Market Report_Q1 2022 Industrial

JKG

Q1 INDUSTRIAL MARKET REPORT MARKET OVERVIEW

Gallelli Real Estate 3005 Douglas Blvd #200 Roseville, CA 95661 P 916 784 2700 www.GallelliRE.com

The industrial market continued its reputation as a top performing asset class in the first quarter of 2022. The extreme lack of availability and inventory within the market has created an aggressive and highly competitive market for tenants. Vacancy rates have continued to drop despite the exceptionally large amount of industrial space that was completed and delivered in 2021. This type of market has caused lease rates to continue trending up and has allowed landlords the opportunity to be selective when negotiating lease points. In addition, there has been a substantial uptick in activity from large institutional groups looking to acquire land to build large industrial sites in the Sacramento Area which points to a continued increase in market saturation from corporate occupiers.

*Quarter Over Quarter Change

3.0% Direct Vacancy Rate

±

1,136,160 SF Net Absorption

$0.68 Average Asking Rate (NNN)

CONSTRUCTION The development pipeline continued to remain rapid with 17 buildings and over 3 million SF underway. Of this total, 70% of under construction activity landed above 100,000 SF within a number of different areas across the market. Although Metro Air Park, a substantial component to the larger Northgate/Natomas submarket, has been especially active. Located adjacent to the Sacramento International Airport, the 1,900 acre site is home to Sacramento’s newest 1 million SF plus buildings including a 1.1 million SF build to suit for Walmart and Amazon’s 1.3 million SF build to suit warehouse.

MARKET TRENDS Market fundamentals remain very strong. Industrial product as a whole has flourished throughout the country and Sacramento is no exception. Net absorption reached an all-time high recording 5.8 million SF in the last 12 months, easily topping the three-year average of 3.1 million SF. E-commerce has been a significant driver of this activity and continued to propel with even more product expansion, all while sustaining low vacancy. Total development square footage continued to rise and even though many buildings are breaking ground as speculative, some projects already have a tenant waiting for occupancy prior to completion.

Sacramento industrial rents did not decrease momentum and continued to accelerate to $0.68/SF/NNN in Q1 2022. As rapid new construction activity persisted, limited inventory was available and the result quickly turned to spikes in rent as developers were forced to keep up with elevated construction costs. In addition, a vacancy rate of only 3.0% continued to make relocation options even more limited. Yet, occupier demand remained significant despite the lack of available space putting upward pressure on lease rates. Historically, the region’s industrial tenant base has focused on serving the local population. That trend has shifted in the last few years as large distribution companies look to leverage the local area’s developable land, available labor, and location.

Amazon also has an additional 603,000 SF under construction with an expected completion before the end of Q2 2022. The build marks the largest of all development underway and will bring their total square footage in Metro Air Park to nearly 3.4 million SF. However, this site is not limited to just e-commerce tenants.

SC Johnson currently occupies a 600,000 SF warehouse that completed in mid-2021, and several more projects are currently in progress or in planning stages.

INVESTMENT HIGHLIGHTS Sacramento’s industrial market tallied 68 transactions for a total of $771 million over the past 12 months. Given low vacancy and strong lease rate growth, the local region has remained an attractive option for investors. Within the same timeframe, the market cap rate of 5.9% is in line with recent trends and there remains room for properties to increase in value in the coming quarters.

Of several transactions that closed within Q1 2022, a noteworthy sale recorded at 8372 Tiogawoods Drive within the Power Inn Submarket. The 144,000 SF industrial building sold in March for $16 million to Irvine, California based LBA Realty. At time of sale, the property was 100% occupied with Pepsi as the majority tenant with 61% of the total building size. Pepsi which recently expanded the property in 2020 has two, five-year options to renew and has occupied the asset since 2012.

±

3,074,868 SF Under Construction

3.7%

3.6%

Sacramento Unemployment

United States Unemployment

INDUSTRIAL UNDER CONSTRUCTION (SF) 7,000,000

Under Construction (SF)

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000

2022 Q1

2021 Q4

2021 Q3

2021 Q2

2021 Q1

2020 Q4

2020 Q3

2020 Q2

2020 Q1

2019 Q4

2019 Q3

0

2019 Q2

1,000,000

Vacancy Rate

Net Absorption (SF)

INDUSTRIAL VACANCY VS. NET ABSORPTION

INDUSTRIAL Q12022 JKG

Industrial Market Statistics

(Submarket criteria based on: 10,000 SF and above, includes owner occupied, does not include flex buildings.

Includes existing, proposed, under construction, final planning)

Inventory

Existing Vacant SF

Vacancy Direct (%)

Total Availability (%)

YTD

SF Under Construction

Avg. Asking Rate (NNN)

Q1-22

Auburn

1,919,355

60,000

3.1%

5.0%

7,110

7,110

37,440

$0.60

Davis/Woodland

13,139,307

148,804

1.1%

5.0%

154,877

154,877

0

$0.48

Downtown

1,453,917

187,345

12.9%

15.4%

8,572

8,572

0

$0.79

East Sacramento

388,427

-

-

-

-

-

0

-

Elk Grove/Laguna

4,652,030

220,155

4.7%

5.7%

118,554

118,554

0

$0.50

Folsom/El Dorado Hills

1,816,631

16,933

0.9%

1.8%

(31)

(31)

0

$0.76

Mather

3,259,595

152,704

4.7%

4.9%

(16,808)

(16,808)

0

$0.57

McClellan

11,001,953

270,148

2.5%

6.2%

(23,546)

(23,546)

313,107

$0.66

Northgate/Natomas

15,625,175

638,966

4.1%

8.7%

100,850

100,850

1,973,199

$0.59

Northeast Sacramento

4,162,336

113,386

2.7%

8.1%

13,300

13,300

0

$0.96

Power Inn

22,073,364

415,793

1.9%

3.1%

748,714

748,714

0

$0.87

Richards

3,357,175

160,578

4.8%

6.0%

55,919

55,919

0

$0.60

Roseville/Rocklin

12,834,231

368,311

2.7%

2.7%

(57,809)

(57,809)

0

$0.70

South Sacramento

2,047,992

3,650

0.2%

2.8%

7,109

7,109

0

$0.90

Sunrise

8,563,336

278,028

3.2%

3.1%

(44,851)

(44,851)

0

$0.76

West Sacramento

18,989,994

682,311

3.6%

8.0%

64,200

64,200

751,122

$0.65

Totals

125,284,818

3,717,112

3.0%

5.6%

1,136,160

1,136,160

3,074,868

$0.68

Warehouse/Distribution

125,284,818

3,717,112

3.0%

5.6%

1,136,160

1,136,160

3,074,868

$0.68

Manufacturing

15,056,363

145,588

1.0%

2.9%

32,017

32,017

0

$0.52

Flex

19,239,184

1,152,627

6.0%

8.6%

6,955

6,955

0

$0.99

Totals

159,580,365

5,015,327

3.1%

5.7%

1,175,132

1,175,132

3,074,868

$0.73

Submarket

Net Absorption

Warehouse / Distribution

Sacramento Regional Totals

Existing vacancy direct column includes buildings that have been delivered and reflects all existing product tracked with the criteria size and product type highlighted above.

Total Availability column includes new construction and reflects all direct and sublease space on the market.

Dedicated speculative construction includes 2,227,910 SF representing 72% of all under construction activity.

Average asking lease rates are $0.59/NNN/PSF for SF currently under construction.

Gary Gallelli President 916 784 2700 gary@GallelliRE.com

Gallelli Real Estate 3005 Douglas Blvd #200 Roseville, CA 95661 P 916 784 2700