VACANCY DIPS AS DEVELOPMENT PIPELINE CONTINUES TO EMPTY
As of the midyear 2024-mark, multifamily vacancy in the Sacramento region stood at 5.9%, reflecting the second consecutive quarter of declines. Three months ago, this metric stood at 6.0% but today’s reading now matches where vacancy stood exactly one year ago. Six new apartment communities were delivered to market in Q2, adding a total of 1,037 new multifamily housing units to the local inventory. However, during this same time, the market recorded 1,134 units of positive net absorption with demand outpacing new supply for the second consecutive quarter.
The current average asking rent of an apartment in the region is $1,767 per unit. While this reflects a 1.6% increase over the $1,739 rate of a year ago, keep in mind that these numbers are not inflation adjusted. Since Q3 2022, year-over-year gains have not topped 2.3%, even while inflation during much of that period was peaking. In other words, in real dollars rents have gone backwards locally in the past two years. If there is any solace at all for landlords, it’s that from 2021 through 2025, Sacramento rents were growing at a
rate that far outpaced inflation—remaining at, or above, the 5.0% mark for four consecutive years. Likewise, the markets where we are seeing the greatest levels of year-over-year rental rate growth; El Dorado Hills (+3.7%), Elk Grove (+4.1%), and Roseville/Rocklin (+4.3%) are among the trade areas that have seen the least amount of new construction in the last few years. Meanwhile, except for the Natomas/North Sacramento (+2.3%) submarket, the trade areas that have experienced the greatest levels of new development all either have recorded negative or flat rental rate growth this quarter; Downtown (-0.3%), Folsom (+0.7%), West Sacramento (-0.6%).
SUBMARKET REVIEW
Eight of Sacramento’s 12 distinct multifamily submarkets recorded positive net absorption in Q2, though not all of them also posted declining vacancy rates. The Folsom submarket led all other trade areas in terms of occupancy growth—it recorded positive net absorption to the tune of 415 units in Q2. This marks the strongest single quarter growth metric that we have ever tracked in this submarket (our data goes back to 2000). However, it was not enough to keep up with deliveries—three new projects came online in Q2 that added 687 new multifamily housing units to the local inventory. While these new projects (Elliott Homes’ 257-unit Broadstone Villas, St. Anton’s 152-unit Mangini Place and Van Daele Development’s
Sacramento Multifamily Market
Sacramento Multifamily Market: Vacancy/Average Asking Rent Per Unit
278-unit Atwell at Folsom Ranch) accounted for over one third of this trade area’s total occupancy gains, it was not enough to keep vacancy creeping upwards from 4.7% to 7.0%. The good news is that we continue to hear reports of new suburban product leasing briskly.
A similar trend played out in the Rancho Cordova market where the delivery of a new 143-unit project outpaced this submarket’s occupancy growth of 51 units to send vacancy upwards from 7.6% to 8.2%. However, the Carmichael/Citrus Heights, Downtown, El Dorado Hills, Natomas/North Sacramento, Roseville/Rocklin, South Sacramento, and West Sacramento submarkets all experienced positive net absorption and declining vacancy levels in Q2. Sacramento’s Downtown market, which has accounted for 29.2% of the region’s new development since 2020, recorded its third consecutive quarter of declining vacancy with net absorption (+208) outpacing deliveries (+50) once again—though it was not enough to alleviate headwinds for rental rate growth (the current average asking rate per unit Downtown of $1,820 per unit is down slightly from the $1,822 rate of exactly one year ago).
NEW DEVELOPMENT TO LEVEL
OFF HEADING INTO 2025
Since 2020, developers throughout the region have added nearly 12,000 new multifamily units (increasing Sacramento’s apartment stock by just over 7.5%) in what has been the strongest wave of new construction since before the Great Financial Crisis (GFC). While local vacancy had fallen as low as 3.2% (Q2 2021), the consistent trend of the past few years has been rising vacancy levels with each surge of new deliveries. Likewise, rental rate growth—which had reached double digits as recently as 2021 (it peaked at 11.1% in Q2 and Q3 2021)—has cooled during this period as landlords dealt with the
challenges of rising vacancy, heightened competition and cashstrapped tenants dealing with the impacts of inflationary pressures.
The news has not been all challenging. Sacramento’s multifamily market continues to benefit from in-migration. Though the state of California has lost more than 750,000 people since the start of the pandemic, Sacramento and California’s inland markets have all seen growth since that time from residents seeking more affordable housing opportunities.
According to the Greater Sacramento Economic Council (GSEC), the greater Sacramento region’s total population in 2019 was 2,528,937 but grew to 2,623,204 by the end of 2023, for an overall growth rate of 3.7% or total growth of just under 95,000 residents. We should note that GSEC’s definition of the greater Sacramento region includes some outlying regions (Amador, Sutter, Yuba County) that we view as exurbs and distant bedroom communities at best, but the growth trend for the region has been a real one.
But while local household formation levels have increased, the market has also been in an extended period of elevated development levels since 2020. The result has been that vacancy (which had been in the 3.0% range as recently as 2019) has been steadily inching higher—particularly as waves of new development have been delivered to market.
It is too soon to say this most recent wave of new development is over, but at the midyear mark there were 28 new apartment communities under construction throughout the region accounting for 4,562 housing units that, assuming developers can stick to current timetables, will be delivered to market over the next two years. This is the lowest amount of new product remaining in the development pipeline since 2020, when this current development wave was ramping up.
multifamily market report
Sacramento Multifamily Market
Avg. Asking Rent Per Unit Vs. Annual Rental Rate Growth Q2 2024
Sacramento Multifamily Market: Average Asking Rent Per Unit/Rental Growth Rate
Source:GallelliRealEstate;CostarGroup
Our analysis of the current development pipeline indicates that 16 new projects will be completed over the course of Q3 2024, with deliveries surging to approximately 2,718 new units, or 59.5% of all the product currently under development in the region. Assuming developers can stick to slated delivery schedules, next quarter could see the greatest amount of new product coming online that the market has recorded in any single quarter since we began keeping stats (2000). This will certainly send vacancy levels back upwards, but following these deliveries, the construction pipeline will have decreased to roughly 1,800 units (its lowest level since 2017). There will be some projects currently in the proposal stage that will move forward and be added to that pipeline, but we see development leveling off heading deeper into 2025 for several reasons.
Sacramento’s recent wave of new development, as well as the trend of spiking vacancy and flattened rental rate growth, is part of a national trend. Multifamily product across the United States has recorded its highest development levels in decades. According to the Costar Group, 2023 set a record for new multifamily deliveries with just under 600,000 new multifamily units coming online—the largest amount that CoStar has tracked in over 25 years. An additional 360,000 units have been delivered over the first six months of 2024. Not surprisingly, multifamily vacancy now stands at 7.8%, its highest level since the Great Financial Crisis (GFC). But both nationally and locally, the development pipeline is dissipating. Rising operating expenses and higher financing costs, along with elevated vacancy levels, have translated into diminishing development pipelines, with the expectation that 2025 could see national multifamily construction levels at a 15-year-low.
We see a similar trend playing out in the Sacramento region. While new deliveries are expected to surge in Q3 2024, the final quarter of this year could see just three new projects totaling less than 700 units coming online with the pipeline diminishing further heading deeper into 2025.
While we have no doubt there will be some additional new projects going forward, we anticipate a wait-and-see approach from developers with projects in the proposal stage entering 2025. This could change quickly, particularly if likely Federal Reserve interest rate cuts spur an economic boom heading into next year, but outside of immediate positive impact for real estate, the impact of one or two rate cuts will take some time to filter through the economy. A scenario we think more likely in 2025 is that rate cuts spur significant commercial real estate investment activity that has been on hold, but that the trend for the overall economy will be one of building momentum heading deeper into 2025.
$350,000
Sacramento Multifamily Market
Sale Price Per Unit Vs. Average Cap Rate
INVESTMENT OUTLOOK
The fact that there is little likelihood for rental rate growth locally has been an additional factor in chilling local multifamily investment activity. Though there are always some value-add projects in any market where investors may be able to achieve some rental rate growth on rehab projects, they tend to be few, far between, and hard to find.
The Sacramento market has traditionally been dominated by private buyers. They have accounted for 75% of all acquisitions and dispositions over the past five years. Over the past year, Sacramento’s limited private equity investment gave way to more private transactions, which rose to nearly 90% of total transactions. Slow/flat rent growth, rising vacancy, and increased financing costs have brought upward pressure on cap rates. The challenge is that most would-be sellers want to command no more than a 5.0% to 5.5% cap rate on their property, if they can. Most buyers want to see a 6.0% or greater cap rate on an acquisition if they can. This means that outside of extremely unique transactions, most of the deals that are happening today are deals of necessity (death, divorce, taxes, etc.). Meanwhile, loan-to-value ratios have also expanded as the cost of borrowing has increased, with deal financing remaining far more difficult, which has also impacted activity save for all cash deals. The reality is that large deals have simply evaporated since the Federal Reserve began its interest rate hike program to tame inflation. With interest rates remaining high until at least the second half of the year, we don’t see investment activity picking up in the near term.
Most investors currently are content to wait for pricing to fall. They are reluctant to make moves in an environment where vacancy is creeping up, rent growth is flat or stagnant and higher concessions are in play—unless the price is heavily discounted. Current cap rates are very close to BBB bond rates, yielding no premiums for the risk involved. Once we do see interest rates starting to come back down, the question is how quickly will buyers and sellers find compromises between the current bid ask gulf?
The real question is what will happen once the Fed begins to lower interest rates? There is $240 billion in dry powder from institutional investors currently sitting on the sidelines waiting to pounce. We anticipate greater deal flow in 2024 than what the market experienced in 2023 but suspect the real activity won’t begin until we see at least a couple of consecutive rate decreases. In the meantime, expect a lot of players to get themselves into position for the race to begin.
Sacramento Multifamily Market: Average Sales Price Per Unit Average Cap Rate
Source:GallelliRealEstate;CostarGroup
multifamily market report
Q3 2024 PLANNED DELIVERIES
Fair Oaks Senior Apartments,12057 Fair Oaks Blvd
110 Units-- Ionic Entertainment Carmichael/Citrus Heights Submarket
Axis at Davis, 2555 Research Park Drive
200 Units-- Anton Development Company Davis Submarket
The Grace, 620-628 15th Street
41 Units-- American Hospitality Services Downtown Submarket
The Haley, 775 N. 6th Street
372 Units—29th Street Capital Downtown Submarket
Luella Lofts, 1208 Q Street
51 Units-- Urban Development Partners Downtown Submarket
The Richmond, 1629 S Street
47 Units-- Saul Vazquez and Nancy Magana Downtown Submarket
Wong Center Senior Apartments, 631 F Street
150 Units—Sunseri Construction Downtown Submarket
Verdell Pointe, 2137 Iron Point Road
253 Units-- Grupe Holding Company Folsom Submarket
The Eames, 1542 Bartlett Lane
331 Units-- FPI Management
Natomas Submarket
Northview Pointe, 2314 Northview Drive
66 Units-- Excelerate Housing Group Natomas Submarket
Bear Hollow Estates, 3370 Zinfandel Drive
149 Units-- Hawthorn Retirement Group
Rancho Cordova Submarket
Terracina at Whitney, 711 University Avenue
288 Units-- USA Properties Fund
Roseville/Rocklin Submarket
Heights of Stockton, 4995 Stockton Boulevard
200 Units-- Jeffrey & Julia Ota
South Sacramento Submarket
Tran Villa Luxury Apartments, 6458 Stockton
Boulevard
32 Units-- Thai Tran
South Sacramento Submarket
Four40 West, 440 Sixth Street
106 Units-- Mark Pruner
West Sacramento Submarket
Kinect @ Southport, 2415 Jefferson Boulevard
322 Units-- American Capital Group
West Sacramento Submarket
Q4 2024 Planned Deliveries
The A.J., 251 6th Street
345 Units-- McClellan Park, LLC
Downtown Submarket
Anindell, 115 Healthy Way
154 Units-- Blue Mountain Enterprises Folsom Submarket
Sutter Green 2.0 Apartments, 2450 Natomas Park Drive
190 Units-- Demmon Partners
Natomas Submarket
Q1 2025 PLANNED DELIVERIES
1720 Research Park Drive
160 Units-- Fulcrum Capital Corporation
Davis Submarket
39th & Broadway Senior Apts, 3900 Broadway
43 Units-- Sacramento Housing & Redevelopment
Agency
Downtown Submarket
Stone Creek Village Apartments, 3390 Zinfandel Dr.
