WESTERN SNAPSHOT, MARCH 2007

Sacramento Industrial Market

Fondale

The Sacramento industrial market is notable for its continued stability and lack of intense volatility. The primary reason for the sector’s stability relative to supply and demand is the concentration of market share among a small group of top local developers. At this time, the supply of industrial-zoned, developable land is finite. In some cases, land prices have doubled in the past 18 to 36 months to around $4.50 to $7.50 per square foot, largely because of the huge appetites of residential developers to buy land. With housing in retreat at the moment, land prices are stabilizing.

The stabilization in the sales of small owner/user buildings (20,000 square feet or less) is a notable trend. In the last 3 years, the “commercial condo” and user/owner micro-market has been driven by historically low interest rates and exceptional marketing. As interest rates and construction costs have risen, the attractiveness of the investment peaked and demand waned, particularly in B- and C-grade interior submarkets. The market for owner/user commercial and industrial buildings remains steady, however, in select suburban areas where business owners live such as the Roseville, Rocklin, Sunrise and Elk Grove submarkets.

Vacancy & Rental Rates

In general, Sacramento industrial vacancy rates are reflective of a balanced market and range from approximately 10 to 12 percent. Landlords aren’t compelled to make significant lease concessions, and tenants aren’t facing the prospect of sudden increases in asking rents.

Industrial pricing has increased for newer buildings in the last couple of years, primarily driven by the cost of new construction. New buildings in the 20,000- to 100,000-square-foot range are leasing for $0.32 to $0.40 per square foot NNN, and spaces of 5,000 to 20,000 square feet are leasing for $0.37 to $0.50 per square foot NNN. Recently constructed buildings of 100,000 square feet or greater are leasing at an average of $0.28 to $0.35 per square foot NNN (if you can find them) for unimproved shell. Industrial space users should expect to pay premiums in the desirable submarkets of Roseville, Rocklin and the foothill community of El Dorado Hills.
Hot Submarkets

One major project that is likely to influence Sacramento’s industrial market in the near future is Metro Air Park. When this approximately 1,800-acre development begins to open in the next year to 18 months, it will be the largest industrial park in the metro area to come on line in many years. Metro Air Park is located just east of Sacramento International Airport and adjacent to Interstate 5. Numerous local developers are taking part in the mammoth project including The Buzz Oates Group of Companies, Massie & Co. and EJM Development Co.

In addition, there has been a surge of development activity in the Northgate area and along the Power Inn corridor. In the Northgate submarket, near the junction of Interstate 80 and Interstate 5, location and demand come together to create a very favorable environment for industrial development. Local developer Joe Benvenuti of J.B. Co. has long been a major player here and his most recent project, Interchange Business Park, continues to see excellent activity.

Perennial development leader Buzz Oates and his company are active in the industrial area along Power Inn Road near Highway 50 with 20,000- to 70,000-square-foot for-lease product. First Half Forecast for 2007

With the Sacramento economy generally strong and steady, expect to see the industrial market maintain historical averages for leasing activity and absorption for most, if not all, of 2007. Even though residential construction is in a downward cycle, overall, the construction industry is still strong in California’s state capital. The slowdown in housing has not yet affected leasing in the commercial markets, though time will tell if it does.

There is one counterpoint to this stability. Sacramento has limited availability in the large distribution market — buildings of 100,000 square feet or more — and this is especially true with state-of-the-art distribution and logistic centers, which are coveted by Fortune 1000 companies. Without available product for this market niche, large companies will likely continue to migrate to areas south of Sacramento like San Joaquin County.

John Fondale is an industrial specialist for TRI Commercial in Sacramento.

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