MARKET SNAPSHOT: Sacramento Supply Constraint a Bright Spot

Sacramento, Calif.—The biggest bright spot for the multifamily market in the Golden State’s capital is the fact that there is no new supply coming online, which will eventually lead to positive absorption, notes Mark Leary, principal in ARA’s (Apartment Realty Advisors) Pacific office. In addition, the shadow market is on the decline.

ARA recently completed the sale of Slate Creek at Johnson Ranch to the San Francisco-based Prime Group for $54,250,000, or $88,644 per unit. Because of its location within the Granite Bay area of the Sacramento Region, the property received 14 offers and the deal was closed in less than 30 days, notes Leary, who acted as one of the advisors on the transaction.

The property sold for a 7.6 percent cap rate, which is a slight decline from a similar asset that was sold in July 2009 at a 7.9 percent cap. “Cap rates in Sacramento have always been, historically, 100 basis points higher than the Bay Area and that is still holding true today, so if you wanted to buy the same asset in the Bay Area it would be closer to a 6.5 cap or lower.”

Some owners in the area believe that the market may have hit bottom, as some submarkets have seen a decrease in concessions and an increase in occupancy. “With the 6.5 percent rent decline in the market, many owners feel that they may have hit bottom on the rents as they’ve been able to maintain occupancy,” Leary observes. Vacancy reached 7.5 percent in the third quarter of 2009, but ARA’s latest survey shows that the average rate is now 7 percent.

According to ARA’s numbers, the best-performing markets are downtown, Folsolm, Rocklin and Roseville—achieving monthly rents in the fourth quarter of 2009 of $1,253, $1,076, $1,009 and $1,017, respectively, compared to the region’s average of $943.

Due to the supply constraint, there are only two projects over 100 units currently on the market; year-over-year, transaction volume for larger properties decreased 52.6 percent, while velocity for properties with 20 units or less declined 41.9 percent.

That is not to say the city is out of the woods just yet. The latest unemployment figures show that 12.3 percent of Sacramento is out of work, compared to the national average of 10 percent. In addition, all state workers—who comprise about 25 percent of the city’s workforce—have been forced to take furlough days, resulting in salary cuts.