So, what has the lifting of COVID-19 restrictions done to the state of the commercial real estate market? What is the commercial real estate outlook for the Sacramento real estate market in 2021? The president and CEO of Capital Rivers Commercial, Greg Aguirre, shares some insights into these questions.
Commercial Real Estate Market Trends
COVID-19 had a drastic impact on people’s lifestyles and the many restrictions increased the demand for e-commerce and delivery services resulting in many small business owners that were unable to adapt closing permanently. Sure, there were a lot of people that lost their jobs during COVID; however, in general most were just shifted to remote working or more limited hours and generally salaries did not decrease as the cost of living decreased providing people with more disposable income. Consumer confidence is currently strong as people continue to make and spend money; however, there is now a labor shortage as many businesses are competing with government subsidies that are incentivizing many workers to stay home. Many people who moved onto unemployment benefits during COVID are making more money than they would if they returned to work and to combat this some employers are offering temporary pay increases, sign-on bonuses, and other perks. The result in a lot of cases is increased prices for consumer goods, more limited store hours, and less customer service as the employers are trying to balance the labor challenges. Many of the benefits put in place temporarily by the government to combat financial strain from COVID will be ending in the fall so hopefully this will get more people back into the workforce and provide some relief to employers. Regardless, labor rates and raw material costs are rising, which means the cost of living and building inevitably rises as well.
As Greg Aguirre explains: There’s a tipping point. Businesses can only do so much to make up for rising costs despite the historically low interest rates and pending inflation. So, what does he think will happen in 2021?
Retail Real Estate Market Analysis and Projections
First, Greg noted that new projects popping up in the Sacramento area are great indicators of growth and prosperity. The Nugget grocery store anchored Campus Oaks Town Center shopping center in West Roseville, CA is a great example; The area has been exploding with new residential and multifamily units. The retail sector is booming right now as stores are busier than ever, with people dying to get out of their houses and back to a sense of normal.
Vacancy rates in this sector are dropping, and rental rates are going up in response. Kimco, a major real estate investment trust (REIT), has acquired Weingarten, another REIT. Greg predicts that we will see increasing consolidation in this area in the future in addition to REITs focusing more of their focus on core urban markets. Due to the lack of net lease product on the market it is driving CAP rates down and creating a strong net lease investment market for sellers.
Industrial Real Estate Market Analysis and Projections
The industrial real estate market is also very strong. Sacramento is an ideal place for companies to move their manufacturing and distribution centers. This area sits at the convergence of major highways while being close to the bay area and the Nevada border.
Similar to the retail sector, vacancy rates have dropped, and rental rates have increased. Greg explained that vacancy rates are around 5.8%, much lower than the historical average of around 10%.
E-commerce had a great year, fueling growth for big players like Amazon during COVID. Amazon needed to expand to handle the demand, so they accelerated their expansion of new industrial space. During this time, Walmart also came to Sacramento opening a new distribution center. There are another 3 million square feet currently under construction for industrial space in the area. Greg believes the industrial market will see continued growth in coming years as demand remains strong but explains that developers will be trying to keep up with the demand while managing the increasing costs of construction. Due to limited areas that are zoned appropriately for industrial and challenging entitlements in California there will continue to be a battle between supply and demand.
Office Real Estate Market Analysis and Projections
Many people thought that work that had become remote during COVID would stay remote. Despite this hope or fear, remote work doesn’t work for a lot of people. For example, having kids and pets can seriously impede your ability to be on phone calls and attend meetings. Despite several company statements that remote work would be indefinite, announcements are now coming out that work will return to the office in the fall.
There was a general rise in vacancies rates, but for smaller offices the rates have remained fairly flat through COIVD. Greg offered that vacancies have been around 10%, which, all things considered, is actually lower than many thought it would be.
Some tenants downsized but reserved the right of first refusal to expand for flexibility because they anticipated going back into the office at some point. This intention to consider expanding once again is a key indicator of the expectation to go back to work, at least close to pre pandemic levels.
Multifamily Real Estate Market Analysis and Projections
The multifamily real estate sector has been doing very well for a long time. Greg explained that vacancy rates are only 3.7%, which is very low compared to historical rates, which land around 5.7%. Concerns surrounding the multifamily sector spurred from the huge increase in people now looking to buy single-family homes. There are also worries over the increasing cost of lumber and labor. For these reasons, it is important to keep a close eye on this sector going forward. Sacramento rent has gone up 69% over the last ten years. It will likely continue to go up to account for higher building costs. Assuming good credit and financial status, it’s now more affordable for many people to own a home than continue to pay rent and particularly if they are relocating from more expensive markets such as the bay area to areas like Sacramento.
Greg believes there will always be people who like to rent or feel that it works better which will continue to ensure the multi-family market stays strong. Overall, COVID’s wave of single-family home buyers might not significantly impact the multifamily sector.
The one thing to watch, Greg offers, is rent control as Cities start to implement new laws to try and combat the affordable housing issues.
More Sacramento Commercial Real Estate Insights
Overall, the commercial real estate market trends of 2021 solid and investors are optimistic. The unprecedented changes that COVID has forced on people’s behavior and lifestyles have temporarily uprooted norms, but the end appears to be near.
See detailed CRE market reports for Sacramento here
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