CLASS A: THE EMERGENCE OF SACRAMENTO’S DOWNTOWN LUXURY MARKET

The greatest concentrations of Class A product in the Sacramento region are in the Roseville/Rocklin (3,481 units), Natomas/North Sacramento (3,263 units), Folsom (2,857 units), Downtown (2,602 units), Elk Grove submarkets (1,911 units), and El Dorado Hills (1,018 units) submarkets. Historically, Class A product has primarily been clustered in the region’s higher income suburban submarkets, but downtown has increasingly become the focus of new development over the past two years.

Class A vacancy currently stands at 9.1%. This is down from Q1 2023’s reading of 10.6% and reflects positive net absorption of 583 units in Q2. The trade areas posting the greatest occupancy gains in Q2 were Natomas/North Sacramento (+249), Downtown (+142) and Folsom (+111). Vacancy for Class A properties peaked at 11.4% in Q4 2022, following last year’s delivery of 966 Class A units.

The current average asking rent for Class A multifamily is $2,210 per unit (though in most new construction we are seeing those asking rates start above the $2,500 range). Over the past 12 months, this metric has fallen by -3.3% ($2,286 per month).

Q2 2023 is the fourth consecutive quarter in which the area’s Class A asking rents recorded flat or negative growth. However, this comes following the region’s unprecedented rental rate growth of the past decade. Until recently, Class A rents had recorded gains in every quarter since Q1 2011.

After the outsized growth of the last few years, further local rental rate growth is increasingly limited by affordability issues. Those have only been amplified by the inflationary environment of the past year. As much as Class A rents are already facing headwinds due to greater economic uncertainty, the pricing environment is about to become more challenging for landlords—at least in some key local submarkets where deliveries of new product are about to surge.

Through the first half of 2023, development levels for Class A product have remained constrained. There were two major new Class A projects delivered to the market in Q2, totaling 351 total units. In April 2023, USA Properties Funds delivered the 111-unit Sage at Folsom project in the Broadstone neighborhood of Folsom. This was followed in May with the Stamas Corporation’s completion of the 240-unit Arena Senior Apartments complex in the Natomas/North Sacramento submarket. While both new projects helped to contribute to Q2’s net absorption totals, we are increasingly seeing longer lease-up times for new Class A product. Most of Q2’s occupancy growth did not occur in brand new developments, but in projects that came online 12 to 24 months ago.

There are 1,595 units Class A units currently under construction in the region. Six projects, totaling 1,014 units, are slated for delivery over the final half of this year. Four of those projects are in Downtown Sacramento—the other two are in West Sacramento. These include Anthem Properties’ 153-unit midrise project Envoy at 1010 11th Street, The A.J., a 345-unit midrise complex at the heart of the new Railyards redevelopment, the 51-unit Luella Lofts at 1218 Q Street and Ary Place, a 159-unit midrise project at 1717 S Street. In West Sacramento, the 200-unit 805 Riverfront and the 106-unit Four40 West at 440 Sixth Street will be delivered in Q4.

Looking ahead, though the sheer amount of new Class A product coming online will drive overall vacancy levels higher, most submarkets will not be impacted. But rental rate growth will remain challenged across the board by economic uncertainty and the still looming potential of a downturn. Those challenges will be particularly acute in the epicenter of current Class A development activity—Downtown. It is conceivable that this submarket’s current 21.0% vacancy rate could approach 40.0% with the addition of so much new space, particularly if economic conditions weaken and slow leasing activity over the final half of 2023. That said, while the new Downtown product will face near-term challenges in terms of competition and lease-up periods, the longterm transformative impact of this current wave of development will be an incredibly positive one for the city. For decades, Sacramento has sought to transform itself into a premier 18-hour city, but the missing component Downtown has been housing.