MARKET STILL FAVORING GROCERY-ANCHORED

The largest inventory subset of the local shopping center market are community and neighborhood centers. These types of shopping centers, typically anchored by grocery or drug stores, account for 38.5 MSF of the region’s 66.0 MSF of inventory, or 58.3% of all local product. They faced the least amount of disruption from the rising tide of eCommerce during the “retail apocalypse” era of the 2010s, they were least impacted by mandated closures during the pandemic, and they continue to outperform not just all other retail asset classes.

The region’s greatest occupancy gains in Q2 came from community and neighborhood centers which recorded 189,000 SF over the past three months. Following occupancy losses in Q1, this quarter’s performance brought year-to-date net absorption back into positive territory to the tune of 59,000 SF. Overall vacancy for community and neighborhood centers in the Sacramento region fell from 7.7% to 7.4% in Q2. There is just over 2.8 MSF of currently vacant space within this category—including only 12 spaces that are above the 30,000 SF mark. This point is critical because we continue to see extremely strong demand for smaller spaces of 3,000 SF or less and we also see it for mid-size box space in the 20,000 to 35,000 SF range (small format grocers and off-price apparel leading the categories demanding that size footprint). It is when availabilities cross the 40,000 SF threshold when the pool of potential tenants for that space significantly diminishes.

The current average asking rent for community and neighborhood product is $1.90 per square foot (PSF) on a monthly triple net basis. However, as this average extends across all sizes of available spaces and all classes of product, this number is best utilized as a benchmark only. It is not uncommon for secondhand large box space in Class B or C locations to have asking rents as low as $1.00 PSF or less, nor is it uncommon for newly constructed small shop space in premium locations or centers to have asking rates of $3.00 PSF or more.

Looking Ahead

ISince April of last year, economists have been debating whether the Federal Reserve could engineer a “soft landing” in its attempts to curb inflation, or whether a recession was simply a given. In August 2022, 72% of the members of the National Association of Business Economists (NABE) anticipated a recession by early 2023. By February of this year, 58% of NABE panelists were predicting that a downturn would still occur this year—but over the final half of the year. So far, the economy has proven to be far more resilient than