Office Report Sacramento Office Insights Volume 2 2nd Quarter 2012 Accelerating success.
Office Report 2nd quarter 2012 Sacramento Office Market Q2 Highlights Overall performance during 2nd Quarter 2012 in the Sacramento office market can best be characterized as steady as she goes ; vacancy continues to decline, velocity is good, positive absorption continues, and lease rate declines have stopped. The following is a summary of the market during the quarter. Vacancy declined for the fourth consecutive quarter, albeit minimally, dropping 12 basis points down to 17.3% during the quarter, and 37 basis points over the four-quarter period. Total leasing activity remained active with just over 1.2 million SF of available space being occupied during the quarter, yielding 113,390 square feet of positive net absorption from April through June. Office sales continue to get consummated, but mostly at favorable buyer prices; average pricing during the quarter declined by almost 20% from the previous quarter level. The direct average lease rate held steady during 2nd Quarter 2012 at a monthly rate of $1.70 per-square-foot full-service, following 16 consecutive quarter declines resulting in a drop of $0.43 per-squarefoot (20%) during that four-year period. There are six office buildings totaling approximately 382,600 square feet under construction in the market as of June 30, with most of that space expected to be completed in 2013. Over the next 90 days we expect vacancy to slightly decline, net absorption to be positive, and lease rates to remain unchanged. There are positive signs to the Sacramento real estate landscape. Overall activity is steady. Regional housing is showing signs of life. Good employment news regarding healthcare, new tenants in the market, and Aerojet s business growth. We have a long way to go, but are optimistic about the future. Randy Dixon Managing Director Key Office metrics - 2Q 2012 (See note Below) Total Market Adjusted Vacancy 17.4% 20.8% Net Absorption 113,390 SF 2,336 SF Deliveries 0 SF 0 SF Construction 382,608 SF 382,608 SF Average Direct Asking Rate FS/Mo $1.70/SF $1.71/SF Note: Statistics in the Total Market column include all office buildings,000 sf and greater in the Sacramento MSA. Statistics in the Adjusted column do not include owner-occupied or government buildings. Third Quarter Forecast VACAncy Asking Rates Net Absorption Deliveries Construction 17.3% Down 0.1% From 2Q 2012 $1.70 No Change From 2Q 2012 100,000 Square feet vs. 113,930 SF 2Q 2012 69,600 Square feet vs. 0 SF 2Q 2012 313,000 Square feet Vs 382,608 SF 2Q 2012 p. 2 Colliers International
Office RePort 2nd Quarter 2012 Vacancy Overall office vacancy in the Sacramento region, including owner-occupied and government owned buildings, continues to head in the right direction, but very slowly. During 2nd Quarter 2012, the metro vacancy rate dropped another 12 basis points, ending the three-month period at 17.4%. Additionally, the current vacancy rate is 30 basis points lower than the 2nd Quarter 2011 level of 17.7%. Key VACAncy Metrics - 2Q 2012 Current Quarter (Q2 2012) 17.4% Current Year (Q2 2012) 17.4% Previous Quarter (Q1 2012) 17.% Previous Year (Q2 2011) 17.7% TOTAl Inventory Breakdown Class C Class A 27.% 27.4% Total Inventory 91.7 91,716,807 SF Million SF 4.1% Metro wide, the Class C sub-sector continues to hold the lowest vacancy level at 1.7%, followed by Class A at 17.8%, and then Class B at 18.1%. Much of this performance is the result of no new Class C inventory being delivered to the market since 1st Quarter 2007, while Class A deliveries since that time have totaled more than 3.1 million square feet and Class B product completions have reached 2.4 million square feet. Vacancy among downtown product compared to suburban inventory shows the desire of office users to be located in, or near, the CBD, close to the large government presence operating near the State Capitol. Vacancy in the office market is highly correlated to employment, and typically declines when job growth is present. However, the Sacramento employment picture continues to flutter, as there remains a lack of definitive sources identified for future employment growth. The following graphic illustrates the relationship between jobs and office vacancy in Metro Sacramento over the past three years. Class B VACAncy Comparison 2.0% 20.0% 1.0% 10.0%.0% 0.0% Class A Class B Class C Downtown Suburban Metro Employment vs. Office VACAncy Employment in Thousands 80 840 830 820 810 800 790 780 770 Forecast Period 18.0% 17.8% 17.6% 17.4% 17.2% 17.0% 16.8% 16.6% 16.4% 16.2% 16.0% Although deal velocity and job growth still lag, we re seeing more confidence from tenants regarding lease completion, and the length of term is more often five years than the shorter terms of recent years. Scott Bennett, # Employed Vacancy Sources: Bureau of Labor Statisics & CoStar As the graph indicates, vacancy has escalated since late 2009 as employment growth has declined. With limited new job sources identified on the near-term horizon, the employment outlook for Metro Sacramento is expected to be slow growth. However, announcements like Advanced Call Center Technologies brining 2,000 new jobs to the region will hopefully boost the pace of job recovery in the region. Office vacancy in Metro Sacramento is projected to decline by 40 basis points by June 30, 2013, ending the next 12-month period at 17.0%. Colliers International p. 3
Office Report 2nd quarter 2012 Absorption Analysis Sacramento s office market registered another quarter of positive net absorption during the second three months of 2012, the fifth consecutive quarter with net positive leasing activity totalling over 6,000 square feet. The positive results reported in 2nd Quarter is attributable to exceptionally strong leasing activity in Class A product, posting a net absorption of 10,000 square feet during the quarter. Many Class B and C users continue to take advantage of the lower lease rates in Class A space and move-up the class chain. With a strong health care industry continuing to grow, and a burgeoning clean energy sector expanding, the Metro Sacramento market should continue to keep the net positive leasing trend going over the next 12 months. Net Absorption Square Feet (100,000) (200,000) (300,000) (400,000) Sources: CoStar & Colliers Research Though these two sectors are growing, there are still businesses consolidating or closing that will keep downward pressure on this positive leasing activity. 400,000 300,000 200,000 100,000 Some submarkets during 2nd Quarter 2012 recorded strong net leasing activity, while others struggled to generate positive leasing results. The following table summarizes the winners and losers relating to 2nd Quarter 2012 absorption activity. 0 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 1Q 2011 2010 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 Forecast Period 3Q 2012F 4Q 2012F 1Q 2013F 2Q 2013F Hot SubmarkeTS - 2Q 2012 Submarket ClASS Absorption Roseville / Rocklin B 69,412 SF Folsom A,70 SF Natomas / Northgate B 32,733 SF Howe Ave / Fulton Ave B 32,3 SF Point West B 2,112 SF Cold SubmarkeTS - 2Q 2012 Submarket ClASS Absorption Highway 0 Corridor B (44,991) SF Downtown B (34,838) SF Davis / Woodland B (28,373) SF Natomas / Northgate C (27,300) SF Folsom B (24,702) SF Some of the submarkets experiencing most of the tenant interest during 2nd Quarter 2012 include Roseville/Rocklin, Folsom, and the Natomas/Northgate submarket. Though the improvements in Sacramento s office market continue to be positive from quarter to quarter, the pace of improvement is not too substantial, leading one to believe that the market is meandering along the bottom of the recovery cycle. This sector is not likely to show any significant improvement until sustainable job generators can be identified. p. 4 Colliers International
Lease Rates The monthly direct average asking lease rate for all office inventory in the Metro Sac region was $1.70, unchanged from the previous quarter level, but a $0.06 decline from the $1.76 reported one year earlier. It is important to note that the flat asking rate experienced from 1st to 2nd quarter comes at the heels of 16 consecutive quarterly declines. With movement in lease rates tied so closely to vacancy, and vacancy in the market continuing to hold its own, rates appear to be bottoming as evidenced by the stability experienced from 1st to 2nd quarter. We expect the rate in both Class A & B product to remain level over the next four quarters. Much of the rate declines experienced over the past few quarters continue to be tied to ownership finally recognizing that the leasing environment has changed, and for their inventory to remain leased they must remain competitive with where the market is. However, an analysis of lease rate reductions over the past few years shows reductions in 2011 were less than in 2010, and 2010 declines were substantially less than those in 2009, with current rates hopefully being the starting point for a recovery. Though most submarkets experienced rate reductions during the past year consistent with the metro area results, there were some bright spots with several submarkets recording an increase in their year-over-year monthly average direct lease rate. The Rio Linda/North Highlands submarket recorded the highest 12-month increase at $0.13 per square-foot. As noted in our previous reports, asking rents for office space in the Sacramento region now stand at similar levels recorded in 2002. We do believe that rents in both the downtown and suburban markets have essentially bottomed, but we do project these rates to stay flat for at least the next 12 months. ConceSSIOns Concessions continue to be a prominent component in the current leasing environment. Leasing activity during 2nd Quarter 2012 was very consistent to previous quarters as it relates to tenant allowances, free rent and rate reductions. Tenants still have the leverage, and seem to be finding more success in closing their leases under their terms. High vacancy buildings will continue to keep pressure on existing ownership to use concessionary tools to keep tenants upon renewal. Additionally, the weak employment outlook for the region shows little promise for any new measurable office demand over the next 12 months. Office RePort 2nd Quarter 2012 Key Direct Rate Metrics - 2Q 2012 /SF/MO (FS) 2Q 2011 2Q 2012 % Change Class A $2.10 $2.04-2.9% Class B $1.74 $1.69-2.9% Class C $1.38 $1.33-3.6% Direct Average Asking Rate Full Service $2.0 $2.40 $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 $1.70 $1.60 Monthly Lease Rate Comparison Increases Monthly Lease Rate Monthly Lease Rate Class A $1.0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 $2.00 $1.7 $1.0 $1.2 $1.00 $2.00 $1.7 $1.0 $1.2 $1.00 Rio Linda / N Highlands West Sacramento Watt Avenue Davis / Woodland Forecast Period Sources: CoStar & Colliers Research East Sacramento 2Q 2011 2Q 2012 Natomas / Northgate 2Q 2011 2Q 2012 Class B Midtown Monthly Lease Rate Comparison Decreases South Sacramento Point West Forecast Period $2.0 $2.40 $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 $1.70 $1.60 $1.0 Colliers International p.
Office Report 2nd quarter 2012 Construction Summary As of June 30, 2011, work continued on six new office buildings in the Sacramento region: an 8,393 square-foot, Class B office building located in Folsom, scheduled for completion sometime in August 2012. a 6,07 square-foot, Class B office building located in El Dorado Hills scheduled for completion sometime in August 2012. a,140 square-foot, four-story, Class B office building located in Roseville, purchased as a shell at auction in November 2011 and is expected to be delivered to the market during 3rd Quarter 2012. a 3,000 square-foot, Class A office building located in Roseville, scheduled for completion sometime in December 2012. Two Class A, build-to-suit, office buildings totaling 260,000 square feet to house CA Correctional Healthcare employees, scheduled to be completed in mid-2013. Investment Climate Cash buyers continue to seek out acquisition opportunities priced right from sellers who continue to struggle. It will continue to be a buyer s market during the remainder of 2012. Well-leased quality assets with strong tenants and a great location will continue to command strong pricing. Additionally, many users in the market continue to pursue acquisition of their facilities to take advantage of the current depressed pricing. In the short-term we do expect to continue seeing some buyers hesitating to pull the trigger on deals, and being more selective based on price and upside. However, out of area interest continues to add an element of competitiveness to acquisition opportunities. Cap rates on Sacramento office sales continue to improve with the average cap rate for sales consummated thus far in 2012 dropping to 7.%. Investment activity is slowly picking up pace in the region due to the recent up-swelling of capital chasing Bay Area investment product. As these investors experience cap rate compression in the Bay Area, some are now again looking to the Sacramento region for better overall returns Heath Charamuga, Cap Rate Analysis 9.0% 8.6% 8.0% 7.7% 7.0% 7.0% 7.1% 7.% 6.0% 2006 2007 2008 2009 2010 2011 2012 Dec Jun Source: Costar p. 6 Colliers International
Office RePort 2nd Quarter 2012 Housing Market on the Up Residential real estate s downturn has been one of the biggest influences in the state of the Sacramento area commercial real estate market. We are happy to report residential real estate is beginning to show signs of a recovery in the second quarter. Although residential property has been transacting at a low rate, those in need of housing are not always the ones buying. As mentioned in the Sacramento Bee Friday, July 27th, Record low interest rates and rock-bottom home prices make now the perfect time for buyers with modest incomes to purchase homes they can afford. In many neighborhoods, their mortgage payments would be about half the cost of rent. Getting an affordable piece of the American Dream isn t so easy, though. These would-be homeowners are competing and often losing to investors paying all cash in a frenzy to snap up cheap rental properties at the bottom of the market. In Sacramento Certified HOT As investors seize great residential deals, the average homeowner is forced to compete for the limited supply of available housing with cash offers, driving home prices upward. In an interview with Tom Beede, President & CEO of MetroList, Hudson Sangree wrote real estate agents consider a housing market heathly when it has about a six-month supply of inventory - meaning it would take six month to sell all listed homes. The Sacramento region has had less than a 30-day supply of inventory for months... Such tight inventory can lead only to upward pressure on prices as demand outpaces supply... We ve moved from a buyer s market to a seller s market... Sangree also cites Zillow s second quarter market report. Sacramento s housing market hit bottom in the first quarter of 2012, and home prices will rise here by more than twice the national average in the coming year. This is a big change from the firm s April forecast of a continuing decline in the region s home values with no sign of a bottom. Zillow also predicts given the limited new supply and lack of inventory in Sacramento... prices will rise by twice the national average in the coming year. The answer to heavy demand is to create more supply. 2012 is already seeing significant increases in annual building permits from the all-time low during 2009-2011. New home sale prices are back to 2001 levels, and entitled land is seeing an increase in activity with multiple buyers for each sale. An increase in supply will keep housing costs affordable. With the rise in building permits, an increase in regional employment will not be far behind. More housing means more jobs. More jobs means higher demand for all commercial real estate sectors. Although these are just sparks, we hope these light the fire to thaw Sacramento s CRE market. In Sacramento In Sacramento Colliers International p. 7
Office Report 2nd quarter 2012 Sacramento Office Market Featured Deals Sale Comparables Map # Property Location Rentable SF Sale Price Price/SF Submarket Buyer Seller 1 1 2406 Del Paso 6,376 $1,772,209 $277.9 Natomas/Northgate Crosspoint Church Buzz Oates 2 2 210 Capitol Ave 12,876 $2,00,000 $194.16 Midtown Center of Praise Capitol Program 3 3 144 Eureka Rd 1,37 $,00,000 $107.09 Roseville/Rocklin Pacific Coast Bldng Miller Family 4 4 1788 Tribute Rd 28,72 $2,00,000 $87.0 Point West Los Rios Comm Coll Ksidakis Trust 3330 Cameron Park Dr 2,00 $900,000 $3.93 El Dorado N/A Sierra Investment Lease Transactions Map # Property Location Leased SF Class Tenant Submarket Type 1 1 3310 El Camino Ave 106,419 C State of California Watt Ave Renewal 2 2 321 Prospect Park Dr 101,400 C Dignity Health Highway 0 New 3 3 4837 Watt Ave 87,43 C Advanced Call Center Tech Rio Linda/N Highlands New 4 4 1601 Alhambra Blvd 0,000 C N/A South Sacramento New 1180 Iron Point Rd 29,166 A Sierra Pacific Mortgage Folsom New Colliers Transactions Map # Property Location Leased SF Class Tenant Submarket Type 2 3 4 1180 Iron Point Rd 29,166 A Sierra Pacific Mortgage Folsom New 249 Natomas Park Drive 24,38 A Delegata Natomas/Northgate Renewal 229 Gateway Oaks Drive 6,818 A Woodruff-Sawyer & Co. Northgate/Natomas New 428 J Street 3,644 B Renne Sloan Holtzman Sakai Downtown New 200 Venture Oaks Way 3,349 A Suzanne Trimble Natomas/Northgate Renewal p. 8 Colliers International
Office RePort 2nd Quarter 2012 3 1 3 3 2 4 2 4 4 1 2 Cameron park Colliers International p. 9
Office Report 2nd quarter 2012 Submarket Analysis 2Q 2012 Submarket Rentable Building Area Direct VACAncy rate Overall VACAncy rate AVAIlability rate Net Absorption SF YTD Net Absorption SF Under Constrcuction SF Direct FS Average Lease rate $/SF/MO Auburn / Lincoln 1,33,493 13.3% 13.6% 1.% (9,008) (3,70) 0 $1.43 Campus Commons 1,09,811 20.6% 20.6% 22.6% (8,303) (9,640) 0 $1.70 Carmichael / Fair Oaks 1,7,318 1.4% 1.4% 19.% (14,172) (6,922) 0 $1.27 Citrus Heights / Orangevale 1,782,476 1.0% 1.4% 18.4% 3,164 37,024 0 $1.27 Davis / Woodland 2,272,997 11.6% 11.6% 12.7% (16,320) (28,64) 0 $1.68 East Sacramento 1,947,127 10.3% 10.3% 11.0% (3,96) 63,40 0 $1.66 El Dorado 1,988,142 20.9% 21.8% 28.9% 4,220 13,882 6,07 $1.66 Elk Grove 1,11,671 20.1% 20.1% 24.9% 16,302 68,272 260,000 $2.10 Folsom,08,961 12.% 13.1% 18.8% 24,689 97,822 8,393 $1.88 Highway 0 Corridor 1,94,22 19.2% 19.7% 22.7% (4,078) (90,141) 0 $1.60 Howe Ave / Fulton Ave 2,837,814 20.9% 20.9% 23.3% 16,76 43,83 0 $1.0 Midtown 4,604,601 7.6% 7.6% 11.8% 26,943 11,143 0 $1.83 Natomas / Northgate 6,376,72 2.% 2.8% 28.3% 9,84 (60,008) 0 $1.67 Point West 2,941,799 29.1% 29.7% 30.9% 1,138 (3,206) 0 $1.66 Rio Linda / N Highlands 1,19,341 31.7% 37.3% 46.0% (4,446) (11,274) 0 $1.62 Roseville / Rocklin 11,770,834 2.2% 2.3% 28.3% 113,803 12,874 108,140 $1.71 South Sacramento 3,261,22 17.9% 17.9% 19.9% 20,312 10,84 0 $1.34 Watt Avenue 2,732,318 14.8% 14.8% 16.0%,911 (1,627) 0 $1.29 West Sacramento 2,30,310 9.1% 9.1% 10.8% (9,227) (8,142) 0 $1.64 Suburban Market 72,773,332 18.9% 19.3% 22.3% 146,73 230,143 382,608 $1.64 Downtown (All) 18,943,43 9.6% 9.9% 11.9% (33,183) (12,780) 0 $2.16 Downtown (Class A) 9,062,694 8.0% 8.6% 11.3% 997 32,06 0 $2.72 Overall Market 91,716,767 17.0% 17.4% 20.1% 113,390 217,363 382,608 $1.70 Results are from CoStar and include all office space existing, under construction, or under renovation greater than,000 square feet located in all core areas of Sacramento, Placer, El Dorado and Yolo counties. p. 10 Colliers International
Office RePort 2nd Quarter 2012 Brokerage Services Office Specialists Scott Bennett scott.bennett@colliers.com +1 916 63 3013 Norah Brennan Sr. Project Coord. Business Devel. norah.brennan@colliers.com +1 916 63 3028 Dave Herrera Vice President david.herrera@colliers.com +1 916 63 3032 Ken Johnson Senior Associate ken.johnson@colliers.com +1 916 63 306 Scott Kingston Vice President scott.kingston@colliers.com +1 916 63 3082 Office Investments & Leasing Eric Ortiz Senior Associate eric.ortiz@colliers.com +1 916 63 309 Investment Specialists Kris Reilly kris.reilly@colliers.com +1 916 63 3016 Jason Rutherford jason.rutherford@colliers.com +1 916 63 309 Tom Walcott, SIOR thomas.walcott@colliers.com +1 916 63 3002 John Banchero john.banchero@colliers.com +1 916 63 300 Investment Sales Steve Chamberlain steve.chamberlain@colliers.com +1 916 63 3006 Investment Sales Heath Charamuga heath.charamuga@colliers.com +1 916 63 3094 Investment Sales Colliers Management John Jackson Vice President john.jackson@colliers.com +1 916 63 3033 Investment Sales Ben Prater Investment Advisor ben.prater@colliers.com +1 916 63 3060 Investment Sales Randy Dixon Managing Director randy.dixon@colliers.com +1 916 63 3023 John Shaffer Senior Research Analyst john.shaffer@colliers.com +1 916 63 303 Colliers International p. 11
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