1st Quarter 2019 | 1

Real Estate Market Review

Sacramento Office

1st Quarter

2019

Office property in the Sacramento market ended 1Q19 strong with leasing activity finishing 9.66% higher year-over-year. Direct vacancy rates continued to decline, ending the quarter 20 basis points lower quarter-over-quarter and 40 basis points lower year-over-year. The construction pipeline is very robust with over 2.3M s.f. still under construction by the end of the quarter. Asking lease rates are up 2.19% quarter-over-quarter and have grown roughly 14% in the last five years. While this market continues to be primarily driven by the State of California government’s demand for office space, the private sector has started to view the market very favorably with Fortune 100 companies relocating their regional headquarters to the state capital of California.

Net Absorption & Leasing Activity

Net absorption jumped drastically quarter-over-quarter as move-

ins began in earnest in 1Q19. South Sacramento led all other

submarkets, with 93,281 s.f. positively absorbed by the end of the

quarter. Downtown Sacramento had led all others in positive net

absorption in 4Q18, but many leases ended at the close of last year,

causing net absorption to dip into negative territory for 1Q19. Overall

net absorption projects to remain positive throughout the year, as the

many leases signed at the end of 2018 should begin to commence in

the coming months.

Leasing activity took a slight step back quarter-over-quarter, but

improved markedly year-over-year. Downtown Sacramento and the

Roseville/Rocklin submarkets easily led all others in leasing activity

with 198,629 s.f. and 164,241 s.f. leased, respectively. 1Q19 featured

some very notable leases, which exemplify the demand by both

government and private sector tenants. The largest lease of 1Q19

occurred along the Highway 50 Corridor, with the State of California

Continued, page 4

Market Forecast TrendsNet Absorption

The quarter ended with 182,487 s.f. of total

net absorption, which was far higher than the

negative territory 4Q 2018 ended in.

Vacancy

Direct vacancy decreased 20 basis points

from 4Q18 to 9.50%.

Rental Rates

Lease rates are nearing decade highs with

a 2.19% quarter-over-quarter increase to

$22.44 annual rent per square foot.

Construction Deliveries

Leasing activity is up 9.66% year-over-year,

which may indicate a very strong year to

come for leasing.

4Q 2018 Market Highlights

YEAR-TO-YEAR BASIS

ABSORPTION

RENTAL RATE

CONSTRUCTION DELIVERIES

VACANCY

2 | Sacramento Office Real Estate Market Review

Market Breakdown

1Q19 4Q18 1Q18 Annual % Change

Vacancy Rate 9.50% 9.70% 9.90% -4.04%

Availability Rate 11.50% 12.00% 12.40% -7.26%

Asking Lease Rate $22.44 $21.96 $21.24 5.65%

Leased SF 1,111,118 1,291,412 1,013,278 9.66%

Sold SF 513,087 1,168,215 965,798 -46.87%

Net Absorption 182,487 -77,583 372,623 N/A

Sacramento Office Charts

VACANCY, AVAILABILITY & LEASE RATE AVERAGE SALES PRICE & CAPITALIZATION RATES

NET ABSORPTION & NEW DELIVERIES SALES VOLUME VS. LEASE VOLUME

Direct Vacancy Total Available Direct Lease Rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

$0

$5

$10

$15

$20

$25

0%

5%

10%

15%

20%

25%

Average Sales Price / SF Cap Rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD$0

$50

$100

$150

$200

$250

4%

5%

6%

7%

8%

9%

Net Absorption (SF) New Deliveries (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD-500K

0

500K

1M

1.5M

2M

2.5M

Sales Volume (SF) Lease Volume (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD0

1M

2M

3M

4M

5M

6M

7M

8M

1st Quarter 2019 | 3kiddermathews.com

Submarket Statistics

SubmarketTotal

InventoryConstruction

Deliveries

Direct Vacancy

Rate

Total Vacancy

Rate

Total Available

Rate

1Q Overall Net Absorption

2018 Overall Net Absorption

1Q Leasing Activity

2018 Leasing Activity

Avg Rental Rate

Downtown 20,556,019 - 7.7% 7.8% 6.8% -21,992 115,591 198,629 182,168 $32.16

Auburn / Lincoln 1,701,458 - 4.3% 4.3% 4.3% 7,899 955 7,778 2,173 $20.52

Campus Commons 1,482,234 - 14.3% 14.6% 13.4% -5,613 11,782 20,180 47,942 $26.04

Carmichael / Fair Oaks 1,559,946 - 14.7% 14.7% 12.2% 27,463 -41,047 3,674 56,337 $16.08

Citrus Heights / Orangevale 1,873,060 - 8.6% 8.6% 8.3% 38,908 39,160 39,944 24,337 $18.24

Davis / Woodland 2,604,332 - 5.5% 5.7% 5.5% -8,892 -26,882 14,191 29,382 $23.52

East Sacramento 2,479,963 - 1.7% 1.7% 1.7% 5,879 5,476 3,221 2,476 $31.08

El Dorado 2,112,370 30,216 12.6% 12.8% 12.2% -1,770 25,615 28,518 25,225 $22.56

Elk Grove 2,040,604 - 8.2% 8.2% 7.0% -16,300 4,795 25,839 5,464 $27.24

Folsom 5,179,593 - 6.0% 6.3% 5.8% 5,539 -48,251 41,433 25,324 $24.24

Highway 50 Corridor 17,906,171 - 10.9% 11.3% 9.9% 15,632 29,784 345,137 175,004 $20.28

Howe Avenue / Fulton Avenue 2,724,094 - 15.8% 15.8% 14.7% 48,945 38,732 24,571 48,106 $19.44

Midtown 4,340,946 - 8.90% 9.10% 7.5% -10,198 -13,770 22,900 95,204 $27.48

North Natomas 3,177,468 - 14.8% 14.9% 10.0% 9,101 -11,214 23,774 93,459 $20.52

Point West 2,916,250 - 12.7% 13.3% 13.1% 34,475 -3,630 18,488 103,942 $22.68

Rio Linda / N Highlands 1,144,998 - 24.8% 24.8% 20.6% 2,132 - 27,869 - $20.40

Roseville / Rocklin 12,212,627 - 10.7% 11.0% 8.6% -7,939 -215,411 164,241 311,936 $23.28

South Natomas 3,626,808 - 7.0% 7.8% 7.5% 3,984 -29,206 32,019 29,094 $26.40

South Sacramento 3,551,763 - 7.0% 7.0% 6.1% 93,281 4,035 9,967 17,521 $19.20

Watt Avenue 2,668,863 - 9.2% 9.5% 9.0% -21,321 17,843 23,656 9,791 $19.68

West Sacramento 2,145,085 - 7.2% 7.2% 6.0% 4,532 -4,656 35,089 6,527 $21.12

Sacramento Total 98,004,652 30,216 9.5% 9.7% 11.5% 203,745 -100,299 1,111,118 1,291,412 $22.44

Class A 26,755,594 - 8.5% 8.8% 10.2% 22,419 69,245 385,641 493,615 $27.60

Class B 45,372,022 30,216 10.6% 10.9% 12.8% 130,744 -182,980 596,937 644,923 $21.72

Class C 25,877,036 - 8.6% 8.6% 10.6% 50,582 13,436 128,540 152,874 $18.00

Notable Lease Transactions

WEWORK

400 Capitol Mall, Ste 900 Sacramento

47,316 s.f.

Notable Sale Transactions

ROCKY RIDGE LIVINGSTON, LLC

Stone Point Plaza I - Opus Corporate Center Roseville

96,337 s.f. $6.7M or $69.77/s.f.

STATE OF CALIFORNIA DEPT OF JUSTICE

3068 Kilgor Rd, Ste 1 & 2 Rancho Cordova

104,042 s.f.

LANCE-KASHIAN & CO.

8745 Folsom Blvd Sacramento

83,750 s.f. $8.1M or $96.72/s.f.

UNDISCLOSED TENANT

400 R St, Ste 200 Sacramento

42,304 s.f.

LEELAND AUBURN LLC

Oak Point Office Park Sacramento

33,170 s.f. $5.7M or $174/s.f.

4 | Sacramento Office Real Estate Market Review

Kidder Mathews is the largest, independent commercial real estate firm on the West Coast, with more than 750 real estate professionals and staff in 21 offices in Washington, Oregon, California, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, property management, consulting, project and construction management, and debt equity finance services for all property types.

ASSIGNMENTS ANNUALLY

TOTAL # APPRAISERS/MAI’S

MANAGEMENT PORTFOLIO

51M+ 1,600+

PROPERTY MANAGEMENT VALUATION ADVISORY

37/23

ANNUAL TRANSACTION

VOLUME

$9B

ANNUAL LEASING SF

40M

ANNUAL SALES SF

20M

COMMERCIAL BROKERAGE

# BROKERS

380+

Contact

The information in this report was composed

by the Kidder Mathews Research Group.

Jerry Holdner

Director of Research 949.557.5050 jholdner@kiddermathews.com

Eric Luhrs

Regional President, Brokerage Northern California / Nevada 916.970.9700 eluhr@kiddermathews.com

Designated Broker

Mark Read | LIC # 00572743

kiddermathews.com

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

Department of Justice taking the entirety of 3068 Kilgor Rd. in the

Prospect Park office building park. Co-working giant WeWork made

a big splash in the state capital with their lease of floors 8 and 9 in

the Wells Fargo Center in Downtown Sacramento. Finally, CIM group

leased out 42,304 s.f. of space in their Downtown office building at

400 R St. to an undisclosed tenant in February.

Rental Rates

The market continues to push higher as it nears levels not seen since

before the Great Recession. Direct lease rates market-wide ended

the quarter at $22.44 p.s.f. annually, which is close to its ten year

peak of 22.92 at the end of 2009. Class B and C buildings saw the

highest quarter-over-quarter rental rate growth, increasing 2.84%

and 2.04%, respectively. Although Downtown Sacramento still leads

all other submarkets by a comfortable margin, the Rio Linda/North

Highlands submarket led all others in quarter-over-quarter rental rate

growth, jumping 37.1% to $20.40 p.s.f. annually. The upward trend

on rents is expected to continue throughout this year, which could

mean market-wide average rental rates not seen in roughly a decade.

Sales

The office market in Sacramento saw a down quarter in sales, as

building square feet sold, dollar volume, total transactions, and

average price per building square foot fell precipitously quarter-

over-quarter. While this is a bit concerning, the delivery of over 2.3M

s.f. in office space will almost certainly put a lot more high quality

office product on the market that should fetch far higher sales

prices. Despite the down quarter, there were some notable sales

for the quarter that are worth highlighting. 8745 Folsom fetched the

highest sales price, as Lance-Kashian & Co. paid Stephen Endsley

$8,100,000 ($96.72 p.s.f.) for the Highway 50 Corridor office property.

The 96,377 s.f. Stone Pointe Plaza 1 in the Opus Corporate Center in

Roseville was bought by Rocky Ridge Livingston LLC for $6,724,000

($69.77 p.s.f.), which was the largest property sold in 1Q19. The

office building at 4420 Auburn Blvd. in the Oak Point Office Park

was sold by Salama Ibrahim to Leeland Auburn LLC in March for

$5,771,500 ($174.00 p.s.f.), which was the highest per square foot

sale of 1Q19.

Construction

There were no new deliveries in 1Q19 in Sacramento, but that

is expected to change as just under half the space still being

constructed is expected to deliver at some point this year. 51.55%

of the office space under construction is pre-leased and will be used

by the State of California in 2022, while the rest is expected to be

delivered this year and will be available to the private sector. The

top six properties under construction are 100% pre-leased, which

indicates that much of the demand is focused on newer and higher

quality space. Despite a slow start in sales, all other indicators point

to 2019 being a strong year for office property in the Sacramento

market.

Source: CoStar