INDUSTRIAL/WAREHOUSE PRODUCT

The Sacramento region’s warehouse 154.5 MSF inventory accounts for 89% of the area’s total product base but has driven nearly 95% of deal activity and 100% of development activity for the better part of the last decade. The warehouse category includes all the subcategories that would be thought of as traditional, heavier industrial product from warehousing to distribution centers, eCommerce fulfillment, manufacturing, cold storage and food processing.

The current vacancy rate for local warehouse product is just 4.0%. This is down slightly from last quarter’s 4.3% reading. Vacancy for this product type has not been above the 5.0% mark locally since the end of 2020. The market was already experiencing strong growth trends at the time (over the previous five years the vacancy rate had been halved from above the 10.0% mark). The pandemic accelerated that demand—over the past 30 months, Sacramento has absorbed 11.8 MSF of space and by Q1 2022 had posted a record low vacancy rate of just 3.5%.

The region’s construction pipeline has been ramping up since 2020, but with warehouse vacancy at just 4.0%, the market has a long way to go before approaching anything close to equilibrium between supply and demand.

The warehouse sector recorded a total of 835,000 square feet (SF) of positive net absorption this quarter, year-to-date net absorption now stands at 1.6 MSF. Not surprisingly, over 75% of the space that has been absorbed in 2023 has been in new construction within nine months of its delivery. Vacancy levels below the 5% range typically translate as few quality options for tenants. While the market has not been immune to the economic headwinds of the past year, there has been little impact yet in terms of vacancy, absorption or rent metrics. Most of what we have seen is tenant negotiations taking a little longer and leaseup times on new product being extended slightly.

These conditions obviously could change, and most economists believe that the chances of the economy slipping into recession over the final half of 2023 are substantial. However, most also believe it would be a brief and shallow downturn. We suspect that what’s just as likely as macro-economic issues to shape Sacramento’s industrial landscape over the final half of the year is the region’s robust construction pipeline.

Select Top Leases Sacramento Market 2023 YTD

Sacramento Industrial Rent Growth by Product Type

Only 366,000 SF of new warehouse product came online in Q2. However, this follows nearly 1.1 MSF delivered in Q1 and comes in advance of a major wave of new development that will be coming online over the final half of 2023. There is roughly 2.9 MSF of new space currently under construction locally, of which 2.7 MSF is scheduled for delivery before the end of this year. Assuming no delays, this will mean that we will close 2023 with roughly 4.3 MSF of new industrial product. While this would not set any new records—it would come very close. Sacramento added 4.0 MSF of industrial space in 2020. It followed in 2021 with an additional 4.1 MSF. The postwar record for new industrial deliveries in Sacramento was 4.5 MSF in 1999.

While current development levels may not set any new records, they will come on the recent heels of a slew of local warehouse records. The market recorded its lowest vacancy rate ever in Q1 2022. It posted its highest occupancy growth ever at 7.4 MSF in 2021. It has set records for rental rate growth as well; the current average asking rate of $0.78 per square foot (PSF) is up 13.0% from the $0.69 rate of a year ago. Keep this in mind; the average asking rent for warehouse space in Q2 2015 was $0.36 PSF.

Though nearly all the demand and focus (not just locally, but nationally) has been on warehousing, distribution and eCommerce space for most of the last decade, in Sacramento we have seen rents skyrocket for all industrial asset classes.

In eight years, rents have effectively doubled. These are astounding numbers. But they are completely unsustainable numbers. The question for the Sacramento market over the final half of the year will be if the combination of strong new development and economic headwinds will finally bring the region’s rent growth back to more modest, but sustainable levels.