TEN KEY TAKEAWAYS

Recent economic indicators suggest that the US economy may not necessarily experience an actual recession in 2023, but instead a year of flat growth, however, if a downturn occurs it is likely to be mild and brief.

2. 5. 8.

Inflation has turned the corner from peak levels in 2022 as the impact of Federal Reserve interest rate hikes continue to play out through the economy. But the Fed will likely continue to raise rates, albeit at a slower rate, through the first six months of 2023.

Office investment will continue to face challenges simply because of the uncertainties surrounding remote work impact. This will likely be the case heading into 2024 but could create opportunities for investors ahead of the curve.

3. 6. 9.

The Sacramento region economy is expected to fare better than other major California markets in 2023 due to continued strong population growth—primarily in-migration from higher cost of living markets in the Bay Area.

In 2022, the US retail market posted its strongest occupancy growth year in almost two decades. Sacramento experienced that trend starting in 2021, but 2023 will be a year in which retail leasing will remain on positive footing but will come back to earth. Class A space will remain difficult to find.

A slight uptick in industrial vacancy, greater deliveries in 2023 will mean more options for tenants that have struggled in recent years to find space in a deeply constrained market. While industrial demand is expected to cool from white hot to hot, the market may see higher deal level activity levels and continued rental growth in 2023 simply due to the availability of sorely needed product.

4. 7. 10.

Office vacancy nationally is anticipated to climb in 2023 due to the impact of space users economizing under-utilized space due to greater utilization of remote and hybrid work models. However, the Sacramento region will fare better than most US markets because of its high concentration of government and smaller professional users that are not expected to return as much space to market as large footprint corporate tenants.

In 2023 multifamily will experience its highest level of new deliveries since before the Great Financial Crisis. After 15 years of housing undersupply, as well as a sharp slowdown in single family residential activity, new product is sorely needed. The impact of interest rate hikes on housing affordability will benefit apartment landlords for the next few years, however, the aggressive rent growth the region has experienced over the past decade will slow as inflationary pressures impact renters.

Retail investment demand to continue to increase. Though cap rates for all asset types will increase in 2023 due to interest rate hikes, quality retail will continue to offer better yields than most industrial or multifamily product, while office product will likely be on the sidelines.

The Sacramento investment market will continue to face the challenge of a lack of available property for sale, as well as for exchange players to trade into. In 2023, deal activity will also continue to be challenged by the impasse between buyers and sellers created by economic uncertainty, with buyers looking for recession-induced deals and sellers looking to capture past pricing. This has already created a gulf between bids and asking prices. Until there is greater economic certainty this will issue will hamper deal flow.