Market Report_Q1_Multifamily2025

6.1% Average Asking Rate (NNN) $1,805/UNIT

AFTER FIVE YEARS OF ROBUST NEW DEVELOPMENT, PIPELINE EMPTYING

At the end of Q1 2025, multifamily vacancy in the Sacramento region stood at 6.1%, down only slightly from the revised 6.2% rate the market recorded three months ago. Vacancy has remained stable at roughly this level (variating only 20 basis points in either direction for going on two consecutive years now. Since 2023, new projects have added an average of 932 new housing units per quarter, but occupancy growth has kept pace. This is even though 2023 and 2024 saw the highest levels of new construction in the region in 20 years. Developers added 4,394 new apartment units in 2024 and 3,815 new units in 2023. The last time deliveries surpassed 3,500 units locally was in 2004 during the inmigration wave of the early 2000s.

A similar dynamic has been at play in the Sacramento region since the pandemic. The region’s population has grown by 6.9% over the past five years, whereas population growth for the nation has averaged 2.3%. Sacramento has emerged as the fastest growing large city in California, which has recorded a growth rate of just .99% since 2020. Against the backdrop of the pandemic

UNITS 918 UNITS 4,169 UNITS

in 2020, the state recorded a decline in its population for the first time since 1900. While there is truth to the fact that many Californians are fleeing the Golden State for more affordable locales throughout the SunBelt from Arizona to Florida, the reality is that Census Bureau data suggests that for every resident that has left California over the past five years, two have simply moved inland from the state’s most costly housing markets seeking greater affordability and higher quality of life.

The unleashing of this in-migration wave in 2020 (when the local population is estimated to have grown 2.2% in a single year, compared to the previous 10-year average of 1.1%) is one of many factors that helped to spur the most recent apartment construction boom. Developers have added 14,270 apartment units to the region’s inventory since 2020, or 8.9% of the current existing stock of 159,513 units (our tracking of the market only includes competitive, market-rate projects with a minimum of 25-units). But both numbers have been coming back to earth as of late. Early data estimates from the Census Bureau suggest that Sacramento’s population grew by just 1.2% in 2024. Meanwhile, the region’s development pipeline has also slowed.

Four new projects added 712 new housing units to the local market in Q1 2025, the lowest number of new deliveries in two years. Meanwhile, there are now 22 projects under

construction in the Sacramento region that will eventually add an additional 3,483 new housing units to the local inventory over the next 24 months (most of these projects will be delivered in the next six months). This is the lowest number of units under construction in the region since Q2 2020 when the most recent development wave began.

Sacramento’s current average asking rent of $1,805 per unit is up just 1.2% over the $1,783 metric recorded one year ago. Throughout this most recent wave of development, rental rate growth has faced headwinds. This was partially a result intense competition driven by new product (we saw this playout most dramatically in the Downtown submarket which has seen rental rate growth in modestly negative territory for five consecutive quarters as it led the region with new deliveries), but it also has been a result of the outsized rental rate growth that had played out locally before the 2020 development boom.

Apartment development had virtually disappeared from the Sacramento market following the 2008 Great Financial Crisis (GFC). Bad loan product in the residential housing market (stated income loans, adjustable-rate mortgages, etc.) fueled a boom and bust that hit strong population growth markets hardest because that is where most of these toxic loans were concentrated. Sacramento was one of the nation’s hardest hit cities with foreclosure rates among the highest in the nation. It is estimated that over 25,000 local single-family homes became rentals in the years following the 2008 GFC. Though most of those would eventually be sold off to owner/ occupants, this shadow inventory kept apartment developers out of the marketplace for the better part of a decade. Between 2008 and 2018, developers added an average of just 728 new apartment units per year.

But by 2020 the shadow inventory of single-family homes was gone, and Sacramento’s apartment vacancy levels were quickly falling to sub 4.0%. By 2021, though developers were already ramping up activity, rents were posting double-digit annual gains (+10.8% between Q3 2020 and Q3 2021) and vacancy had fallen to its record all-time low of just 3.0% (Q2 2021).

CONDITIONS ALIGN FOR INCREASED ACTIVITY, IF THE ECONOMY COOPERATES

The reason we state this is not just to provide a history lesson regarding the local market, but to point out one of the challenges facing investors locally over the past few years. Low vacancy rates and outsized rental rate growth fueled a boom in investor demand, rising prices and strong cap rate compression. By 2022, the average recorded cap rate across all classes of multifamily transactions fell to just 4.7% with averaging pricing hitting a high of $262,000 per unit.

But what goes up eventually must come down. Not surprisingly, total transactional volume fell by a whopping 80% from $1.6 billion in 2022 to just $332.8 million in 2023. With little room for raising rents and cap rates at record lows, projects offering upside return on investment became harder to find and deal flow cooled. Activity focused primarily on the few remaining value-add deals that investors could find. Meanwhile, spiking inflation and the Federal Reserve’s ensuing moves to contain it (the fastest increase in interest rates since the 1980s) presented additional headwinds to investment activity.

Apartment rents in the Sacramento region have grown at an average of just 1.0% annually for three years now. Considering that inflation during this period has averaged 3.5%, it means local rents have gone backwards in real dollars.

Meanwhile, the region’s development pipeline is emptying, and we do not see that trend ending. While we have no doubt that some projects currently in the proposal stages will move forward, we are increasingly hearing from developers that they are concerned about the economy. Timing is everything for developers and with spiking economic uncertainty around the new administration’s global trade war, most economists have significantly heightened the odds of a recession ahead. As one developer told us, “We were going to move forward with one of our projects in March but have decided to take our time. There is just too much uncertainty right

Q1 25 multifamily market report

market or that must double up or move back in with their parents (as is the case in every downturn), multifamily rarely sees significant upswings in vacancy during downturns. For example, the GFC began in September of 2008. Sacramento apartment vacancy stood at 6.2% as of Q2 2008. One year later, at the peak of the worst economic crisis since the Great Depression, it was 7.4%. A year after that, it came back down to 6.9%. Apartment vacancy levels tend to be more directly impacted by development than cyclical economic trends. This is not to say there were no impacts. Rental rate growth went modestly backwards for two consecutive years following the GFC. Sacramento’s average asking rent of $1,067 per unit as of Q4 2008 eventually fell to a low of $1,015 per unit in Q4 2010 (-4.9%) before stabilizing and returning to growth by 2011.

Multifamily properties also typically fare better in terms of investment activity than other commercial real estate asset types during a recession because they are the best inflation hedge. With office, retail and industrial properties, lease terms are longer—typically at least three years, but usually five to ten. While those lease agreements may allow for annual rate increases, those are typically locked in well in advance. But apartment leases are usually one-year affairs, meaning that landlords can more quickly pass their pricing on to tenants. Especially given the potential nature of a downturn this year being driven by the inflationary impacts of tariffs; we have little doubt that multifamily investment demand would likely be the strongest of any asset type heading into the final half of the year. Of course, for the sake of the general economy, let’s hope we don’t find out.