The report indicates that an abundance of speculative development will push vacancies higher this year; however, investment activity remains strong and sales prices are forecast to increase by year's end. "Sublease space, which has been the bane of many office markets, is not a major contributor to Sacramento's vacancy rate," says Robert Hicks, M&M's regional manager. "Additionally, projected job growth this year will help fuel the local office market." Total employment is forecast to increase by 1.2% by year-end 2003, according to the report.
Office construction completions in 2003 will total 1.7 million sf, the same as 2002, according to the report. About 30% of that total will be located in the Roseville/Rocklin submarket, and much of it will be speculative.
In the first quarter of 2003, office vacancy increased 80 basis points to 13.3%, according to the report. By year's end, M&M is forecasting it will hit 14.7%. As a result, average effective rents, which were at $18.15 per sf at the end of the first quarter, should remain relatively unchanged by the end of the year, according to the report.
Office properties are selling at an average cap rate of 9.2%, according to the report, as Bay Area investors continue to seek affordable product that will support further price appreciation this year. As a result, M&M predicts sales prices will rise 4% by the end of the year.
The report says a contributing factor to the rising vacancies is consolidation of government operations into state-owned buildings. In 2002, the first of five buildings at the one-million-sf East End project came online and various agencies vacated 190,000 sf of leased space in the county. "The state is expected to leave behind another 286,000 sf of office space in 2003," states the report. "As additional buildings at the East End project reach completion, more local landlords will be affected."
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