market overview
SACRAMENTO MULTIFAMILY DELIVERIES AND NET ABSORPTION HIT 20+ YEAR HIGH
At the end of Q4 2024, multifamily vacancy in the Sacramento region stood at 6.1%. This reflects the same rate recorded just three months ago and a modest decline from the 6.2% reading of a year ago. The market recorded positive net absorption in Q4 to the tune of 701 units, bringing total annual occupancy growth for 2024 to 4,228 units. This compares to 2,554 units of total positive net absorption in 2023 and to a ten-year average of 1,574 units annually. The last time the Sacramento region’s apartment market recorded positive net absorption totaling more than 4,000 units was in 2000, when the region was also benefiting from a major wave of in-migration from (mostly) Bay Area residents seeking more affordable housing costs and higher quality of living. Sacramento has benefited from a similar wave of growth since the pandemic.
According to the Greater Sacramento Economic Council, the extended region’s population (they include outlying exurbs in Sutter, Yuba, and Nevada counties in addition
to the core local population base in El Dorado, Placer, Sacramento and Yolo Counties), regional population entering 2024 stood at just over 2.6 million residents, and is up 2.3% since 2020. While growth numbers have been slowing since the initial lockdown days of the pandemic, the Sacramento region has long acted as a pressure valve market for the Bay Area where the San Francisco and San Jose markets have consistently ranked among the five most expensive nationally. For example, as of December 2024 the median home price in San Francisco was $1,422,726 and it was $1,400,000 in San Jose. Sacramento, by comparison, recorded a median home price of $442,299 during the same period.
The numbers play out similarly in terms of multifamily rents. As of the end of 2024, the average asking rent per unit in San Francisco was $3,137 per month. In San Jose it stood at $3,070 and in the East Bay it was $2,419 per month. In Sacramento, it stood at $1,790.
The net result of these trends has been strong local in-migration from young professional households looking to enjoy California’s quality of life at a fraction of the cost of coastal markets. While a similar trend is playing out in Southern California between the Los Angeles metro and Inland Empire markets, Sacramento has consistently ranked as the fastest growing major city in California since the pandemic with multiple local communities
growth levels for cities of all sizes (Folsom was the State’s third fastest growing community overall in 2024).
Net absorption has been in positive territory for eight consecutive quarters now across the Sacramento region. Even though the region has been undergoing one of its most substantial waves of new development in decades, occupancy growth has largely been keeping pace with the delivery of new multifamily product.
DEVELOPMENT SLOWING ENTERING NEW YEAR
At the peak of the early 2000s growth wave (from 1997 through 2007), developers added an average of 2,784 new competitive multifamily housing units per year.
But apartment development virtually disappeared following the 2008 Great Financial Crisis (GFC). The markets that were hardest hit by foreclosures during that crisis were those that had been most active between 20042007 when bad loan product (stated income loans, adjustable-rate mortgages, etc.) flooded the market. Sacramento’s housing market was particularly impacted with foreclosure rates among the highest in the nation. It is estimated that over 25,000 local single-family homes became rentals in the years following the 2008 GFC. Though most of those would eventually be sold off to owner/occupants, this shadow inventory kept apartment developers out of the marketplace for the better part of a decade. Between 2008 and 2018, developers added an average of just 728 new apartment units per year.
Development has since been on the rise in California’s capitol city, since 2019 the Sacramento multifamily market has averaged adding just under 2,600 new housing units annually. In 2024, a total of 4,232 new units were delivered—the most since the market added 4,532 apartments in 2000. But demand has kept pace with vacancy levels remaining steady at 6.1% over the final half of the year, slightly below the 6.2% reading of one year ago.
Meanwhile, the development pipeline is shrinking. It peaked locally in Q1 2023 when there were 7,629 multifamily units under construction across the region across 49 different projects. At the start of 2024, there were 6,100 units in various stages of development underway. But as of Q4 2024, there were 23 projects under construction totaling 3,512 units, the lowest amount to be in the development pipeline since Q2 2020.
All these factors should bode well for landlords in 2025. As of the close of 2024, the average asking rent in the region stood at $1,790 per month (across all local submarkets and classes of multifamily product). This metric is up just 2.2% annually from where it stood one year ago but has been slowly climbing the past year following a flat 2023 when rent growth faced stronger headwinds from aggressive new development. With the construction pipeline emptying, we only see rental rate growth escalating heading into 2025.
DOWNTOWN CONTINUES
EVOLUTION TO LIVE/WORK/PLAY
We think the most notable ongoing trend is the continued evolution of downtown Sacramento from being a 9-5 office-worker driven business district to its increasing emergence as an emerging 18-hour live/work/ play city. This is an evolution that has been decades in the making that first began to build momentum with the conversion of the former Downtown Plaza Mall into the new home of the city’s NBA franchise, the Sacramento Kings, and their new arena (Golden 1 Center) in 2016. This project took a dying 1.0 million square foot (MSF) mall and replaced it with the Arena and the 630,000 SF sports and entertainment-themed Downtown Commons, or DoCo.
Meanwhile, after decades of planning, the redevelopment of the former Union Pacific Railyards immediately adjacent to Downtown Sacramento’s Old Town, Chinatown and Alkali Flats neighborhoods, has begun to transform the northwestern end of the city’s central business district. At 244-acres this project is of the nation’s largest infill urban redevelopment projects that will double the size of downtown.
At the start of 2020, we were tracking 94 competitive multifamily projects (these numbers only include major properties with at least 25 units) that accounted for 7,537 apartment units. Entering 2025, that number had climbed to 125 projects and a total inventory of 11,834 units, an increase of 36.3% in just five years.
As of the end of Q4 2024, multifamily vacancy downtown stood at 10.3%, down from a reading of 11.0% three months ago and the 12.4% rate posted one year ago. While the last couple of years have seen outsized new development and vacancy levels climbing into the low double digits, Downtown leasing activity has remained brisk with the market absorbing new space at a healthy clip. Much of this is being driven by in-migration from young professionals.
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more likely to rent and have grown faster over the past decade (+35%) than overall households (+26%). This has been a critical factor behind a few trends impacting Sacramento’s multifamily market. First, the median family household size for young professional households has declined from 1.3 to 1.2 people per household over the past decade and has played out as stronger leasing fundamentals for single-bedroom and studio units at the higher end of the scale with demand for new product remaining robust, with newly relocated professionals continuing to demonstrate their willingness to pay a premium to live in new construction in the urban core.
Developers added 3,512 new apartment units to the Sacramento region’s competitive inventory in 2024 across 27 new projects. The Downtown submarket singlehandedly accounted for a third of the region’s new multifamily construction in 2024; ten new projects came online with 1,165 multifamily rental units delivered in 2024.
Heading into 2025, we are tracking 23 projects currently in the development pipeline that will eventually deliver 3,512 additional housing units to market with deliveries slated through mid-2026. For the first time in five years, the Downtown submarket is not accounting for at least one in three of these rooftops. There are two major projects currently underway, including the 345-unit The A.J. Apartments (slated for April 2025 completion) which is within the greater Railyards redevelopment project and will be adjacent to a planned Kaiser Permanente hospital. The A.J. is the largest multifamily project currently under construction in the region and one of only two ongoing projects Downtown (the 106-unit Four40 West at 440 Sixth Street will likely be completed before the end of Q1 2025). While Downtown development has been dominant in recent years, 2025 appears to be shaping up as the year of suburban deliveries.
NEW CONSTRUCTION HEADING TO THE BURBS
In 2024 we began to see an uptick in multifamily development in some key suburban trade areas, though Downtown was still accounting for one in three newly constructed units and the trend was hardly universal.
Three major new projects came online in 2024 in the Folsom submarket, adding 788 new housing units to local inventories. This has been the primary factor driving vacancy upward in this trade area. As of the close of 2024, apartment vacancy in Folsom stood at 24.9%, up substantially from the 5.3% rate of one year ago. Nearly all the increase has come from these projects which (though delivered in Q2 and Q3 2024) are still in the process of initial lease-up.
addition of three major new projects in 2024 that added 587 new housing units to that trade area’s inventory. Those projects, however, have not substantially impacted vacancy levels. Multifamily vacancy currently stands at 6.7% in Natomas/North Sacramento. While this reflects a slight uptick from the 5.8% rate of midyear 2024, it remains below the 7.1% reading of a year ago. Developers may have added 587 new units of supply here over the past year, but tenant demand outpaced that figure with the market recording 651 units of positive net absorption over the past 12 months.
The Rancho Cordova submarket has also been a recent focal point of new development with both single-family and multifamily development ramping up to the south of Highway 50 along the Zinfandel Drive corridor south of International Boulevard, as well as new projects emerging along the Sunrise Boulevard corridor near Anatolia Ranch. Deliveries slightly outpaced supply here with two new projects adding 272 new housing units to the local inventory during the first half of 2024. The market recorded 191 units of positive net absorption over the course of the year and though the current vacancy rate of 7.5% stands above the 6.8% rate of a year ago, it has been trending downward for the past six months. There are two additional projects currently in the development pipeline that will add another 300 apartments locally over the first six months of 2025.
Lastly, the Roseville/Rocklin submarket added three new projects and 487 new units in 2024. Most of that space has been gobbled up by tenants; vacancy as of the end of Q4 2024 stood at 4.9%, only slightly up from the 4.2% reading of a year ago.
Heading into 2025, eight of the top ten projects under construction are suburban. Hines’ 303-unit Natomas Fountain Gardens is currently underway in the Natomas/North Sacramento submarket (this project is currently slated for Q1 2026 delivery). This trade area leads all others in terms of active pipelines with 583 units currently under construction and multiple planned deliveries likely to add 280 additional apartments to the local inventory later this year.
But unlike 2024, when new development was concentrated in just a handful of submarkets, the current pipeline is dispersed across the region. In addition to the 583 new apartments under construction in Natomas/North Sacramento and the 485 units underway Downtown, most local trade areas are seeing some activity. Entering the new year, we were tracking projects under construction in the Roseville/Rocklin (441 units), South Sacramento (364 units) El Dorado Hills (328 units), Rancho Cordova (300 units), Elk Grove (294 units) West Sacramento (202 units), Arden Arcade (201 units), and Davis (160 units) submarkets. Based on current vacancy levels and ongoing leasing trends, we don’t anticipate significant increases in vacancy across any of these trade areas barring any unforeseen macroeconomic shocks.
Heading into 2025, we have no doubt there will be some currently proposed projects that will move forward. But we anticipate continued moderation ahead and for rental rate growth to tick up noticeably in the coming year.
INVESTMENT OUTLOOK
In 2024, Costar tracked just 13,277 multifamily investment transactions nationally, accounting for total sales volume of $96.1 billion. Multifamily investment activity has been hobbled in recent years by challenging underlying fundamentals and high interest rates. By comparison, in 2019 Costar tracked 23,510 transactions accounting for $163.4 billion in total volume.
These same trends have impacted multifamily investment activity locally. Across the Sacramento region in 2024, 87 deals closed for a combined transactional volume of $497.2 million. This compares to 168 deals in 2019 and total deal volume exceeding $1.2 billion. Private investors (typically in all cash deals) have driven 90% of local activity in the past year— institutional investors have virtually disappeared from the landscape since 2022. The rise in inflation and subsequent cycle of aggressive interest rate hikes from the Federal Reserve is clearly one factor for this, but just as great a challenge is the fact that the region’s outsized rental rate growth of 2016 through 2021 had meant there was little room for rental rate growth before the 2022 spike in inflation, temporary slowing of tenant demand and record setting wave of new development. We see a return to stronger rent growth in 2025 playing a pivotal role in driving greater sales activity by late 2025 or early 2026.
Cap rates have been climbing in recent years, with the average asking cap rate in the Sacramento region standing at 5.9%. The average cap rate on transacted deals has fallen as low as 4.7% in early 2022 but has been climbing since even as transactional volume has also slowed.
LOOKING AHEAD
Heading into 2025, the US economy appears poised for growth. The Federal Reserve appears to have (for now) pulled off what many economists thought nearly impossible; a soft landing for the economy in their battle to contain inflation. Inflation, though still elevated from the Fed’s target of 2.0%, has been in the mid-2.0% range throughout most of Q3 and Q4 2024. But as recent developments in the bond market demonstrate, that battle may not yet be over.
Unemployment as of December 2024 stood at just 4.1% with that month’s job creation of 256,000 new positions ranking as the second highest of the year. Meanwhile, the latest Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics indicates that as of November 2024, there were 8.1 million available jobs in the US. While this is down from the post-pandemic (and all time) peak of 11.5 million in December 2021, these numbers remain far above historical averages. From 2015 through 2019, this metric averaged 6.4 million. In other words, the early indicators suggest strong employment growth ahead.
Retail sales have remained strong with early holiday sales projections showing a 3.5% annual increase. Meanwhile, the National Federation of Independent Businesses reports that as of December 2024, their Small Business Optimism Index had increased 3.4 points to 105.1 in December, its highest reading in six years. All of these are extremely positive signs for business growth in the coming year.
But not all the indicators are rosy. Though retail sales have remained in positive territory throughout the past couple of years of heightened inflation, this is largely because Americans have taken on massive amounts of new debt. In 2021, Americans owed roughly $800 billion on their credit cards. That number is now approaching $1.2 trillion. Worse
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yet, the average interest rate on that debt in 2021 was 16.5%. Today the average interest rate on US credit card debt is nearly 24.0%. Against the backdrop of a recent wave of notable retail bankruptcies, that sector may prove to be the canary in the coalmine in 2025.
Meanwhile, bond yields have spiked globally with the 10-year Treasury up half a percentage point in December alone. Modest upticks in the October, November and December 2024 inflation readings plus the unexpected strength of recent jobs reports have been factors suggesting that the economy may still be too hot and that the battle with inflation may not be over. Adding to these concerns are investor nervousness over policy uncertainty, global unrest, and the potential impacts of tariffs. We think that much of this uncertainty will lift over the first six months of the new administration, but for now, the impacts of recent bond market spikes have been real and felt primarily by the real estate sector.
Despite three consecutive drops in the federal funds rate by the Central Bank over the final months of 2024 (from a range of 5.25% to 5.50% in September to 4.25% to 4.50% in December), mortgage rates are now higher than they were a few months ago. At the start of 2024, the average rate on a 30-year, fixed rate mortgage stood at 6.62%. This number fell to a low of 6.09% in September but has since climbed to 7.01% as of January 15, 2025. This is because while the Federal Reserve’s monetary policy is one of the top factors impacting interest rates, it is not the only factor. Fiscal policy, trade policy and the strength of the US economy are also factors that influence the rates passed on to consumers.
All these factors will be center stage for the new Trump administration as it takes power in January with the bond market playing the potential role of spoiler. Expected tax cuts and deregulation from the new administration will assuredly spur business growth and economic output in 2025. However, major tax cuts without significant reductions in government spending will increase the deficit—another concern that could further rile the bond market.
Lastly, promised “across-the-board” tariffs of 20% to 60% would certainly have an inflationary impact if enacted in 2025 though it remains to be seen how much of Trump’s rhetoric may be a negotiation tactic for revisiting trade deals. As this report went to press, Bloomberg was reporting that senior Trump advisors were looking at the possibility of gradual or incremental tariffs to avoid inflation spikes. Whether this proves to be the case or not, we see this as a positive development and signs that incoming policymakers will be keeping a close eye on the real-time impacts of policy. Whether that will translate into the ability to change course quickly, if necessary, remains to be seen. But given the immensely negative political impacts that inflation had for the outgoing Biden administration we struggle to see any new administration not taking inflationary spikes extremely seriously quickly.
We believe much of the current uncertainty regarding policy shifts will dissipate over the first three months of the new administration with the impacts of those policy shifts becoming clearer by the midyear mark. In the meantime, we expect continued strong occupancy growth for the
multifamily sector that will translate into declining vacancy rates with a reduced development pipeline. The return of stronger rental rate growth will be critical in driving investment activity ahead. The last couple of years of near flat growth, following the runup in investment pricing the market experienced before recent the recent inflationary wave, meant it was exceedingly difficult for investors to find any quality product that offered solid returns on investment. That challenge will likely become less of an impediment to dealmaking heading deeper into 2025.
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