Q2 23

STABLE Q2; DEVELOPMENT WAVE ON THE WAY

As of the close of Q2 2023, multifamily vacancy in the Sacramento market stood unchanged from last quarter’s recorded level of 5.8%. While this metric remained steady in Q2, vacancy has been trending upwards over the past two years.

In Q2 2021, vacancy fell to a record low of just 3.1%. But long before market availability grew that tight, a limited availability of space and a decade of underbuilding had already translated into extremely robust rental rate growth for the Sacramento market. By 2021, Sacramento was leading all US markets for rental rate growth in national surveys from data firms as diverse as Costar, Realtor.com and Yardi Matrix.

Attractive metrics, of course, unleashed a muchneeded wave of new development in the region. Since Q2 2021, approximately 6,800 new multifamily units have been built in the Sacramento region. Though net absorption has consistently remained in positive territory over the past two years, it has been surpassed by new deliveries in seven of the past eight quarters—sending vacancy levels creeping upward.

In Q2, the Sacramento market recorded positive net absorption of 639 units, while a total of 651

4.5%

Sacramento Multifamily Market Average Asking Rent Per Unit vs. Vacancy Q2 2023

Multifamily Market: Vacancy/Average Asking Rent Per Unit

new multifamily units were delivered. With demand (net absorption) and supply (new construction) keeping pace with one another, overall vacancy remained stable at 5.8%.

Sacramento’s average asking rent currently stands at $1,721 per unit (across all classes of multifamily). This metric stands exactly where it did a year ago. But while the region’s overall numbers appear to have been remarkably stable this past quarter, they mask some underlying shifts that are evident when breaking out market performance by class and submarket. Those shifts, incidentally, are likely to become far more pronounced over the final half of 2023, as a robust construction pipeline ramps up Over the first half of 2023, developers added a total of 829 new multifamily housing units to the local inventory. We are currently tracking another 4,961 multifamily units under construction across the region. The lion’s share of these, or 3,040 units, are scheduled to be delivered over the final half of this year (the remainder are slated for completion in 2024). If developers can keep to their timetables, this means that we will close 2023 with 4,012 new multifamily units—the most we have recorded in our survey since 2000.

Sacramento’s housing market (both single-family and multifamily) is far from overbuilt. According to the California Apartment Association, Sacramento needs at least 8,000 to 10,000 new units annually just to keep up with population growth. But the timing of these deliveries may prove to be challenging depending on how the economy shakes out over the final half of 2023.

So far, the economy has proven to be far more resilient than expected both to consumer spending and to a labor market that keeps outperforming. However, after two years of high inflation, consumer spending has been coming back to earth in recent months. Meanwhile, though a solid 209,000 jobs were created in June—this was the lowest level of employment growth the US has recorded since December 2020. The reality is there is a considerable lag time that occurs before the impact of interest rate hikes fully hits the economy. The Federal Reserve’s current campaign to tame inflation is not just the most aggressive we have seen in 40 years; it is also the fastest—with the effective funds rate having been raised a full five percentage points in one year. We have not felt the full impacts yet—which raises the risk that the Fed will overdo it (assuming they return to rate hikes again) or that they may already have. Either way, expect elevated vacancy and greater downward pressure on rents ahead, with new projects facing longer lease-up times amidst greater competition and weaker economic fundamentals.