Submarket health check

Let us start by exploring the region’s three most expensive submarkets; Davis/Woodland, Roseville/Rocklin and Downtown.

In terms of rent growth over the past year, the Davis/Woodland market remains on firm territory, despite the fact that it already ranks among the most expensive of local submarkets in the region. The average asking rent here is currently $2,173 per month, up 7.3% from last year’s average rent of $2,025. There are two reasons for this market’s continued outsized performance. First, it is one of our smallest trade areas with just 88 projects totaling 7,773 housing units. But it also has one of the most dependable demand pipelines in the region due to the presence of UC Davis and its 32,000 students. While enrollment and on-campus attendance took hits during the pandemic, these have now returned to pre-pandemic norms. Approximately 15,000 UC Davis students live in on-campus housing, but the remainder live off campus, with a sizable contingent that opts for local market-rate multifamily housing. This also happens to be a trade area where development tends to be challenging; the market itself is land-constrained and the community itself has often proven to be outspoken against growth. The net result has been a lack of housing, higher pricing and a submarket where existing landlords have a strong upper hand in negotiations. Not surprisingly, Davis/Woodland has the region’s lowest submarket vacancy rate at just 1.6%. We suspect rental rate growth here will slow in the coming year, but it is likely to remain positive.

The next most expensive apartment market in the region is Roseville/Rocklin. We track 98 competitive complexes in this submarket that account for 15,272 apartment units. Vacancy here has crept up slightly over the past year from 4.6% to 5.1% and it is likely to creep higher in the next few months with 375 units currently in the development pipeline. The current average asking rent per unit is now at $2,024 compared to $2,106 one year ago, reflecting a decline of -3.9%. It is critical to note this same metric a year ago stood at 9.8% and at 12.9% two years ago making this the highest rental rate growth trade area in the region for 2021 and

Submarket Health Check Continued

2022. But here is where we are seeing the impact of inflation starting to price out tenants and set the ceiling for rents in the area. What remains to be seen is whether the actions of the Federal Reserve to tame inflation (the numbers have been consistently falling) can do so, without plunging us into a downturn. Regardless, we anticipate rental growth in this trade area to be negative to flat through the remainder of the year.

The region’s emerging Downtown market is facing a similar situation; here 103 competitive projects account for 9,468 total apartment units. The past ten years have seen development here pick up substantially, though the pandemic temporarily derailed the city’s continued efforts to convert Downtown Sacramento into an 18-hour city. Ten years ago there were 6,139 apartment units Downtown (please note, we only track competitive apartment projects with 25 units or above so these numbers do not include fourplexes, section 8, etc.). The stock of quality Downtown apartment housing units has grown by 54.2% in a decade. Additionally, there are another 1,707 units currently being developed, with delivery times slated through late next year. No other trade area comes close to these development levels. We anticipate this will ultimately lead to a much stronger Downtown retail and office market as well as the further flourishing of Sacramento’s arts, culture and dining scene. But in the near-term, vacancy levels will be going up, perhaps substantially. Current vacancy is already 13.5%, we anticipate it to cross the 16.0% threshold later this year and for an already competitive leasing marketplace to become even more so. Rental rate growth Downtown has only turned negative recently; as of Q1 2023 the average asking rent of $1,820 per unit was down -0.8% from the $1,835 rate of a year ago. It is likely that this metric will fall further as more supply comes online at a time where there are macroeconomic headwinds despite the fact that activity in the Downtown core has the greatest potential to be transformative to the city as a whole.

Out of our three most expensive apartment submarkets, all are experiencing upticks in vacancy likely due to renters being priced out combined with new construction. Two are already reflecting negative rent growth, while the other—which is uniquely buffered from market forces due to the presence of UC Davis and continued under-development—is still posting gains.

On the flip side of that equation, let’s explore the region’s four most affordable submarkets; Arden Arcade, South Sacramento, West Sacramento and Carmichael/Citrus Heights.

Sacramento Multifamily Market Average Asking Rent Per Unit Vs. Annual Rental Rate Growth

While the Arden Arcade submarket currently has the lowest average asking rent in the region at $1,412 per unit, it actually reported the second highest rental rate growth in the region (behind Davis/Woodland) at 2.8% over the past year. While still positive, this compares to asking rent growth of 9.4% the year prior. In contrast to Davis/Woodland, this is one of the region’s larger trade areas with 194 complexes totaling 16,813 units. While we anticipate rental rate will continue to slow here, we also see the potential for stronger demand from tenants that may have already been challenged by the region’s price increases of the past few years, with the cumulative impact of inflationary pressures.

In South Sacramento, the current average asking rent per unit is $1,496 per unit, up 3.0% annually. Like virtually all other local submarket this is a considerable slowing from the 9.9% (2022) and 5.9% (2021) of the past two years but it places it within the six of 12 local trade areas that are still recording growth, nearly all of which are lower priced markets where the average asking rent has not crossed the $1,600 per unit threshold. There are 945 units under development here, slated for deliveries through the middle of 2024. Current vacancy stands at 6.2% and will almost certainly climb into the low 7.0% range by early 2024, which is likely going to flatten rent growth here in the near future.

Meanwhile, West Sacramento currently has a 3.8% vacancy rate and its average asking rent per unit now stands at $1,543, compared to $1,521 a year ago. While this still reflects a modest 1.5% gain, this compares to 10.9% (2022) and 6.0% (2021) in previous years. Given its proximity to the urban core and local city government support for new development, the apartment development pipeline in West Sacramento is among the strongest in the region; there are currently five major new projects