This article originally appeared on JLL’s Edge Blog
By John Sheaffer, Research Analyst, JLL
For better or worse, Sacramento is a government town. The office market recovery has lagged behind tech-powered economic engines like San Francisco and Silicon Valley, but the State of California’s presence also tempers the drastic swings in the real estate cycle that neighboring Bay Area markets with more volatile industry bases experience. When class A rental rates in San Francisco plummeted by 61.8% during the aftermath of the Dot.com bust, class A rental rates in Sacramento actually increased by 4.8% during the same two year period. Not unlike most other office markets, Sacramento took a hit during the last economic downturn and barring 2013 occupancy gains—over 1.6 million square feet of positive net absorption—the market has remained relatively anemic compared to the last run through 2007. With that said, Sacramento may be on the verge of its next real upswing.
After years of racking up increasingly higher deficits, the State of California presented a balanced state budget for 2013-2014. Whether the budget is in fact balanced is debatable, but the fact that state government has recorded annual job growth every month since February 2013 is not. Healthcare and professional and business services (PBS) have posted much stronger gains and the two super sectors are expected to propel much of Sacramento’s office job growth in the next 4 years. Moody’s Economy projects the region will add over 44,000 state government, healthcare and PBS jobs in the next 4 years, which will translate into a sizable chunk of absorbed office space: 1.7 million square feet annually to be exact (assuming 150 s.f. per employee). While healthcare employment expansion includes non-office positions, the projected growth is still significant and PBS alone is anticipated to grow by 17,000 in the next four years.
Recent developments and emerging trends also signal that momentum is building, especially at the urban core. Construction of the Sacramento Kings’ new downtown arena is underway and slated to open for the 2016-2017 season, a number of major redevelopment projects are well into the pipeline and at least one building greater than 110,000 square feet traded each quarter in 2014. But the tacit demand not yet inked on the stats sheet is also worth noting. At the end of 2014, Vanir Development Co. submitted plans to the City for a 26-story office tower on a site adjacent to the new arena location. The building would be the first high-rise office to go up in Sacramento since 2009. Although dwindling, the amount of available space downtown does not currently support new construction, but Vanir and others are reading between the lines: the market is undeniably strengthening and possibly poised to take off in the not too distant future.