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Capital City: Sacramento Is A Rising Star With Industrial Investors

Sacramento Tower Bridge

Formerly sequestered watching San Francisco’s meteoric rise from across the Bay, Sacramento is having a moment all its own, with industrial and life sciences investors taking notice of the city’s offerings and spending accordingly.

With several local acquisitions so far this year, plus new development on the horizon and a distribution-friendly location, Sacramento is positioned to capitalize on the realigned priorities showing up in certain segments of the commercial real estate world.

“Sacramento had finally been discovered and acknowledged by a lot of logistics managers and real estate decision-makers about how strategic it is to be near the intersection of Interstate 5 and Interstate 8,” CBRE Executive Vice President Todd Sanfilippo said.

“It allows you to distribute to all four borders of North America,” he said. "It can get you to Los Angeles and to Canada, you know, same day, and is very quick access to the San Francisco Bay Area and up through Reno out to Salt Lake."

Convenient locations near major roads are attractive to industrial investors, and that fact shows in the Sacramento industrial market’s performance in the last few years.

In its second-quarter 2022 industrial report, CBRE recorded a 2.9% vacancy rate that has decreased steadily from 6% in 2017, along with net absorption increasing to over 6.5M SF in 2021, up from 4.3M SF in 2017.   

CBRE also reported a 56% increase in asking rents since 2017 to 80 cents per SF on a triple-net basis so far in 2022.  

These rising rents have attracted investors looking to maximize yields, with several trades taking place this year.

Mississippi-based EastGroup went on a buying spree, acquiring California-based Tulloch Corp., including its portfolio of 14 industrial properties totaling 1.7M SF across San Francisco and Sacramento. The company plans to develop another 215K SF.

Dalfen Industrial also acquired a 348K SF industrial property, the Belvedere Logistics Center, located in the city’s Power Inn submarket.

Developers have made good progress with coveted, often elusive last-mile facilities, Sanfilippo said. Speculative development is popular in the area, and he said he is optimistic about the city’s continued growth.

“I think in 2021, we had just over 4.5M SF of new construction completions,” he said. "And then through the second quarter of this year, we've had just over 2.2M SF of new industrial completions. And we're tracking another 690K SF of completions that should wrap up by the end of this year."

Investors and businesses are also enticed by the fast turnaround in the permitting process compared to the surrounding metros, which Greater Sacramento Economic Council President Barry Broome said is a remarkable feat.

The permitting approval window in Sacramento can be as short as 90 days, Broome said, making the city an outlier among its cohorts.

"You're in California. That's going to be unbelievable," he said.

Broome also attributed much of the city’s demand for industrial and life sciences properties to the strong recruitment and research potential of the University of California, Davis and Sacramento State. Amid the struggle for talent playing out across the country, these universities are a boon to companies interested in bringing business to Sacramento.

The two universities together are home to 70,000 students and are investing in their research, Broome said. UC Davis, for example, has a $1B research platform.

Broome also said that as the office climate shifts, his organization is assessing how much of the city’s existing office supply can be converted into labs — usually a costly process. But with life sciences demand at an all-time high, investors are increasingly motivated to keep up with tenant interest.

“We're recommending that industrial developers build those buildings, like their shells, and allow them to be convertible,” Broome said. "The other thing that we're doing is we're undertaking an evaluation of all our Class-A office."

Keeping these spaces flexible allows developers and city leaders to adapt to changing needs, he said.

“That would be a very powerful tool,” Broome said.