SACRAMENTO OFFICE REPORT SACRAMENTO FIRST QUARTER 2014 www.colliers.com/sacramento Accelerating success. Colliers International 2014 First Quarter Report 1
KEY OFFICE METRICS - Q1 2014 Total Market Adjusted Vacancy 15.1% 17.8% COLLIERS INTERNATIONAL SACRAMENTO First Quarter 2014 Office Insight Net Absorption 219,445 SF 206,554 SF Deliveries 82,107 SF 82,107 SF Under Construction 84,300 SF 84,300 SF Average District Rate $1.66/SF $1.67/SF FIRST QUARTER HIGHLIGHTS Overall Vacancy this quarter dropped 20 basis points from 15.3% to 15.1% following the same declining trend seen in 2013. Total Absorption totaled 219,445 SF in the overall market. Although activity appears to have slowed slightly over the beginning of the year, absorption remains positive and is expected to continue to improve throughout the year. The New Year had a jump start with the Delivery of five new developments totaling 82,107 SF. Currently there are 3 more properties still under construction totaling 84,300 SF expected to be delivered to the Sacramento County in April, and two deliveries in Placer County May and June of this year. (See Pg. 4 for more details) Asking Lease Rates averaged $1.66/ SF. This is a $0.01 increase from the previous quarter showing slow growth within all classes in the office market. Lease rates have remained at an average of $1.66/SF over the last 8 quarters after bottoming out in the 2nd quarter of 2013 at a rate of $1.64/SF. 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 general message from our office clients is positive. The tenants are optimistic about their current financial position and expect to see future growth. This gives them more flexibility to look at their real estate options. Most landlords are in a stable position for the most part and are optimistic that the market will improve and they will see better results going forward. What are the dynamics influencing the Downtown market and what are your predictions? There is no doubt that due to the new arena we are seeing more interest downtown. The Arena will bring with it a live/work/play demand that we have not seen in this area of Sacramento. Given the improved financial health of the state and our general business climate, the demand for space is improving and the long term health is strong. The greatest optimism is with downtown owners and prospective investors. However, we do expect to see in time a stronger interest of companies to consider moving or relocating back from the suburbs to Downtown even with the higher rent and parking costs.
VACANCY AND ABSORPTION Employment and Vacancy Overall office vacancy has continued to steadily decline since its peak in the 2nd Quarter of 2011 at 17.6% to now 15.1%. The largest change in vacancy this quarter was seen in Class A properties as the vacancy square footage dropped by 75,592 SF, 13.3%. Class B properties saw a much more timid improvement declining by 20 basis points from 16.9% in the 4th quarter of 2013 to 16.7% in the first quarter. Class C remained level with 4th quarter of 2013, at 14.7%. Overall absorption remained positive for the 4th straight quarter totaling 219,445 SF. At the end of 2012 there was 1,347,790 SF of total annual net absorption while at the end of 2013 there was 1,162,645 SF of total annual net absorption. Looking at the trend since 2008 to today, there is a definite positive tone for the recovery and growth overall in the market. After a moderately healthy final quarter to 2013 and a strong overall year, activity appears to have slowed slightly in the first quarter. Although it is unlikely that the market will experience a major decline in absorption, the rate of absorption appears to have slowed this first quarter. The rate of absorption is expected to improve over the next three quarters and potentially outperform 2013. Employment in Thousands 1,100 1,050 1,000 950 900 850 800 750 700 650 600 1,500,000 # Employed Vacancy # Employed Vacancy Net Absorption Period Period 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% With limited new supply expected to come online over the remainder of the year and positive absorption expected to continue, vacancy should continue to decline. Overall market vacancy is expected to reach between 14.3% and 14.1% by the end of the year. This trend in vacancy continues to remain consistent with our improving job growth market wide. 1,000,000 500,000 0 (-500,000) (500,000) ASKING LEASE RATES Overall asking lease rates rose at the start of the year from $1.65 to $1.66. Individually, both class A & B properties saw minor improvement over the last quarter. Class A total average rate raised $0.02 since last quarter landing at $2.05 showing positive growth in the Class A Office sector since its lowest average rate was $1.97 in the 2nd quarter of 2013. As Class A space continues to be filled in, asking lease rates are expected to maintain a slow and steady improvement through 2014. Class B asking lease rates have yet to improve significantly as the average rate remained unchanged since last quarter at $1.62. The total average rate in Class B properties has remained consistently at $1.62 since the beginning of 2013. Similar to Class A, Class B asking rates are expected to be maintained going forward with only nominal increases during 2014. There continues to be a tightening of office space available for larger spaces that support users with 100,000 SF requirements. As of the writing of this report, only six properties in the market listed availabilities that could support those users. With demand remaining consistent for this size range, landlords of these spaces will see support for higher asking rates. (1,000,000) $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2009 2010 2011 2012 2013 2014 YTD/ 1Q 2015 2008 2009 2010 2011 2012 2013 2014 YTD/ Direct Average Asking Rate Full Service Class A Period Actual Class B 2011 2012 2013 2014 2011 2012 2013 2014 Class B Period 1Q 2015 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Colliers International 2014 First Quarter Report 3
CONSTRUCTION SUMMARY / INVESTMENT CLIMATE Construction deliveries this quarter consisted of five developments totaling 82,107 SF. The first development was 1740 Prairie City Rd and totaled 21,860 SF, the second development was 2150 Harvard St. and totaled 19,761 SF, the third development was 1847 Iron Point Rd which totaled 7,890, the fourth development was 9327 Laguna Springs Dr. totaling 5,800 SF, and the fifth development was 8239 E Stockton Blvd. which totaled 12,576 SF. There are three developments currently under construction totaling 84,300 SF. The graph to the right details each building. PROPERTY LOCATION SF UNDER CONSTRUCTION SUBMARKET 1. 1535 Eureka Road 7,300 Roseville/Rocklin 2. 116 South Grant Street 55,140 Roseville/Rocklin 3. 1740 Prairie City Road 21,860 Folsom BROKER PERSPECTIVE What is your opinion of the market so far this year? Both the data and the mood among landlords and brokers seems to be improving. National credit companies who occupy space in our region are growing and signing longer-term deals, and several large transactions are now nearing the finish line. But while this is a good sign, we won t truly turn the corner until mid-sized Sacramento-based companies start to absorb more space. The key question for the region is which industry aside from the State of California will lead the growth. Thus far, indications are that it will not be the Bay Area spillover we saw in the booms of the 90s and early 2000s. JASON RUTHERFORD +1 916 563 3059 jason.rutherford@colliers.com How has landlord perspective on the market changed this quarter? For quite some time, aggressive tenant demands have made deals more difficult for landlords. Increased concessions and higher TI expectations have had an impact; shorter-term deals, suspect credit, and uncertainty about a tenant s long-term viability have slowed transactions to a crawl. Although the market has improved, landlords are looking more closely at the tenant s credit worthiness and at whether the transaction looks sound long term. I expect asking lease rates to remain relatively flat, with slight increases toward the end of 2014, when submarkets like Roseville-Rocklin, Folsom, and Highway 50 will likely lead the market in improving asking rates and absorption. One reason is reduced options for tenants, due to a 6-year stall in construction. Landlords will soon cautiously take advantage of the short supply of quality space in certain markets. I predict we will see developers start planning some spec construction this year, and given an 18-month lag time, look for completion in some markets as early as late-2015/early-2016. What effect is the arena already having in the Downtown area? The new arena will bring a positive dynamic to the Downtown area, which means asking lease rates will trend upward as we draw close to the arena completion. Historically tenants have shied away from locations in Downtown due to the higher rents and parking costs unless they have a specific need for being in that location. With the development of the arena there are now more reasons for employers to need or want to be Downtown and this will all cause rents to increase and give Downtown a surge of activity.
SACRAMENTO OFFICE SUBMARKET ANALYSIS - FIRST QUARTER 2014 SUBMARKET ANALYSIS Submarket Rentable Building Area Direct Vacancy Rate Overall Vacancy Rate Net Absorption SF YTD Net Absorption SF Under Construction SF Direct FS Avg. Asking Lease $/SF/Mo Auburn / Lincoln 1,648,442 15.4% 15.4% 7,775 7,775 0 1.39 Campus Commons 1,481,893 18.8% 18.8% (12,487) (12,487) 0 1.77 Carmichael / Fair Oaks 1,612,138 12.7% 12.8% (16,668) (16,668) 0 1.23 Citrus Heights / Orangevale 1,807,744 14.2% 14.2% (5,583) (5,583) 0 1.32 Davis / Woodland 2,420,538 8.0% 8.1% 19,962 19,962 0 1.61 East Sacramento 1,977,973 13.2% 13.2% 4,894 4,894 0 2.08 El Dorado 2,025,237 21.3% 21.9% 11,575 11,575 0 1.49 Elk Grove 1,861,916 10.2% 10.2% 20,565 20,565 0 1.8 Folsom 5,142,481 10.8% 11.2% 15,421 15,421 21,860 1.73 Highway 50 Corridor 17,618,617 14.2% 14.7% 37,636 37,636 0 1.51 Howe Ave / Fulton Ave 2,790,763 24.7% 24.7% (50,624) (50,624) 0 1.50 Midtown 4,214,330 6.9% 7.1% (17,595) (17,595) 0 1.75 Natomas / Northgate 6,675,835 21.3% 21.3% 7,968 7,968 0 1.68 Point West 2,907,090 25.6% 26.0% 21,480 21,480 0 1.65 Rio Linda / N Highlands 1,126,313 28.6% 28.6% (1,258) For further comparable information, feel free to contact one of our brokerage professionals. (1,258) 0 1.47 Roseville / Rocklin 11,706,709 18.8% 18.9% 103,688 103,688 62,440 1.64 South Sacramento 3,462,079 14.3% 14.3% 24,953 24,953 0 1.41 Watt Avenue 2,584,662 13.2% 13.2% 5,274 5,274 0 1.37 West Sacramento 2,090,804 9.5% 10.5% (848) (848) 0 1.65 Suburban Market 75,155,564 15.9% 16.1% 176,128 176,128 84,300 1.58 Downtown (All) 18,954,748 11.4% 11.5% 43,317 43,317 0 2.15 Downtown (CBD) 9,075,984 9.9% 10.0% 18,734 18,734 0 2.61 Overall Market 94,110,312 9.9% 15.1% 286,094 219,445 84,300 1.66 Colliers International 2014 First Quarter Report 5
SACRAMENTO OFFICE MARKET FEATURED DEALS SALE TRANSACTIONS # Property Location RSF Sale Price Price/SF Submarket Buyer Seller 1 2 3 4 5 8455 & 8475 Jackson Rd. 95,000 $5,500,000 $57.89 Highway 50 Corridor Cristo Rey High School, Sacramento 2288 Auburn Blvd 51,300 $10,133,000 $197.52 Watt Ave Omni Medical 1500 Expo Parkway 34,717 $6,000,000 $172.83 Point West 3785 Placer Corporate Drive Sutter Health Medical Center Foundation Buzz Oates Rickey W Massie & Debra L Massie, Massie Family Trust Radiological Associates of Sacramento 62,034 $5,600,000 $90.27 Roseville/Rocklin Amazing Facts Inc. US Bank 2 Scripps Drive 34,500 $5,100,000 $147.83 Campus Commons Berger Family Trust Massie & Co., GP 6 501-505 12th Street 5,400 $670,000 $124.07 Downtown LEASE TRANSACTIONS Legal Services of Northern California Mark D & Janis Dingman # Property Location Leased SF Class Tenant Submarket 1 1601 Exposition Blvd 132,408 B Covered California Point West 2 9000 Foothills Blvd 120,000 B Quest Supplies Roseville/Rocklin 3 6030 W Oaks Blvd 52,500 A Liberty Mutual Insurance Company Roseville/Rocklin 4 3001 Lava Ridge Court 27,412 A Sutter Care At Home Roseville/Rocklin For further comparable information, feel free to contact one of our brokerage professionals.
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SACRAMENTO BROKERAGE SERVICES Office Specialists SCOTT BENNETT +1 916 563 3013 scott.bennett@colliers.com NORAH BRENNAN Associate +1 916 563 3028 norah.brennan@colliers.com KEVIN GOLDTHWAITE Associate +1 916 563 3038 kevin.goldthwaite@colliers.com DAVE HERRERA +1 916 563 3032 david.herrera@colliers.com KEN JOHNSON Senior Associate +1 916 563 3065 ken.johnson@colliers.com ERIC ORTIZ Senior Associate +1 916 563 3095 eric.ortiz@colliers.com KRIS REILLY +1 916 563 3016 kris.reilly@colliers.com JASON RUTHERFORD +1 916 563 3059 jason.rutherford@colliers.com BILL SWETTENHAM +1 916 563 3082 bill.swettenham@colliers.com TOM WALCOTT, SIOR +1 916 563 3002 thomas.walcott@colliers.com Investment Specialists JOHN BANCHERO +1 916 563 3050 john.banchero@colliers.com GRETCHEN BECKER Sr. Analyst & Transaction Mgr. +1 916 563 3041 gretchen.becker@colliers.com STEVE CHAMBERLAIN +1 916 563 3006 steve.chamberlain@colliers.com HEATH CHARAMUGA +1 916 563 3094 heath.charamuga@colliers.com JOHN JACKSON Vice President +1 916 563 3033 john.jackson@colliers.com Appraisal Specialist Colliers Management BEN PRATER Investment Advisor +1 916 563 3060 ben.prater@colliers.com RYAN FRINGS Valuation Services Director +1 916 724 5506 ryan.frings@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