Industrial Report. Sacramento Industrial Insights Volume 4 4th Quarter Accelerating success.

Transcription

1 Industrial Report Sacramento Industrial Insights Volume 4 4th Quarter 2012 Accelerating success.

2 Sacramento Industrial Market Q4 HIGHLIGHTS Overall performance during 4rd Quarter 2012 in the Sacramento industrial market continued in the right direction, once again moving forward in the recovery process. The following is a summary of the industrial market during the quarter. VACANCY improved, dropping by 40 bps to end the three-month period at 12.9%. Total LEASING ACTIVITY continues to remain active with just over 1.8 million SF of available space being occupied during the quarter, yielding 720,631 square feet of positive net absorption from October through December. TENANTS still hold the upper hand in lease negotiations, and continue negotiating favorable concessions as part of their basket of bargaining tools. Quality product is now trading at a more affordable rate, which has negatively effected the desirability of older and out of date product. Tom Tyer SIOR INDUSTRIAL sales continue to get consummated, but on mostly favorable buyer prices MONTHLY LEASE RATES remained flat during the quarter at $0.40 per-squarefoot on a NNN basis. Lease rates will continue to favor tenants until economic stability returns to the region and long-term employment sources are identified. TENANTS in the market generally continue to remain steady, but consolidations and closures are still a factor. KEY INDUSTRIAL METRICS - 4Q 2012* TOTAL MARKET ADJUSTED There are NO NEW INDUSTRIAL BUILDINGS in the market as of December 31st, with the 200,000 square-foot Mori Seiki building, completed in September, being the last industrial facility UNDER CONSTRUCTION to be delivered in the market. OVER THE NEXT 90 DAYS we expect vacancy to slightly improve and net absorption to be net positive, while lease rates should remain unchanged. First Quarter FORECAST $0.40 NO CHANGE FROM 4Q 2012 ASKING RATES 12.8% DOWN 0.1% FROM 4Q 2012 VACANCY Vacancy 12.9% 16.8% Net Absorption 720,631 SF 438,644 SF Deliveries 0 SF 0 SF Construction 235,553 SF 235,553 SF Average Direct Asking Rate NNN/Mo 0.40 / SF $0.40 / SF *Statistics in the Total Market column include all flex & industrial buildings in the Sacramento MSA. Statistics in the Adjusted column does not include owner-occupied & government buildings. TOTAL INVENTORY BREAKDOWN NET ABSORPTION 175,000 SQUARE FEET VS. 720,631 SF 4Q ,000 SQUARE FEET VS 235,553 SF 4Q SQUARE FEET NO CHANGE FROM 4Q 2012 DELIVERIES Flex 10.5% 188 Million SF 89.5% Warehouse CONSTRUCTION P. 2 COLLIERS INTERNATIONAL

3 VACANCY Vacancy in flex inventory showed minimal change during the 4th Quarter of 2012, declining by 20 basis points to end the quarter at 19.6%. Warehouse space ended the quarter improved by 40 basis points dropping down to 12.1% KEY VACANCY METRICS - 3Q 2012 Current Quarter (Q4 2012) 12.9% Current Year (Q4 2012) 12.9% VACANCY COMPARISON 25.0% 20.0% 15.0% 10.0% 5.0% Previous Quarter (Q3 2012) 13.3% Previous Year (Q4 2011) 13.5% 0.0% Warehouse Flex JOBS, JOBS, JOBS User requirements in Sacramento s industrial sector will always be correlated to the health of the local economy, measured predominantly by employment, and vacancy typically declines when job growth is present. The following graphic illustrates the relationship between jobs and office vacancy in Metro Sacramento over the past three years. METRO EMPLOYMENT VS. INDUSTRIAL VACANCY As the graph indicates, vacancy has escalated since late 2009 as employment growth has declined. We are anticipating about 15,000 new jobs over the next year, having a limited, but positive impact on the regional vacancy rate, which we project will drop to % 12.4% 12.2% about 12.4% by the end of According to the Sacramento State University # Employed Sources: Bureau of Labor Statisics & CoStar Vacancy College of Business Administration s Sacramento s Labor Market & Regional Economy 2013 Outlook, positive growth is anticipated across every sector including construction, financial and government, which were three of the hardest hit sectors from the recession. Improvement in the housing market will bode well for the construction and financial sectors. The report also states that the housing prices have increased 14% year over year in September 2012, according to the Freddie Mac Housing Price Index. With the State of California on the track to budget surpluses after years of deficits forcing cuts in programs and spending, this sector, which reportedly accounts for 28% of the local labor market, is finally beginning to stabilize. In addition to these two vital sectors in the Sacramento economy, the health and education sectors are having a strong impact on job growth in the region. Business service activity is expected to increase now that the election season is over. The manufacturing sector is also expected to benefit from the long awaited end to some of the gridlock in Washington, with looming fiscal cliff and debt ceiling crisis at least partially settled. Additional growth in the region will be fueled by less traditional sectors including the green energy and biotech industries. Both are following what appears to be an exponential growth pattern. According to SACTO s 2012, 2013 Regional Report, both are becoming heavily rooted in the area, benefitting from the presence of research facilities in Sacramento State University and its close proximity to UC Davis. The Sacramento region is becoming a hub for green energy technology for the following additional reasons: Employment in Thousands Forecast Period As the capitol of California, Sacramento is home to green energy decision making organizations such as the EPA, California Energy Commission, California Air Resources Board, the Legislature and the Office of the Governor. The Sacramento Region is home to three of the top ten most progressive utility companies in the US; SMUD, PG&E, and Roseville Electric. The world s largest cluster of life science companies are headquartered in the adjacent San Francisco and Bay Area, and the Sacramento Region s biotechnology and life science industries are growing at a rapid pace, currently home to 100 biotechnology and medical device companies and 15,000 life science employees. 14.0% 13.8% 13.6% 13.4% 13.2% 13.0% 12.8% COLLIERS INTERNATIONAL P. 3

4 ABSORPTION ANALYSIS ON THE ROAD TO RECOVERY The industrial market experienced solid activity during 4th Quarter 2012, with just over 1.8 million square feet of available space being occupied during the three-month period yielding a positive net absorption level of 720,631 square feet. Though the four-quarter net level is only slightly positive, it does show a consistency of favorable activity and also supports our position of a slow pace of recovery. A review of the last four quarters of net absorption performance shows one quarter with net negative results and three with net positive leasing activity. Though we had a slightly erratic year, we expect more consistent positive results over the next 12 months. NET ABSORPTION Square Feet 1,500,000 1,000, ,000 (500,000) (1,000,000) (1,500,000) ORGANIC GROWTH IN THE REGION Sacramento s Sources: CoStar & Colliers Research industrial market experienced 224 new leases inked during the three-month period, with the largest of these being United Natural Food s signing a deal for 137,632 square feet at Alantown Drive in Roseville. United Natural Foods bills itself as one of the leading independent distributors of natural, organic and specialty foods in the United States. Another notable deal to take place this quarter is the Starwest Botanicals lease of 117,600 square feet at 161 Main Avenue in the Natomas/ Northgate submarket. The bulk herb and natural products on-line supplier started out 37 years ago as a small retail herb and spices shop and now is one of the major suppliers of organic herbs in the United States. They negotiated a seven year lease with seven months of free rent and 2.5% annual increases. 0 1Q Q Q Q Q Q Q Q Q Q Q Q 2012 Forecast Period 1Q 2013F 2Q 2013F 3Q 2013F 4Q 2013F HOT SUBMARKETS - 4Q 2012 SUBMARKET CLASS ABSORPTION Roseville / Rocklin Warehouse 115,478 SF Marysville / Yuba City Warehouse 107,556 SF Elk Grove / Laguna Warehouse 98,280 SF McClellan / North Highlands Warehouse 91,339 SF Davis / Woodland Flex 84,437 SF COLD SUBMARKETS - 4Q 2012 SUBMARKET CLASS ABSORPTION Northgate / Natomas Warehouse (33,894) SF Auburn / Lincoln Warehouse (30,045) SF McClellan / North Highlands Flex (24,504) SF Northgate / Natomas Warehouse (10,682) SF Northeast Warehouse (8,667) SF P. 4 COLLIERS INTERNATIONAL

5 LEASE RATES THE BLEEDING HAS STOPPED, LET THE HEALING BEGIN The average direct asking rent has remained flat over the previous quarter for all industrial properties (all types and all classes of buildings) throughout the Sacramento area at $0.40 per-square-foot (on a monthly, triple net basis). Last quarter we saw slight positive movement which signaled the first quarterly increase in the average rate since the Great Recession officially began in December Year-end numbers also produced positive results. Looking back over the five year period as lease rates plummeted year after year, 4th quarter results improved by $.01 over This pricing trend is consistent with a sector that is slowly working on a recovery. Westcore s purchase of 8 million square feet in the region should also help nudge up pricing, as their intent is to improve the quality and raise lease rates in their properties. An increase driven by such a large chunk of real estate is likely to help values in neighboring properties. Please note that these are the direct asking rents of all industrial property types and DIRECT AVERAGE ASKING RATE NNN $0.85 $0.75 FLEX Forecast Period WAREHOUSE Forecast Period $0.85 $0.75 LEASE RATE COMPARISON - 4Q 2012 /SF/MO (NNN) 4Q Q 2012 % Change Warehouse $0.36 $ % Flex $0.71 $ % MONTHLY LEASE RATE COMPARISON INCREASES Monthly Lease Rate $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Downtown / Midtown Richards Folsom / El Dorado Q Q Davis / Woodland Davis / Woodland $0.65 $0.55 $0.45 $0.65 $0.55 $0.45 MONTHLY LEASE RATE COMPARISON DECREASES $0.35 $0.35 $1.00 $0.90 $ Sources: CoStar & Colliers Research classes in the Sacramento reporting area, and that there is often a wide spread between ask and actual rents. Lease rates among the various product classes continue to hold their own. The warehouse sector rates have remained at approximately $0.36 over the last 12 months, while flex rates have only experienced a small decline over the last four quarters. $0.25 Monthly Lease Rate $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Marysville / Yuba City Auburn / Lincoln South Sacramento Q Q Roseville / Rocklin McClellan / North Highlands With movement in lease rates tied so closely to vacancy, and vacancy projected to steadily decline over the next 12 months, we do not expect any decline in rates in In fact, the rate in both warehouse and flex inventory is forecasted to remain level over the next four quarters, and might even start edging ever so slightly upwards. With respect to submarket lease rate activity, some submarkets during the past 12 months experienced an increase in their average direct monthly rate, while others posted a decline as indicated in the adjacent graphs. CONCESSIONS The 4th Quarter 2012 tenant allowances and free rent remain unchanged, and lease recasting continued to be prevalent. Tenants maintained their leverage, but with rates essentially bottoming and concessions maxed out, landlords are likely to find some relief in the next 12 months. Keep in mind though that the market is still saddled with high vacancy buildings that will keep pressure on existing ownership to use these tools to keep tenants upon renewal. COLLIERS INTERNATIONAL P. 5

6 CONSTRUCTION SUMMARY The only building currently under construction is a 70,000 square foot, class B industrial facility for Nippon Shokken USA, Inc. The new facility for the Japanese food manufacturer in the Southport Business Park will be used for management and sales offices and will be the first production facility in the United States. Delivery to the market is slated for February of INVESTMENT CLIMATE The most significant transaction for the quarter was the Westcore Properties purchase of the 11.1 million square foot industrial portfolio in California and the Midwest from the JB (Joe Benvenuti) Company. This 600 million dollar acquisition was purchased in a joint venture with a fund managed by DRA Advisors LLC. The bulk of the assets, 8 million square feet, of the portfolio are located here in Sacramento. A recent article from the company s website included the following statement from Marc Brutten, Chairman and Founder of Westcore Properties: We have been long- term believers in industrial markets supported by ports and agri-business, which has led us to invest heavily in greater San Francisco as well as the San Joaquin and Central Valley areas of Northern California. This acquisition gives us a strong foothold in Sacramento, a stabilizing market that has an outstanding distribution and transportation network. While this acquisition does demonstrate a continuation of the trend that has allowed opportunity in the market for buyers to seek out and acquire assets priced competitively due to the high vacancy rate in the market; this purchase also indicates (along with the 887,779 square foot Ellis Partners purchase of the Hines Office Portfolio), a growing interest from strong outside investment groups that see the positive signs of recovery in the market. CAP RATE ANALYSIS 8.5% 8.0% 8.3% 8.1% 7.5% 7.9% 7.0% 6.5% 6.0% 6.7% Source: Costar P. 6 COLLIERS INTERNATIONAL

7 HACKER LAB A two year, 10,500 square foot warehouse lease is not typically considered newsworthy, but in this instance, we feel it deserves some discussion due to its non-traditional use of real estate, and how it pertains to our changing economy and world. IN SACRAMENTO Certified HOT When Gina Lujan came home to Sacramento after previously developing a collaborative workspace for software developers in Berkeley, she started Hacker Lab, whose initial Sacramento space was 850 square feet above Pangaea Café on Franklin Boulevard. They quickly outgrew the space and in October of 2012, moved into a 10,480 square foot building at 1715 I Street in Midtown Sacramento. According to Dave Herrera, who represented the landlord in the deal, the space was difficult to lease due to the limited parking. Hacker Lab, however, did not require the traditional amount of parking because most of its 30 urban occupants either rode their bikes, skateboarded or walked to work. The large open midtown space was perfect for their use given their collaborative model and their desire to be in close proximity to coffee shops and pubs. As seen in the photographs below, they outfitted the space with partial walls to encourage more of a collaborative setting and use the roll up doors to allow sunlight and fresh air. When Gina initially went looking for a new space, she was only looking for about 3,500 square feet. Commitments from her major tenants stepping up and committing to take space in some of the private offices in the new space helped her take the plunge. When we recently spoke to Gina, she was already outgrowing the 10,500 square feet that she just moved in to in October. She has already leased up all of her private office spaces and her membership is growing quickly. Gina doesn t just offering private offices and hacker and maker space in a collaborative environment; she also hosts events, has a successful community outreach program and even has a jobs page listed on her website to attract more visitors and interest. In the parlance of commercial real estate, this executive lab space model appears to be a solution to a growing need in our new technology driven economy. With today s innovations allowing for smaller space and less human and equipment resources coupled with limited capital available for startup companies, we suspect that Gina s innovative business model will proliferate and more of these incubators will pop up around Sacramento. Occupants that operate their businesses out of the Hacker Lab Space include: C7GROUP : A consulting and technology services firm that improves business culture and workflow using the social web, mobile and cloud-based technologies. We help organizations better engage, communicate and collaborate with customers and employees. EPICODUS: An eight week, forty hour per week in-person class on programming. LCS TECHNOLOGIES INC.: An Oracle consulting firm. LEADWERKS is a fast & flexible development platform for building mobile games with native code. Coming soon to ios, Android, Windows, and Mac. MINNICK LLC: A media services firm that helps businesses of every size to overhaul their web sites and to develop new mobile apps. STREAM SEND: Creates marketing software for sending HTML newsletters & promotions. SHIELDS ELECTRIC: Provides logical, innovative solutions for electrical installations, upgrades and repairs to residential and commercial properties in the heart of Sacramento. VSP GLOBAL: An eye care and eyewear industry leader. IN SACRAMENTO IN SACRAMENTO COLLIERS INTERNATIONAL P. 7

8 SACRAMENTO INDUSTRIAL MARKET FEATURED DEALS SALE COMPARABLES Map # Property Location Rentable SF Sale Price Price/SF Submarket Buyer Seller Portfolio Sale 11,100,000 $600,000,000 $54.05 Multiple Locations Westcore Joe Benvenuti 9062 Union Park Way 10,955 $3,350,000 $ Elk Grove Michel Mayer Bernard Lynn 3005 Gold Canal Drive 12,800 $2,275,000 $ Rancho Cordova Stanley Zimmerman Carlo Mormorunni 890 Embarcadero Drive 164,330 $5,750,000 $34.99 West Sacramento Ethan Conrad Affymetrix 8280 Elder Creek Road 56,000 $1,001,000 $17.88 Power Inn Balbir Sohal Masonite Interior LEASE TRANSACTIONS Map # Property Location Leased SF Class Tenant Submarket Type Alantown Drive 137,632 A N/A Roseville/Rocklin New 161 Main Avenue 117,600 C Starwest Botanicals Natomas/Northgate New 3700 Seaport Blvd 100,008 B K/P Corporation West Sacramento Renewal 5201 Luce Avenue 72,000 C Jackson Sports Academy McClellan New 8372 Tiogawoods Drive 72,000 C Pepsi Beverages Power Inn Renewal COLLIERS TRANSACTIONS Map # Property Location Leased SF Class Tenant Submarket Type See #3 above 3700 Seaport Blvd 100,008 B K/P Corporation West Sacramento Renewal Mercantile Drive 71,608 A RC Travel & Tourism Rancho Cordova New Sunrise Park Drive 30,000 B Renew Packaging Solutions Rancho Cordova New 2431 Mercantile Drive 27,239 B Mailing Systems, Inc. Rancho Cordova Expansion 2020 Taylor Road 24,000 C Auto Nation Roseville/Rocklin New P. 8 COLLIERS INTERNATIONAL

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10 Industrial REPort 4th quarter 2012 Submarket Analysis 4Q 2012 Submarket Rentable Building Area Total Vacant SF Overall Vacancy Rate Net Absorption SF YTD Net Absorption SF Under Constrcuction SF Direct FS Average ASking Rate $/SF/Mo Auburn / Lincoln Warehouse 3,082, , % (30,045) 4, Flex 590, , % 2,212 6, Davis / Woodland Warehouse 17,439,927 2,532, % 84,437 (79,320) Flex 717, , % 332 (49,908) Downtown / Midtown Warehouse 3,218, , % (1,480) 17, Flex 253,904 67, % 0 (2,265) East Sacramento Warehouse 944, , % 0 (14,684) Flex 110,386 53, % 5,000 (3,060) Elk Grove / Laguna Warehouse 6,153, , % 98,280 82, Flex 395,919 51, % 1,585 8, Folsom / El Dorado Warehouse 4,179, , % 28,407 (56,728) Flex 1,944, , % 42,180 75, Marysville / Yuba City Warehouse 6,510, , % 107, , Flex 203,686 17, % McClellan / North Highlands Warehouse 18,719,030 3,606, % 91,339 (9,617) Flex 2,203, , % (24,504) 6, Northeast Warehouse 6,319, , % (8,667) 86, Flex 1,089, , % 5,802 12, Northgate / Natomas Warehouse 12,570,641 2,064, % (10,682) (187,048) Flex 2,225, , % (33,894) (26,834) Power Inn Warehouse 28,255,098 2,690, % 67, , , Flex 1,292, , % 11,827 8, Richards Warehouse 4,925, , % 28,720 18, Flex 291,148 45, % 48 8, Roseville / Rocklin Warehouse 19,715,297 2,935, % 115,478 89, Flex 3,257, , % 8, , South Sacramento Warehouse 4,803, , % 30,675 6, Flex 404,457 54, % 5,140 9, Sunrise / Highway 50 Warehouse 14,755,420 1,675, % 61, , Flex 3,470, , % (4,605) 61, West Sacramento Warehouse 16,685,209 1,557, % 35,727 (252,974) Flex 1,347, , % 1,670 26, Overall Warehouse 168,278,043 20,427, % 699, , , Flex 19,798,099 3,874, % 21, , Overall Market 188,076,142 24,301, % 720,631 1,198, , Results are from CoStar and include all industrial space existing, under construction, or under renovation greater than 5,000 square feet located in all core areas of Sacramento, Placer, El Dorado and Yolo counties. p. 10 Colliers International

11 Industrial Report 4th Quarter 2012 Your Experts Industrial Specialists Bud Applegate Industrial Sales & Leasing Steve Cippa Industrial Sales & Leasing Jim Dennis Associate Vice President Industrial Sales & Leasing Trent Thomason Vice President Industrial Sales & Leasing Tom Tyer SIOR Industrial Sales & Leasing Investment Specialists John Banchero Investment Sales Gretchen Becker Sr. Analyst & Transaction Mgr Investment Sales Steve Chamberlain Investment Sales Heath Charamuga Investment Sales John Jackson Vice President Investment Sales Colliers Management Ben Prater Investment Advisor Investment Sales Randy Dixon Managing Director John Shaffer Senior Research Analyst Colliers International p. 11

12 Author Gretchen Becker Sr. Analyst & Transaction Manager Colliers International 301 University Avenue, Suite 100 Sacramento, CA