Urban in-migration and inner-ring suburban overspill in Sacramento

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By: John Sheaffer, Senior Analyst

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Not unlike many other US markets, midtown and downtown Sacramento have benefited from recent population growth, primarily fueled by millennials and baby boomers increasingly eschewing the suburbs for a more urban lifestyle. Regional employers have begun to follow suit. The revitalization of Sacramento’s urban core has helped catalyze this trend locally, leaving a single option, 980 9th Street, for office users over 50,000 square feet seeking space downtown.

Rising demand for downtown office space is demonstrated in the average asking rate, which has increased by over 4.0 percent during the past 12 months. Asking rates among buildings 100,000 square feet and larger have appreciated at an even faster rate, at 5.7 percent year-over. Large, cost-sensitive tenants with expiring leases are beginning to feel the crunch; State Street Bank recently opted for a more affordable location in the adjacent South Natomas submarket. New tenants to the CBD and expansions have already negated the 100,000 square foot hole left by State Street and the vacated space is now the primary target for expanding state agencies, which require a downtown address. In other words, the last remaining block of contiguous space over 50,000 square feet downtown will not sit vacant for long.

Located directly across the river from the grid, landlords in the South Natomas and Point West submarkets stand to gain the most from CBD overflow. The two submarkets have already begun to the benefit from an increasingly competitive landscape downtown, with more than 270,000 square feet of positive net absorption YTD (compared to an average of 70,000 square feet, among other submarkets). South Natomas landlords are capitalizing on this trend, where the average asking rate has increased by 15.1 percent, year-over-year, to $2.20 FS. Demand overspill has rendered the Point West submarket the most affordable, adjacent submarket to the CBD. As South Natomas asking rates continue to approach downtown averages, cost-conscious tenants will increasingly look to the Point West submarket as the only viable option within close proximity to downtown.

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