WESTERN SNAPSHOT, MARCH 2005

Sacramento Retail Market

Jon Gianulias and John DuBois

More and more capital has been flowing into commercial real estate, in part because investors have shied away from the unsteady stock market economy. Given today’s  lending environment, loans can be fixed in the 5.0- to 5.25-percent range for up to 10 years. This results in yields that are better than alternative investments. The demand has continued to push cap rates down to the 6.0- to 6.5-percent range for new, well-located retail centers, with some selling at more than $500 per square foot.

Currently 11 significant retail projects are under construction in the greater Sacramento area, totaling more than 1.7 million square feet. The Northgate/Natomas submarket has the largest amount, with construction exceeding 660,000 square feet on Opus’ lifestyle/power center, Promenade at Natomas. Other active submarkets include: downtown, North Highlands, Elk Grove, Roseville/Rocklin and Auburn/Loomis. The majority of the retail projects are due to be completed by the end of the year and early 2006. In the first quarter,  more than 260,000 square feet of retail space was completed in the Folsom/El Dorado Hills submarket (Folsom Gateway by Evergreen).

Donahue Schriber can boast of many successful retail developments in the Sacramento market including: Elk Grove Commons at Bruceville and Elk Grove Boulevard; and Highland Reserve at Highway 65 and Pleasant Grove. Phase III of Laguna Village on Laguna Boulevard, Elk Grove by Pappas Investments, Elk Grove Marketplace by Saca Commercial, the highly anticipated downtown Safeway on 19th and R streets by Petrovich Development, and Opus’ Promenade at Natomas at Interstate 80 & Truxel Road are other new developments in the city. West Sacramento is also expanding with IKEA planning to build a 265,000-square-foot store along with Wal-Mart and The Home Depot off of Reed Avenue and I-80. In the past few years, United Growth of San Francisco has built more strip centers in Northern California than anyone.

Additionally, more expansions are planned by Wal-Mart-Sam’s Club, The Home Depot, Lowe’s Home Improvement Warehouse and most of the major grocers. Other new tenants who have entered the Sacramento market in the past year include Kohl’s, Sports Chalet, Panera Bread and Fazoli’s.

REITs and other institutional shopping center owners have been taking advantage of today’s hot market by selling certain assets that might not fit with their long-term goals. In Folsom, Donahue Schriber recently closed escrow on Willow Creek Town Center, which is shadow-anchored by Albertsons and Longs Drug, selling it in the 7 percent percent cap rate range. A few months later, Donahue Schriber purchased Town & Country Village, anchored by Albertsons and Trader Joe’s at Marconi Avenue and Fulton Avenue in Sacramento, for $44 million, also in the 7 percent cap rate range.

Last summer, Pan Pacific Retail Properties sold Laguna 99 in Elk Grove, which is anchored by Pak‘ N Save (Safeway) and shadow-anchored by Wal-Mart. A few months later PPRP bought two Elk Grove centers totaling 123,231 square feet: Bel Air Village at Calvine and Elk Grove Florin roads, anchored by Bel Air Grocer; and Laguna Park Village at Laguna Boulevard and Laguna Park Drive.

In fourth quarter 2004, Sacramento’s retail market broke records for development and tenant activity. The overall vacancy rate was 4.5 percent, down 1.1 percent from the prior year. Vacancy rates in the high-growth areas remain at record-low levels ranging from 1 to 2 percent. The 303,000 square feet of net absorption marked the sixth consecutive positive quarter. Average asking lease rates range from $1.50 to $1.76 per square foot NNN for existing retail centers in the greater Sacramento area. Shop space in community centers in the high-growth areas fetches above average asking lease rates of $2.25 to $2.75 per square foot NNN.

The retail investment market has never been so hot. The current investment market will remain strong as long as interest rates don’t rise too high, too fast. As soon as rates rise 100 basis points over their current level, the market will be in for tougher times as the gap between sellers’ and buyers’ expectations will widen until cap rates eventually follow interest rates. Construction costs are rising, development constraints have intensified, but there are still many very competitive developers bringing more retail into the Sacramento market. Sacramento has become a very diverse and strong retail market, which has become attractive to owners throughout the United State and abroad.

John DuBois and Jon Gianulias are senior vice presidents in CB Richard Ellis’ Sacramento office.

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