

29,979

29,979

$1.92

East Sacramento

2,374,943

4.90%

5.40%

6.10%

8,687

8,687

4570

4,570

$2.11

El Dorado

2,058,275

20.10%

20.10%

27.00%

5,081

5,081

22,774

22,774

$1.60

Elk Grove

1,999,041

9.30%

9.30%

10.20%

4,709

4,709

23,389

23,389

$1.95

Folsom

4,940,740

7.90%

8.50%

10.50%

6,393

6,393

53,957

53,957

$1.90

Highway 50 Corridor

17,841,018

14.40%

15.10%

17.80%

(218,416)

(218,416)

219,229

219,229

$1.58

Howe Ave/Fulton Ave

2,788,843

19.00%

19.00%

22.00%

(2,817)

(2,817)

32,608

32,608

$1.61

Midtown

4,280,777

6.40%

6.50%

9.00%

6,975

6,975

29,432

29,432

$2.06

Natomas/Northgate

6,831,325

13.70%

14.40%

16.60%

39,937

39,937

181,495

181,495

$1.78

Point West

2,906,940

16.60%

16.60%

22.00%

(7,868)

(7,868)

39,666

39,666

$1.68

1,144,537

23.40%

23.40%

28.80%

9,250

9,250

0

0

$1.34

12,020,299

9.60%

10.00%

12.50%

(38,504)

(38,504)

181,772

181,772

$1.78

Rio Linda/N Highlands Roseville/Rocklin South Sacramento

3,813,272

9.80%

9.80%

14.60%

14,427

14,427

54,041

54,041

$1.69

Watt Ave

2,660,909

10.40%

10.40%

14.70%

19,031

19,031

5,592

5,592

$1.41

West Sacramento

2,137,139

7.50%

7.50%

9.30%

15,536

15,536

12,890

12,890

$1.78

Class A

26,015,788

10.60%

11.10%

12.60%

(248,095)

(248,095)

283,084

283,084

$2.18

Class B

44,714,730

11.10%

11.40%

14.30%

56,664

56,664

691,092

691,092

$1.73

Class C

25,660,952

11.50%

11.50%

14.30%

24,686

24,686

265,576

265,576

$1.45

Total

96,391,470

11.10%

11.40%

13.80%

(166,745)

(166,745)

1,239,762

1,239,762

$1.78

equipment supplier JLM Energy signed the quarter’s largest lease, taking 39,869 s.f. at 3735 Placer Corporate Drive in Rocklin. In Downtown Sacramento, Kaiser Permanente continued to increase its presence in the market, grabbing 17,000 s.f. on the fifth floor of 906 G Street, one of the few downtown availabilities that met the healthcare provider’s parking requirements.

software firm Inductive Automation satisfied its expansion needs with a $5 million purchase at 90 Blue Ravine Road, where it will grow into 56,000 s.f. Inductive Automation, which makes the Ignition industrial automation platform, has 100 employees and will have room to add 200 more after it moves into its new offices in July.

While the downtown area was the focal point of the market’s 2016 fourth-quarter investment activity, suburban areas enjoyed the majority of the action over the past three months. Roseville saw two multi-building office complexes change hands, led by the Olympus Corporate Center at 3001-3013 Douglas Blvd, which went to Southern California-based Barker Pacific Group for $33.85 million or $177/s.f. This is Barker Pacific’s second notable Roseville play, after it acquired the Lava Ridge Business Center for $27.6 million last year. Down the street, Ridge Capital, Inc., shelled out $23.15 million for the Slate Creek Corporate Center at 33003500 Douglas Blvd, which comes out to $157/s.f. The largest single structure investment sale involved One Capital Center, a 124,000 s.f. asset at 3100 Zinfandel Drive in Rancho Cordova, which went to the local investor Ethan Conrad Properties for $16.3 million or $126/s.f. On the owner/user side, the Folsom

As developers await higher rental rates to justify new construction in downtown Sacramento, the South Natomas area is home to a handful of new projects that will add to its office inventory. During the first quarter, Perkins, Williams & Cotterill Architects filed plans to build a 60,000 s.f. office structure at 2500 River Plaza Drive, adding to the existing six-building complex. Meanwhile, Bannon Investors, which owns the Gateway 2020 building, has proposed a pair of 90,000 s.f. projects in the submarket, one on a sixacre site near Gateway 2020 and another at the corner of West El Camino and Natomas Park Drive. The Natomas/Northgate submarket has seen vacancies dive from nearly 20% in the second quarter of 2015 to 14.4% this quarter, and rental rates there have climbed faster than the market average, rising by 3.3% year-over-year to $1.78.

2 | Sacramento Office Real Estate Market Review

Data Source: CoStar

VACANCY VS ASKING LEASE RATE

VACANCY VS AVAILABILITY

18%

$2.30

16%

$2.15

14%

$2.00

12%

$1.85

10%

$1.70

8%

$1.55

6%

$1.40

4%

$1.25

20%

FORECAST

18%

16%

14%

1Q15

17

16

10%

1Q

15

20

14

20

13

20

12

20

11

20

10

20

09

20

08

20

07

20

06

20

05

20

04

20

03

20

02

Vacancy

20

01

20

20

20

00

12%

2Q15

3Q15

Vacancy

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

Availability

Asking Lease Rate (PSF)

AVERAGE SALES PRICE & CAPITALIZATION RATES

ASKING LEASE RATE

$300

12%

$2.30 FORECAST

$2.15 $250

9%

$2.00

$200

6%

$150

3%

$1.85

$1.70

$1.55

17

$1.40

20

16 20

15 20

14 20

13

12

20

11

20

20

10 20

09 20

08

07

20

06

Average Sales Price (PSF)

20

20

05 20

04 20

03

02

20

20

20

20

01

0% 00

$100

NET ABSORPTION - HISTORICAL

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

Class B-C (PSF)

17

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

20

15 20

15 20

14 20

13 20

20

20

20

20

20

20

20

20

20

20

20

20

20

12

-200K 11

-1M 10

0

09

0

08

200K

07

1M

06

400K

05

2M

04

600K

03

3M

02

800K

01

4M

00

1M

kiddermathews.com

2Q15

NET ABSORPTION - QUARTERLY

5M

Net Absorption (SF)

1Q15

Class A (PSF)

Cap Rate

Net Absorption (SF)

1st Quarter 2017 | 3

kiddermathews.com

Market Breakdown Q1 2017

Q4 2016

Q1 2016

Annual % Change

Offices

Vacancy Rate

11.40%

11.20%

12.40%

-8.10%

Seattle 206.296.9600

Availability Rate

13.80%

13.90%

15.40%

-10.40%

Asking Lease Rate

$1.78

$1.76

$1.74

2.30%

1,239,762

1,267,725

1,094,718

13.20%

681,347

1,723,273

1,145,167

-40.50%

-166,745

656,263

-139,650

N/A

Bellevue 425.454.7040 South Seattle 206.248.7300 Tacoma 253.722.1400

Leased SF Sold SF Net Absorption

HISTORICAL LEASING ACTIVITY & ASKING LEASE RATES

Olympia 360.705.2800

SF

$/SF

Portland 503.221.9900

8M

$3.00

San Francisco 415.229.8888

7M

$2.75

6M

$2.50

Redwood Shores 650.769.3600

Orange County 949.557.5000 Inland Empire 909.764.6500 San Diego 858.509.1200 Carlsbad 760.430.1000

Leasing Activity

17 1Q

15

15

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Long Beach 562.472.0071

14

$1.00 13

0 12

Commerce 323.727.1144

11

$1.25

10

1M

09

Los Angeles 213.880.5250

08

$1.50

07

2M

06

Roseville 916.751.3600

05

$1.75

04

3M

03

$2.00

02

4M

Sacramento 916.970.9700

01

$2.25

00

5M

Silicon Valley 408.970.9400

Asking Lease Rate (FSG)

HISTORICAL SALES SF & MEDIAN SALE PRICE SF

$/SF

5M

$250

4M

$210

3M

$170

2M

$130

1M

$90

0

$50

Total Square Feet of Sales

17 1Q

20 16

20 15

20 14

20 13

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

Designated Broker Reed Payne | LIC #00818935

20 03

Reed Payne Executive VP, Brokerage Northern California 415.229.8888 [email protected]

20 02

Contact

20 01

Phoenix 602.513.5200

20 00

Reno 775.301.1300

Median Price/Building SF

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

4 | Sacramento Office Real Estate Market Review