What Is Driving Growth Throughout the Sacramento Area?
29th Street Capital’s Kevin Smith examines the housing fundamentals in the capital city of California and delves into the strengths of the market.
Limited opportunity for new development, a lack of supply and relocating residents from the Bay Area have underscored the need for housing in Sacramento, Calif., in the past few years. The pandemic has accelerated this trend, forcing residents to leave gateway cities in search of more affordable options.
While Sacramento seems to be benefiting from its proximity to the Bay Area, the upward pressure put on rental rates might lead to locals being priced out of Sacramento, according to Kevin Smith, senior vice president of development at 29th Street Capital. Here’s what he unveiled about both the strengths and the weaknesses of the market, and what he thinks about the short- and long-term effects of the COVID-19 crisis.
How has the pandemic impacted Sacramento’s multifamily market compared to other California metros?
Smith: The Sacramento market has held up on occupancy and even continued to increase rental rates during the COVID-19 crisis. The strength and growth of the rental market have been driven by a combination of the strong government, health-care and educational base of the Sacramento job market and the push of COVID-19 refugees from the Bay Area pouring into the mid- to high- homeownership market in the region.
Has the metro’s employment composition helped soften the blow for the multifamily industry?
Smith: Absolutely. Higher percentages of government, health care, education and other essential workers have softened the blow. Additionally, COVID-19 work-from-home refugees from the Bay Area are putting strong upward pressure on the for-sale market, keeping more local mid-level employees priced out of the ownership side and in the rental market.
What can you tell us about the current supply-demand dynamics in the market?
Smith: Sacramento suffers from the statewide problem of chronic underdevelopment of new housing of all types. The State of California Regional Housing Needs Assessment identifies a regional need for around 150,000 new units over the next eight years, more than 44,000 just within the city limits of Sacramento. The lack of supply has allowed rents to grow dramatically since the end of the Great Recession, even during this time of COVID-19. The development of new multifamily housing continues to be very challenging within the regulatory and cost environment of California, making those projects that are built even more in demand and more valuable.
How has the pandemic impacted multifamily development activity in the metro?
Smith: Housing development has kept going full steam ahead. Because of the housing crisis, the state deemed construction as an essential activity and allowed the construction of new projects to continue. There seems to be a short-term renewed interest in more suburban locations, and those urban projects which include significant ground-floor retail are struggling more because of the economic fallout. Overall, the lack of supply continues to make all types of housing in all types of locations needed and in demand.
Do you expect more or less activity in the metro this year in terms of sales and acquisitions?
Smith: We expect less activity in the market as the bid-ask spread widens. Sellers are seeing strong occupancy, and continued rent growth that means they are not in distress and don’t see reasons to discount. Buyers are looking at the macro COVID-19 picture and are expecting distress and discounts to 2019 prices. Fewer are finding a meeting place in the middle as they start further apart in their sense of value.
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How has the global health crisis affected 29th Street Capital’s portfolio and operations in Sacramento?
Smith: It has not affected our development side, which is in the early stages of long-term projects with 10-year hold periods, well beyond the expected one- or two-year COVID-19 crisis. On the acquisitions and asset management side, we took a brief pause in the second quarter of this year to assess the impacts of our portfolio and target acquisitions. With strong operations continuing, we have reentered the market and are closing on two acquisitions in the third quarter.
How do you see the future of the housing market in Sacramento?
Smith: Having worked in housing development in the region for more than 25 years, Sacramento has proven to be the epitome of a “yo-yo on an escalator” market, where the monthly and yearly market fluctuates with economic externalities, but the chronic undersupply and pressures from the Bay Area in-migration trends continue to push Sacramento’s housing market upwards.
Although the state has recently started prioritizing housing production, the regulatory, political and economic realities of California do not lend themselves to meeting the underlying supply requirements of the market anytime soon. Sacramento, with its base of government employment and its proximity and affordability relative to the Bay Area, is poised to generally continue to have strong occupancy and rent growth for the foreseeable future—notwithstanding any short-term shocks from recessions or other events that impact the immediate market for a period.