After a six-year stalemate with no new development to speak of, the Natomas basin is poised for rapid growth following the decision by Congress to fund the remaining levee improvements needed to mitigate the flood risk that plagued the once vibrant region for years. With new flood zoning maps in the works, and a backdrop of an improving economic and commercial real estate scene, the news is a boon for residential and commercial real estate developers who have been waiting patiently for signs that the market is ready for the next chapter of growth that will define a long-awaited renaissance for Sacramento. Timing of the decision couldn’t be better; commercial sectors are finally starting to gain traction after a multi-year downturn, and the underlying fundamentals – including vacancy rates, tenant demand and rental rates – are all pointing to a sustained and justifiable recovery. This coupled with an influx of thousands of new residents and increasing property values is nothing less than a perfect storm for many prosperous years to come.
But before we get too far ahead of ourselves, let’s take a brief walk down memory lane and look at the events that led up to the Natomas moratorium.
In 2006, the Army Corps of Engineers determined that the levees protecting the entire Natomas basin – includes North and South Natomas and parts of southern Sutter County – were prone to seepage, putting 100,000 residents and $7 billion in property at risk. The heightened risk prompted FEMA to rezone the area to a higher risk rating (AE) in 2008, requiring any new construction to be raised a minimum of 20 feet above the current flood plain. The building restrictions initiated a defacto building moratorium for the Natomas region.
The rezoning caused millions of square feet of commercial, office, industrial and multi-family projects as well as thousands of single-family housing units to be put on hold until the levees were improved. In the years leading up to the moratorium, North Natomas was one of the fastest growing residential and commercial areas in the Sacramento region, bringing tens of thousands of residents and billions of dollars in commercial development into the basin.
The Sacramento Area Flood Control Agency (SAFCA) embarked on some of the most important work to improve the levees, upgrading 18 of the 42 miles surrounding the Natomas basin with $400 million in state flood-control funds and local property taxes. The responsibility for the remaining ±24 miles of levee improvements, totalling over $760 million dollars, were allocated to the Army Corps of Engineers. However, funding for the projects stalled in Congress for years while they argued over the federal budget and spending.
Fast-forward to May of 2014.
Congress approved the Water Resources Reform and Development Act, a $1 billion dollar investment in levee improvement projects around the US, including the improvements necessary to bring the Natomas levees up to code. City planners say there are roughly 5,000 housing units eligible to start building in June of 2015 in addition to 430,000 square feet of retail space and 1.6 million square feet of non-retail commercial space that only need final approvals to be built.
The region’s sustained housing recovery in recent years warrants a conservative approach to new housing development in the Natomas basin, and many developers with land holdings in the area are poised to start construction once the new flood maps are issued in spring of 2015. The big question is whether we will see any notable commercial retail and non-retail development follow alongside the housing construction, or if developers will hold tight and wait for fundamentals to improve further before they break ground on any new projects.
One could make the argument that in certain commercial segments, the market may be ready for new development. Vacancy rates are on the decline and asking rental rates across various product types are gradually improving. And with no notable new development since 2008, select commercial product types (including industrial warehouse and distribution space) are desparately in need of new supply. For now, only time will tell how quickly developers are going to react to the moratorium lifting. But as an active observer of commercial real estate trends in the region, I am optimistic that this is but one of the many positive trends leading up to a renaissance for the Sacramento region.