JKG
Q4 INDUSTRIAL market report
Gallelli Real Estate 3005 Douglas Blvd #200 Roseville, CA 95661 P 916 784 2700 GallelliRE.com
2023 | GALLELLI REAL ESTATE
market overview
Q4 23
5.9%
(±430,000) SF
$0.83
Direct Vacancy Rate
Net Absorption
Average Asking Rate (NNN)
±2.4 MSF
4.5%
4.9%
3.7%
Under Construction
Sacramento Unemployment
California Unemployment
United States Unemployment
*To provide the most accurate snapshot of market conditions, we revise our historical data in cases where new information is uncovered after the fact.
CONSTRUCTION SURGE NOT OVER YET
6.0%
$0.70
5.0%
$0.60
4.0%
$0.50
3.0% 2023 Q4
2023 Q3
2023 Q2
2023 Q1
Vacancy Percent
2022 Q4
2022 Q3
2022 Q2
2022 Q1
Source: Gallelli Real Estate; Costar Group
2021 Q4
2021 Q3
2021 Q2
2021 Q1
2020 Q4
2020 Q3
2020 Q2
2020 Q1
2019 Q4
Average Asking Rent (Monthly NNN)
Vacancy Rate
$0.80
2019 Q3
Average Asking Rent per Square Foot (Monthly, Triple Net)
7.0%
2019 Q2
There is just over 2.4 MSF of space currently under construction throughout the region, most of which is being developed on a speculative basis (as this report went to press, 1.6 MSF of this product was available and being marketed). Most of these projects are scheduled for delivery in Q1 2024. Just under 1.7 MSF of product is currently slated for delivery over the next three months, which will undoubtedly result in yet another uptick in the region’s vacancy rate by the close of Q1 2024.
Sacramento Industrial Market: Vacancy/Average Asking Rents $0.90
2019 Q1
As of the close of Q4 2023, industrial vacancy in the Sacramento region stood at 5.9%. This reflects a substantial uptick from Q3’s recorded rate of 4.6%. Developers added more than 2.0 million square feet (MSF) of space in Q4, making this one of the strongest quarters for new construction that the market has ever experienced (there are only four occasions in the past 25 years in which more than two million square feet of new product came online in a single quarter). All told, Sacramento’s industrial inventory grew by more than 3.8 MSF over the course of 2023. Since 2020, developers have added 15.8 MSF of new industrial product across the Sacramento region, growing the market’s inventory by a whopping 8.9% over just 36 months. And they are not done yet.
Sacramento Industrial Market All Classes of Product Q4 2023
Sacramento Industrial Market All Classes of Product Q4 2023 Sacramento Industrial Market: Supply/Demand/Vacancy 7.0%
5,000,000
6.0%
3,000,000 5.0% 2,000,000 4.0% 1,000,000 3.0%
0 2023 Q4
2023 Q3
2023 Q2
2023 Q1
2022 Q4
2022 Q3
2022 Q2
2022 Q1
Deliveries SF
2021 Q4
2021 Q3
Net Absorption SF Total
2021 Q2
2021 Q1
2020 Q4
2020 Q3
2020 Q2
2020 Q1
2019 Q4
2019 Q3
2019 Q2
2019 Q1
(1,000,000)
Vacancy Rate
Net Absorption/Deliveries (SF)
4,000,000
2.0%
Vacant Percent % Total
Source: Gallelli Real Estate; Costar Group
As recently as Q1 2022, Sacramento industrial vacancy reached an all-time low of just 3.8%, even though we were still two years into a construction boom. Feverish demand for modern industrial distribution, logistics, and eCommerce fulfillment space not only drove local space availability to record lows but drove explosive rental rate growth. The current average asking rent for industrial space in the region stands at $0.83 per square foot (PSF) on a monthly triple net basis. Since 2020 rents have grown by 40.6%. They have doubled over the last decade—something that has not occurred in any other major (inventory of at least 100 MSF) United States industrial market. So, it is no wonder why development has surged locally. But that pipeline is finally emptying. While builders will add 1.7 MSF of new inventory in Q1 2024, those numbers start to fall off significantly heading deeper into the year. Our current review of projects underway shows us that at least 223,000 SF of new space will come online in Q2 2024, followed by just 108,000 SF in Q3, 190,000 SF in Q4. There is one 312,000 SF distribution facility scheduled to come online at Buzz Oates’ Metro Airpark project near the Sacramento International Airport in early 2025. We have no doubt that some currently proposed projects will also move forward and add to these totals. We anticipate continued growth from Buzz Oates (both at Metro Airpark and elsewhere), as well as new projects coming out of the ground from Mark IV Capital, Panattoni and a few others. However, we anticipate that construction levels are going to begin to moderate back towards pre-2020 norms. Since 2020, the Sacramento industrial market has averaged 990,000
SF of new industrial product being delivered per quarter. This compares to an average of 264,000 SF per quarter from 2010 through 2019 and 445,000 SF per quarter between 2000 and 2009. In our discussions with developers, we are increasingly seeing a wait and see attitude regarding some proposed new projects as well as timetables being pushed back. As one developer told us, “We’ve been going full throttle for a while and want to slow things down a little bit to give the market a chance to absorb what’s already out there. We’re still seeing demand out there, but it’s not the frenzy it was a few years ago.”
IS THE FRENZY OVER? The market experienced negative net absorption in Q4 2023 to the tune of -429,000 SF. This marks the second consecutive quarter in which occupancy growth was negative and reflects a major reversal. Through the first half of 2023, the market absorbed over 1.5 MSF of industrial product. Over the final half of the year, space users gave back 578,000 SF of space. While Sacramento closed out 2023 with a respectable annual net absorption total of 966,000 SF, this compares to 2.9 MSF in 2022 and a whopping 7.7 MSF of occupancy growth in 2021. Clearly the market is slowing, but those levels of growth simply were not going to be sustainable forever. Keep in mind that throughout the 2010s, average annual net absorption was 2.7 MSF per year. In the first decade of the 2000s, it averaged 978,000 SF per year. Q4’s big winner was the Elk Grove/Laguna submarket, which recorded 609,000 SF of positive net absorption, followed by McClellan Park where new leases took down 195,000 SF of previously vacant space. But 12
Sacramento Industrial Market All Product Types Q4 2023 Sacramento Industrial Market: Median Price PSF/Average Cap Rate 7.0%
$160 $140
6.5% $120 6.0%
$100 $80
5.5% $60 $40
5.0% 2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Median Price PSF
Average Cap Rate
Source: Gallelli Real Estate; Costar Group
of the region’s 16 industrial submarkets posted negative net absorption in Q4 2023. The biggest loser was the Davis/Woodland market where a 396,000 SF sublease came back to market late in the quarter resulting in this trade area recording -314,000 SF of overall net absorption. West Sacramento posted -211,000 SF of negative net absorption in Q4—half of which came from one user sublease becoming available. The Sunrise submarket followed with -206,000 SF of occupancy declines, while Power Inn recorded negative net absorption to the tune of -176,000 SF. The Roseville and South Sacramento markets rounded out our trade areas in the red, respectively posted -168,000 SF and -134,000 SF of occupancy declines. Clearly activity has slowed. We tracked 124 transacted leases in Q4, down from 147 in Q3. But it is not just that the deal activity slowed, it’s that we just didn’t see many large transactions above the 100,000 SF range over the final three months of the year. And some of those we saw were deals where occupancy is not occurring until 2024—for example, we are aware of one 520,000 SF sublease transaction that was signed in December where tenants won’t be moving in (translating into positive net absorption) until sometime in Q1 2024. We expect the market to return to positive occupancy growth in Q1 2024 thanks to deals already in the pipeline. But that growth will be modest—at least over the first half of the year until there is greater macroeconomic clarity. Tenants that had been in aggressive growth mode have slowed down over the course of 2023, over macroeconomic concerns. As one retail logistics advisor for a major national superstore chain told us, “My client still has a need for multiple traditional
distribution centers and at least two more eCommerce fulfillment locations to fill out their supply chain. But they’ve been slowing the pace in 2023 out of potential recession concerns. Hopefully, those concerns fade over the next few months so they can put me back on the road.”
RECESSION OR SOFT-LANDING? For much of the past 18 months, the central economic debate in the United States has been whether the Federal Reserve would be successful in engineering a “soft landing” for the economy. Unfortunately, the Fed only has one tool to deal with inflation: interest rate hikes. And those work more like a sledgehammer than a scalpel. Adding to the challenge is that while some sectors of the economy—like real estate—feel the impact of interest rate hikes nearly immediately, it can take up to 18 months for the full impacts to play out in other critical areas of the economy like consumer spending. All of which translates into an exceedingly difficult balancing act as the Central Bank attempts to raise interest rates just enough to cool the economy and tame inflation, but not so much that it freezes the economy and spurs a recession. According to conventional economic wisdom, the Fed has only successfully managed to execute a soft landing once in eleven tries over the past 60 years. This Goldilocks moment took place in 1994 when the economy was in its third year of recovery following the 1990-1991 recession. Quickly falling unemployment and strong consumer spending had led to an uptick in inflation. Fed Chairman
Alan Greenspan would oversee seven rate hikes in 1994 as the FFR doubled from 3.00%/3.25% to 6.00%/6.25% by the end of the year. Then, when the economy showed signs of softening too much by early 1995, the Fed cut interest rates three times, which spurred significant economic activity. The result ended up being the late 1990s boom that was one of the strongest economic growth periods in the history of the United States and what Greenspan would describe in his memoirs as “one of the Fed’s proudest accomplishments during my tenure.” The Federal Reserve’s most recent rate hike campaign began in March 2022 when the Federal Funds Rate (FFR) stood at just 0.25% to 0.50%. By the end of 2022, the central bank had increased rates seven consecutive times bringing the FFR to 4.25% to 4.50%. They would raise rates four more times in 2023, pausing the campaign after they increased the FFR to the current rate of 5.25% to 5.50% in July 2023. With the lion’s share of their actions (both in the number and size of interest rate hikes) having taken place well over a year ago, it suggests that the economy has already experienced the impacts of most of those moves without veering into an actual overall economic recession. If the goal of the Federal Reserve has been to engineer
Select Sacramento Region Industrial Leases Past Six Months (Q3/Q4 2023) Address
Submarket
SF Footage
Tenant
3771 Channel Drive
West Sacramento
397,077
Encore Glass
3765 Channel Drive
West Sacramento
159,270
eShipping
10050 Foothills Boulevard
Roseville/Rocklin
146,016
SynergyForce
1630 Terminal Street
West Sacramento
143,480
Cubework
8250 – 8290 Industrial Avenue
Roseville/Rocklin
132,570
Denman of California
3021 – 3034 Peacemaker Way
McClellan
105,000
Perimeter Solutions
Roseville Rod @ Stationers Way
McClellan
82,000
Lund Equipment
1227 Striker Avenue
Natomas/Northgate
45,918
Shred-It
8360 Belvedere Avenue
Power Inn
42,000
Emerald Textiles
5860 Alder Avenue
Power Inn
40,000
Electric Equipment Company
4119 S. Market Court
Natomas/Northgate
34,306
ENO Glass
2650 Industrial Boulevard
West Sacramento
31,500
Propak Logistic
4522 Parker Avenue
McClellan
20,000
Quincy Compressor
4350 Pell Drive
Natomas/Northgate
16,000
Direct TV
4350 Raley Boulevard
McClellan
11,530
Highlands Community Charter and Technical School
3134 James Way
McClellan
8,250
AmeriCorps
5950 Key Court
Roseville/Rocklin
6,200
IOS Optics
4601 Lang Avenue
McClellan
6,146
Safi International
198 Opportunity Street
Natomas/Northgate
6,184
DaBella
industrial market report a “soft landing,” the airplane that is the US economy is touching down right now in what could best be described as a hold your breath moment. As for the chances of a recession in 2024, the consensus forecast of the National Association of Business Economists (NABE) continues to improve. In August 2022, 72% of the members of the NABE anticipated a recession within the next six months. That never happened. By the time the NABE conducted their August 2023 survey, 69% of NABE economists said they saw a “soft landing” on the horizon. That view has only gotten stronger with time; their December 2023 survey found that 76% of their economist membership believed the chances of a recession in 2024 were 50% or less. Of the NABE economists that see a downturn ahead, 40% believe that it will begin in Q1 2024 while 34% believe it will happen starting in Q2. Meanwhile, Bank of America economists have also changed their tune—at midyear 2023 they were forecasting a strong likelihood of a recession by either Q4 2023 or Q1 2024. Their outlook now is for a soft landing. What exactly would a soft landing in 2024 look like? The soft landing engineered by Alan Greenspan and the Fed in 1994 may give us some clues. Job growth was dismal that year. The economy lost jobs every month of 1994, averaging -321,000 jobs per month. But strangely, retail sales were phenomenal—posting significant gains every month and averaging year-over-year growth of 8.2% overall. In other words, it was an incredibly mixed bag. We do not believe the trends would be so contradictory in the months ahead, but our soft-landing scenario sees the next six months as
JKG
Q4 23
having near flat retail sales and job growth—with both metrics likely to remain in positive, but extremely tepid, territory. But we are not out of the woods.
One potentially troubling development has come from the latest inflation numbers for December 2023 which indicate a 3.4% increase in the Consumer Price Index (CPI). While these numbers have vastly improved since the peak inflation rate of 9.1% recorded in June 2022, December’s reading indicates an uptick from the 3.1% rate that had been posted in November 2023. Whether December’s numbers were just a holiday shopping season blip, or the resumption of an upward trajectory in inflation remains to be seen— but this development is one of critical importance. Following November’s inflation numbers, Fed policymakers said that that current interest rates were likely at their peak level and that if their current forecasts held up, the central bank would be in the position to cut interest rates at least twice in 2024 by later in the year. The Fed has not commented on whether December’s modest uptick in inflation has changed that plan. We think it is likely that policymakers will wait to see January’s inflation data before changing course. But further upticks in inflation would clearly mean the Fed would feel compelled to resume raising interest rates further, which would cast a further pall over the economy. All of this means that the next few months of inflation, employment and retail sales report will have outsized importance in determining what happens next. As for the Sacramento region’s industrial market, we expect growth in 2024 but think economic concerns will dictate whether that growth is tepid, in line with historical averages, or robust. In the meantime, expect a frenzy of new product deliveries in Q1, but for the construction pipeline to slow after that—returning to levels more in line with pre-2020 norms. Vacancy will go up in Q1 into the low 6.0% range bringing greater equilibrium to negotiations between landlords and tenants, though we don’t see rents moving backwards.
Net Absorption Submarket
Existing Vacant SF
Vacancy Direct (%)
2,728,771
Inventory
Total Quarterly
Last Four Quarters
SF Delivered
SF Under Construction
Avg. Asking Rate PSF
Avg Asking Rent PSF One Year Ago
Average Asking Rent % Change Annually 49.2%
Warehouse / Distribution Auburn/Newcastle
46,059
1.7%
(22,564)
(21,887)
-
37,440
$0.97
$0.65
Flex Warehouse
663,860
11,755
1.8%
3,240
10,617
-
-
$0.70
$0.70
-
2,064,911
34,304
1.7%
(25,804)
(32,504)
-
37,440
$1.05
$0.64
64.1%
Davis/Woodland
16,810,047
534,876
3.2%
(314,280)
(132,585)
-
107,612
$0.59
$0.62
(4.8%)
Flex Warehouse
844,034
60,450
7.2%
(13,446)
(32,808)
-
107,612
$2.25
$1.88
19.7%
15,966,013
474,426
3.0%
(300,834)
(99,777)
-
37,440
$0.53
$0.58
(8.6%)
Downtown
2,451,552
140,000
5.7%
(3,663)
25,404
-
-
$0.88
$0.83
6.0%
Flex Warehouse
455,995
3,007
0.7%
-
-
-
-
$1.30
-
-
1,995,557
136,993
6.9%
(3,663)
25,404
-
-
$0.85
$0.83
2.4%
East Sacramento
539,688
32,457
6.0%
-
13,200
-
-
$1.55
$2.00
(22.5%)
Flex Warehouse
55,619
10,457
18.8%
-
-
-
-
$2.00
$2.00
-
484,069
22,000
4.5%
-
13,200
-
-
$1.20
$0.00
-
7,036,335
Elk Grove/Laguna
51,051
0.7%
608,975
671,388
631,465
59,100
$1.11
$0.86
29.1%
Flex Warehouse
370,610
-
-
9,785
15,904
-
-
$1.27
$1.08
17.6%
6,665,725
51,051
0.8%
599,190
655,484
631,465
59,100
$1.02
$0.80
27.5%
Folsom/El Dorado Hills
5,174,612
219,624
4.2%
(4,507)
(29,579)
-
-
$0.94
$0.97
(3.1%)
Flex Warehouse
2,062,661
153,779
7.5%
10,311
(3,183)
-
-
$0.82
$0.86
(4.7%)
3,111,951
65,845
2.1%
(14,818)
(26,396)
-
-
$1.16
$1.22
(4.9%)
Mather
5,342,171
353,341
6.6%
(37,606)
(60,070)
-
155,076
$0.90
$0.72
25.0%
Flex Warehouse
1,575,171
229,232
14.6%
(7,308)
(104,367)
-
-
$0.98
$0.96
2.1%
3,767,000
124,109
3.3%
(30,298)
44,297
-
155,076
$0.90
$0.62
45.2%
McClellan
17,454,236
706,020
4.0%
195,485
130,522
-
149,500
$0.97
$0.71
36.6%
Flex Warehouse
1,856,283
308,000
16.6%
15,785
71,336
-
-
$0.86
$0.80
7.5%
15,597,953
398,020
2.6%
179,700
59,186
-
149,500
$0.99
$0.68
45.6%
Northgate/Natomas
21,835,851
1,759,131
8.1%
93,584
670,784
659,000
1,714,725
$0.83
$0.78
6.4%
Flex Warehouse
2,013,288
174,769
8.7%
3,362
(104,436)
-
-
$0.84
$0.95
(11.6%)
19,822,563
1,584,362
8.0%
90,222
775,220
659,000
1,714,725
$0.82
$0.71
15.5%
Northeast Sacramento
6,064,585
318,866
5.3%
(7,880)
(72,905)
-
-
$0.83
$0.86
(3.5%)
Flex Warehouse
917,661
45,973
5.0%
(12,717)
(2,157)
-
-
N/A
N/A
-
5,146,924
272,893
5.3%
4,837
(70,748)
-
-
$0.82
$0.86
(4.7%)
Power Inn
26,961,969
842,217
3.1%
(175,666)
(415,417)
11,800
-
$0.87
$0.92
(5.4%)
Flex Warehouse
1,155,046
119,696
10.4%
(3,567)
(73,963)
-
-
$1.13
$0.99
14.1%
25,806,923
722,521
2.8%
(172,099)
(341,454)
11,800
-
$0.84
$0.91
(7.7%)
Richards
4,014,959
20.6%
239,609
6.0%
(40,824)
(10,323)
-
-
$0.76
$0.63
Flex Warehouse
200,275
-
-
-
8,256
-
-
-
-
-
3,814,684
239,609
6.3%
(40,824)
(18,579)
-
-
$0.76
$0.63
20.6%
Roseville/Rocklin
19,168,995
528,355
2.8%
(167,861)
191,095
-
-
$0.99
$0.69
43.5%
Flex Warehouse
3,297,925
259,171
7.9%
(166,801)
(234,011)
-
-
$1.23
$1.09
12.8%
15,871,070
269,184
1.7%
(1,060)
425,106
-
-
$0.86
$0.60
43.3%
South Sacramento
4,367,995
1,165,023
26.7%
(134,498)
(186,196)
-
-
$0.79
$0.93
(15.1%)
Flex Warehouse
192,758
27,740
14.4%
(12,514)
(3,439)
-
-
$0.79
$0.83
(4.8%)
4,175,237
1,137,283
27.2%
(121,984)
(182,757)
-
-
$0.79
$0.97
(18.6%)
Sunrise
12,879,716
1,375,627
10.7%
(206,348)
(13,699)
717,346
30,000
$0.90
$0.54
66.7%
Flex Warehouse
1,901,692
389,776
20.5%
(172,088)
(153,976)
-
-
$0.94
$0.84
11.9%
10,978,024
985,851
9.0%
(34,260)
140,277
-
30,000
$0.87
$0.52
67.3%
West Sacramento
24,013,740
2,139,679
8.9%
(211,404)
206,054
-
189,916
$0.85
$0.74
14.9%
Flex Warehouse
1,387,116
40,325
2.9%
(11,983)
(17,961)
-
-
$1.02
$0.87
17.2%
22,626,624
2,099,354
9.3%
(199,421)
224,015
-
189,916
$0.81
$0.73
11.0%
Totals
176,852,449
10,451,935
5.9%
(429,057)
965,786
2,019,611
2,443,369
$0.83
$0.78
6.4%
Flex
18,949,994
1,834,130
9.7%
(357,941)
(624,188)
-
107,612
$1.01
$0.95
6.3%
Warehouse
157,902,455
8,617,805
5.5%
(71,116)
1,589,974
2,019,611
2,335,757
$0.79
$0.74
6.8%
SPECIALTY SUBSETS: Cold Storage/ Food Process
4,660,249
875,577
18.8%
-
-
-
155,076
$1.00
-
-
Warehouse
15,868,110
296,031
1.9%
619,314
669,189
631,465
-
$0.66
$0.88
(25.0%)
JKG
GALLELLI BROKER TEAMS INVESTMENT Gary Gallelli
Partner gary@gallellire.com
Pat Ronan
Vice President pat@gallellire.com
Aman Bains
Associate Vice President abains@gallellire.com
Adam Rainey
Associate Vice President arainey@gallellire.com
RETAIL Kevin Soares
Bob Berndt
Matt Goldstein
Kurt Conley
Robb Osborne
Brandon Sessions
Executive Vice President | Partner ksoares@gallellire.com
Vice President mgoldstein@gallellire.com
Executive Vice President | Partner bberndt@gallellire.com
Jeff Hagan
Senior Vice President | Partner jhagan@gallellire.com
Senior Associate kconley@gallellire.com
OFFICE Executive Vice President rosborne@gallellire.com
Senior Vice President bsessions@gallellire.com
CAPITAL MARKETS RESEARCH Kristopher Krise Capital Markets Advisor kkrise@gallellire.com
JKG Gallelli Real Estate 3005 Douglas Blvd #200 Roseville, CA 95661 P 916 784 2700 GallelliRE.com
Garrick Brown VP, Real Estate Intelligence & Business Development
gbrown@gallellire.com
Kannon Kuhn
Associate kkuhn@gallellire.com
Phillip Kyle
Senior Vice President pkyle@gallellire.com