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WESTERN SNAPSHOT, NOVEMBER 2005
Sacramento Industrial Market
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Winterling |
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During the late 1990s, Sacramento was the beneficiary of an unprecedented spillover demand from the San Francisco Bay Area and Silicon Valley. Bay Area industrial vacancy rates had dropped dramatically, fueled by the tech sector boom, and lease rates in the Bay Area doubling annually was not uncommon. Sacramento geared up for this increased industrial demand with new construction, but as the tech sector cooled in the early 2000s, space became more readily available and lease rates dropped dramatically in the Bay Area. The result for Sacramento in the early part of this decade was a vacancy rate hovering at nearly 17 percent, little demand (especially from larger corporate users) and a generally soft leasing market.
Much has changed for Sacramento in the past 5 years. With gross absorption in excess of 5 million square feet during the first half of the year, Sacramento is off to its best start in the last five years. This mid-year activity level has almost matched the total absorption for all of 2004.
The Sacramento area is off to a healthy balance of new construction relative to tenant lease activity. With 2.3 million square feet currently under construction, the vacancy rate has still dropped by approximately a quarter point since the start of the year to its current overall level at 13.26 percent. The majority of new product continues to be built by Buzz Oates Enterprises and JB Company.
Lease rates for smaller industrial spaces (less than 10,000 square feet) tend to range from 45 to 65 cents per square foot NNN. Rates for mid-size space (10,000 to 50,000 square feet) typically range from 30 to 40 cents per square foot per month NNN and larger spaces will normally range from 25 cents to 32 cents per square foot per month NNN. It is noteworthy that large blocks of space in Sacramento (100,000 square feet and more) have had a substantial increase in activity, and, as such, the inventory of such spaces is approximately half of what it was approximately 18 months ago!
A definite strong point for the greater Sacramento market over the past few years has been the activity from owner/users seeking to acquire their own building. This strong demand from typically smaller service companies, combined with low interest rates and limited inventory, has led to record prices for small buildings up to approximately 30,000 square feet. During the past few years, prices for small buildings have risen in many cases to more than $100 per square foot, an impressive price since many of these sales involved older buildings. New building shells can range from $100 to $150 per square foot depending on size, location and amenities.
Who would have believed a few years back that industrial land would be scarce? Well, it is. Many of the previously overlooked infill sites have been snapped up, and much of the potential “new” industrial land is being zoned for residential to feed the voracious demand of local home builders. Consequently, industrial land prices have risen dramatically. Pricing for bulk pieces in excess of five acres range from $3.50 to $7 per square foot, with smaller parcels ranging from $6 to $10 per square foot.
Overall, the local economy remains good with a strong balance of government and private sector employers; the local unemployment rate continues to hover around 5.3 percent. The trends of decreasing vacancy, moderate construction activity and continued upwards pressure on area lease rates should continue through the end of the year and into the foreseeable future.
Peter Winterling is vice president of Cornish & Carey Commercial's Sacramento office.
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