SACRAMENTO INDUSTRIAL REPORT SACRAMENTO FIRST QUARTER 2014 www.colliers.com/sacramento Accelerating success. Colliers International 2014 First Quarter Report 1
KEY INDUSTRIAL METRICS - Q1 2014 Vacancy Total Market Adjusted 11.5% 14.3% Flex Vacancy 17.4% 20.1% COLLIERS INTERNATIONAL SACRAMENTO First Quarter 2014 Industrial Insight Net Absorption 359,504 SF 39,619 SF Deliveries 0 SF 0 SF Under Construction Flex Average Direct Rate Average Direct Rate 774,054 SF 548,014 SF $0.72/SF $0.34/SF N/A N/A FIRST QUARTER HIGHLIGHTS Overall Vacancy this quarter dropped by 20 basis points from 11.7% to 11.5% following the same slowly declining trend we have seen for the last 5 years. An overall warehouse vacancy of 11.5% was last realized mid-year of 2009. Overall Flex Vacancy has continued to decline for the sixth straight quarter hitting 17.4%; the lowest flex vacancy has been since mid-year of 2008. Total Absorption of Flex and space remained positive this quarter at 359,504 SF. This brings the total net absorption for the last 4 quarters to 2,003,882 SF, a 106,332 SF increase compared to what was absorbed by the end of 2013. There were no Deliveries of new supply during this quarter, but 548,014 SF of space is still under construction, divided among six developments. Asking Lease Rates dropped by $0.01 this quarter to $0.34 /SF. Asking rates continue to bump up and down by a penny quarter to quarter and estimates show that this will continue through 2014. Flex Asking Lease Rates have remained at $0.72 this quarter and continue to change by a few cents quarter to quarter. RANDY DIXON Managing Director We continue to see overall positive employment results for the greater Sacramento Region, with unemployment declining and job growth improving, how are we seeing this impacting our local real estate market? I don t believe current job growth is the lead driver to our improving local market. The fundamentals of real estate will always be the same; job growth is the driver for demand and demand is what pushes absorption, reduces vacancies and ultimately increases rates. Our employment results are positive, but are still not strong. We are seeing the low rental rates or sale values, the low interest rate environment, and the compression of cap rates in our major west coast port cities being equally valuable for our local real estate recovery. The industrial market continues to get a lot of looks for expansion and job growth, but it is a very competitive market along the central valley corridor. We are seeing wins, but the driver continues to be the low cost to purchase and low lease rate environment. With limited large contiguous space, and limited high end product, we will see more demand in these products and landing a couple of these might stimulate overall demand in our market. We are starting to hear about build to suit construction interest and even some spec development, what are your thoughts about this? We already have one going in West Sac and know that there have been some significant requirements that have very few qualified locations available in the Sacramento Region. Therefore, a build to suit is always a consideration. We are seeing build to suits already underway as close as the Central Valley and Fairfield, so it will eventually work its way to Sacramento. Spec development is typically driven by a moderately low vacancy and rental rates correlating with construction costs. While we are a ways from both of those, when you have limited large available space at top of market standards, we could see land owners and developers taking risk to move forward.
VACANCY AND ABSORPTION Employment and Vacancy The overall industrial vacancy (Flex and combined) declined by 20 basis points over the last quarter from 12.4% to 12.2%. A vacancy percentage of 12.2% was last achieved around this same time in 2009, showing vacancy in the market is still on the downward slope of the bell curve after hitting a peak at the start of 2011 at 14.3% Overall warehouse vacancy has continued its decline into the New Year, decreasing by 20 basis points to 11.5%. Larger submarkets like Davis/Woodland (13.1%) and McClellan/North Highlands (18.4%) continue to struggle with vacancy greater than the overall average but do see consistent positive absorption quarter-toquarter. Northgate/Natomas saw the most significant absorption this quarter, totaling 149,868 SF. Employment in Thousands 1,100 1,050 1,000 950 900 850 800 750 700 650 600 # Employed Vacancy Flex Vacancy Period 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Flex vacancy has dropped 10 basis points to 17.4% at the end of the first quarter. Flex vacancy has consistently declined over the last three years from a high of 21.2% at the end of 2010. Flex demand continues to remain timid through the beginning of the year with a low net positive absorption of 4,650 SF. 3,000,000 Net Absorption Period Overall absorption was moderately healthy in 2013 and has continued through the beginning of 2014. It is anticipated that the drought currently affecting the market will limit demand for additional warehouse space. Even with the drought, absorption is expected to remain positive for the next four quarters. 2,000,000 1,000,000 0 ASKING LEASE RATES asking lease rates have continually trended downward by a few cents each quarter. As the market has continued to recover, newer and higher quality spaces have steadily been absorbed as tenants took advantage of the depressed rates. The number of these superior spaces that can support larger users have dwindled and it is expected that landlords will push their asking rates up with the continued demand. Unfortunately there is still a significant amount of inferior supply that must remain as competitive as possible to attract tenants, and these will offset asking lease rate growth seen in more desirable buildings. Overall, asking lease rates are anticipated to increase by $0.02 to $0.03 over the next four quarters. (1,000,000) (-1,000,000) (2,000,000) (-2,000,000) (3,000,000) (-3,000,000) $1.25 2008 2009 2010 2011 2012 2013 2014 YTD/ 1Q 2015 2008 2009 2010 2011 2012 2013 2014 YTD/ Direct Average Asking Rate Full Service Flex Actual 1Q 2015 $1.25 Flex asking lease rates have behaved similarly to over the last twelve quarters. Asking lease rates have continued to fluctuate by $0.01 - $0.03 per quarter and have generally remained level through 2013. Currently, 1st quarter 2014 maintained an average of $0.72/SF and is expected to remain level through 1st quarter 2015. $1.00 $0.75 $0.50 Period Period $1.00 $0.75 $0.50 Sources: CoStar & Colliers Research $0.25 $0.25 $0.00 $0.00 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Colliers International 2014 First Quarter Report 3
CONSTRUCTION SUMMARY / INVESTMENT CLIMATE There were no new deliveries during the 1st quarter of 2014, however there are 4 properties totaling 238,014 SF that are expected to come onto the market throughout the next quarter. The 4 properties consist of an owner/user building for Blue Iron Inc. located at 3545 Carlin Dr. in West Sacramento, a 198,744 SF build-to-suit facility for Fed-Ex located at 8501 Foothills Blvd in Roseville/Rocklin, and 4663 & 4665 Golden Foothill Parkway in Folsom/El Dorado. There is another 60,000 SF build-to-suit for Tomra Sorting located at 875 Embarcadero Dr. in West Sacramento that is expected to be completed in September, bringing a total of 280,963 SF currently under construction and scheduled to be completed this year. The largest development currently under construction is a 250,000 SF built-tosuit distribution center by Ridge Capital for Core-Mark, located at 3030 Mulvany Pl in West Sacramento Southport Business Park; this property is expected to be delivered January 2015. PROPERTY LOCATION SF UNDER CONSTRUCTION SUBMARKET 1. 875 Embarcadero Drive 60,000 West Sacramento 2. 3545 Carlin Drive 14,028 West Sacramento 3. 4665 Golden Foothill Parkway 12,621 Folsom/Ed Dorado 4. 4663 Golden Foothill Parkway 12,621 Folsom/Ed Dorado 5. 8501 Foothills Blvd. 198,744 Roseville/Rocklin 6. 3030 Mulvany Place 250,000 West Sacramento BROKER PERSPECTIVE Has the first quarter of 2014 maintained the same positive momentum that we saw in 2013? I don t agree that the 2013 industrial market was significantly positive. The market has bounced along the bottom for a while and companies continue to close. While it s true that some businesses are growing, I attribute their growth to competitors leaving the area. So far this year we ve seen an increase in sales, and leasing activity continues to be steady, which indicates that the market is becoming healthier. But both sales and leasing rates remain low because of high vacancy levels and an abundant supply of property for sale. What should we focus on this year in the industrial market? BUD APPLEGATE +1 916 563 3003 bud.applegate@colliers.com There is talk of more manufacturers coming to Sacramento, and companies like VSP are growing, but we don t see a significant number of manufacturers interested in making the move. A large part of the current growth is in the distribution and service-related industries. Many cities are improving the process for moving a business to the Sacramento market, but at the same time, the fees associated with moving have increased. One factor that will affect the growth of trucking in 2014 is costly clean air regulations on truck engines. Smaller trucking businesses will have a harder time absorbing that cost than the larger operations. Overall, our clients feel positive about the market, but it s guarded optimism. This isn t likely to change in 2014 until we get far enough down the road to look back and realize that the market has slowly and quietly improved. The market won t return to the norm in a giant leap. Instead, we ll continue to see small increases that will bring the market back to where we want to be.
SACRAMENTO INDUSTRIAL SUBMARKET ANALYSIS - FIRST QUARTER 2014 SUBMARKET ANALYSIS Submarket Auburn / Lincoln Rentable Building Area Total Vacant SF Overall Vacancy Rate Net Absorption SF YTD Net Absorption SF Under Construction SF Direct NNN Avg. Asking Rate $/SF/Mo 2,579,192 102,257 4.0% 41,315 41,315 0 $0.55 Flex 540,630 226,073 41.8% (10,720) (10,720) 0 $0.71 Davis / Woodland 16,974,463 2,231,026 13.1% 107,568 107,568 0 $0.26 Flex 728,899 139,836 19.2% 13,019 13,019 0 $1.01 Downtown / Midtown 3,177,683 105,219 3.3% 0 0 0 $1.02 Flex 533,050 38,625 7.2% (2,265) (2,265) 0 $0.93 East Sacramento 777,165 58,459 7.5% 6,000 6,000 0 $0.61 Flex 112,561 52,686 46.8% 0 0 0 $1.35 Elk Grove / Laguna 5,445,327 501,276 9.2% 21,934 21,934 0 $0.38 Flex 395,919 67,009 16.9% 2,812 2,812 0 $0.87 Folsom / El Dorado 3,271,519 122,307 3.7% (947) (947) 0 $0.73 Flex 1,919,469 155,765 8.1% 5,288 5,288 25,242 $0.84 Marysville / Yuba City 6,442,906 416,353 6.5% 64,975 64,975 0 $0.40 Flex 193,300 22,892 11.8% 2,000 2,000 0 - McClellan / North Highlands 14,867,257 2,728,585 18.4% 19,699 19,699 0 $0.36 Flex 2,028,751 493,032 24.3% (5,308) (5,308) 0 $0.52 Northeast 6,011,507 435,893 7.3% (1,986) (1,986) 0 $0.39 Flex 1,043,718 97,647 9.4% 10,000 10,000 0 $0.86 Northgate / Natomas 11,854,233 1,374,259 11.6% 249,868 249,868 0 $0.38 Flex 2,329,355 588,597 25.3% (11,881) (11,881) 0 $0.68 Power Inn 26,208,034 2,695,436 10.3% (103,202) (103,202) 0 $0.33 Flex 1,330,550 176,821 13.3% (22,017) (22,017) 0 $0.54 Richards 4,281,260 336,636 7.9% 15,741 15,741 0 $0.35 Flex 302,026 44,807 14.8% 0 0 0 $0.59 Roseville / Rocklin 17,679,001 2,444,573 13.8% 34,521 34,521 198,744 $0.36 Flex 3,160,939 285,206 9.0% 30,948 30,948 0 $0.91 South Sacramento 4,600,384 1,526,796 33.2% 280 280 0 $0.25 Flex 403,457 84,069 20.8% (576) (576) 0 - Sunrise / Highway 50 14,452,682 1,501,679 10.4% (131,904) (131,904) 0 $0.39 Flex 3,646,806 828,143 22.7% (23,819) (23,819) 0 $0.55 West Sacramento 16,411,743 1,206,542 7.4% 30,992 30,992 324,028 $0.40 Flex 1,599,745 232,839 14.6% 17,169 17,169 0 $0.68 Overall 155,034,356 17,787,296 11.5% 354,854 354,854 522,772 $0.34 Flex 20,269,175 3,534,047 17.4% 4,650 4,650 25,242 $0.72 Overall Market 175,303,531 21,321,343 359,504 359,504 548,014 Colliers International 2014 First Quarter Report 5
SACRAMENTO INDUSTRIAL MARKET FEATURED DEALS SALE TRANSACTIONS # Property Location RSF Sale Price Price/SF Submarket Buyer Seller 1 2 3 4 5 4721 & 4725 Kelton Way 95,580 $2,600,000 $27.20 Natomas/ Northgate 3429 Freedom Park Drive 69,000 $3,725,000 $53.99 McClellan Shams & Mary Kian The Randall Group, Inc. 4205-4225 W Capitol Ave 44,035 $3,100,000 $70.40 West Sacramento LG Holdings LLC 1317 Vinci Avenue 21,645 $2,400,000 $110.88 McClellan Truck Site 9900 Kent Street 7,700 $820,000 $106.49 Elk Grove/Laguna Gurmukh S & Kuldeep K Sandhu Jarvis Enterprises, LP Andrew D Hahs Jose J & Elisa C Ramirez US Small Business Administration Lawson Trust LEASE TRANSACTIONS # Property Location Leased SF Class Tenant Submarket Type 1 8845 Washington Blvd 107,759 B Wright Celebrations Roseville/Rocklin 2 10175 Iron Rock Way 76,725 B Mondelez International Elk Grove/Laguna 3 1431 E Beamer Street 37,800 B Bullet Transportation Services Davis/Woodland 4 4391 Pell Drive 32,202 C Modern Waste Solutions Natomas/ Northgate 5 3548 Rancho Road 31,200 C Tri State Store Fixtures Marysville/Yuba City For further comparable information, feel free to contact one of our brokerage professionals.
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SACRAMENTO BROKERAGE SERVICES Industrial Specialists BUD APPLEGATE +1 916 563 3003 bud.applegate@colliers.com STEVE CIPPA, SIOR +1 916 563 3047 steve.cippa@colliers.com JIM DENNIS Associate Vice President +1 916 563 3019 jim,dennis@colliers.com TOMMY O. PONDER Vice President +1 916-563-3005 tommy.ponder@colliers.com TRENT THOMASON Vice President +1 916 563 3011 trent.thomason@colliers.com Industrial Specialists Investment Specialists TOM TYER, SIOR +1 916 563 3027 tom.tyer@colliers.com JOHN BANCHERO +1 916 563 3050 john.banchero@colliers.com Investment Specialists GRETCHEN BECKER Sr. Analyst & Transaction Mgr. +1 916 563 3041 gretchen.becker@colliers.com Appraisal Specialist STEVE CHAMBERLAIN +1 916 563 3006 steve.chamberlain@colliers.com Colliers Management HEATH CHARAMUGA +1 916 563 3094 heath.charamuga@colliers.com JOHN JACKSON Vice President +1 916 563 3033 john.jackson@colliers.com BEN PRATER Investment Advisor +1 916 563 3060 ben.prater@colliers.com MARTY SHEARER Sr. Services Director Valuations Services +1 916 724 5528 marty.shearer@colliers.com RANDY DIXON Managing Director +1 916 563 3023 randy.dixon@colliers.com LOGAN DUNNAWAY Research Analyst +1 916 563 3067 logan.dunnaway@colliers.com COLLIERS INTERNATIONAL 301 University Avenue, Suite 100 Sacramento, CA 95825 916 929 5999