MARKET SNAPSHOT: Oversupply and Rising Unemployment are Major Impacts to Sacramento, Calif.’s Apartment Market

By Erika Schnitzer, Associate Editor Sacramento, Calif.—Apartment construction in Sacramento is expected to come to a near standstill this year, according to Marcus & Millichap’s 2009 National Apartment Report.Only 100 new units are slated for delivery this year, and the planning pipeline consists of fewer than 2,000 apartments.The main challenges for the Sacramento metro area include job losses, supply constraint and the land’s geography, which Ryan DeMar, associate vice president-investments in Marcus & Millichap’s Roseville, Calif. office, notes, “continues to generate an oversupply of market-rate and affordable apartments and single-family homes.” He adds that the metro has a low barrier to entry.The shadow market is significant and has a tremendous impact on apartment fundamentals. “The for-rent market entering the pipeline is huge,” says DeMar. Although the construction pipeline has deteriorated, the shadow market has added a significant amount of stock to the market, increasing vacancies—particularly in the Class A segment.Vacancy in the metro is expected to increase 60 basis points, to 7.9 percent, following last year’s 80 basis point rise. DeMar notes that vacancy in the metro is typically at 5 percent to 6 percent.Despite all this, Sacramento moved up four places this year to No. 21 in the firm’s annual National Apartment Index (NAI), a snapshot analysis that ranks 43 apartment markets based on a series of 12-month forward-looking supply and demand indicators.“Effective rents are flat—or were flat coming out of ’08—but we are seeing people lowering rents, especially for new leases,” DeMar tells MHN. While asking rents are forecast to gain 0.3 percent this year, to $979, effective rents will remain at $927. Some properties are lowering rents in addition to offering concessions—a practice that is becoming more prevalent in the Class A apartments than in the B or C markets.Transaction-wise, DeMar notes a gap between buyer and seller expectations. “I think that, as we move forward toward the end of the year, investment opportunities—mainly distressed—will become more abundant,” predicts DeMar. “Owners with maturing debt and highly leverage owners will have difficulty, so there will be opportunities for buyers to negotiate good-buy opportunities.”He adds that while select submarkets may fare better than others—for example, Davis has renter demand stemming from the area’s student population—a reasonable expectation for the market to turn around would be five to seven years. For those investors who have a long-term outlook, he says, “If you negotiate a good deal, there’s no reason not to buy, regardless of what you paid.”Marcus & Millichap’s report predicts that buyers will turn to lower-tier products in primary locations, such as downtown and midtown, which are expected to benefit from the city’s renewal efforts.“What we’re faced with is the loss of affordability, not only from the apartment and single-family standpoint, but from the employer standpoint,” says DeMar, adding that the city will “look like a promising place for businesses to locate and hire employees because cost of living is low. The benefits of locating a tech company is all there now—you just need capital markets to come back to start a business.”(Click here to read last week’s Market Snapshot on New York.)