Sustainable expansion of any city's tech sector depends first and foremost on people. Without sufficient tech talent, tech-oriented companies are left dead in the water. Strong STEM programs at local schools like The University of California, Davis, and California State University, Sacramento, have always produced a healthy stream of tech workers, but most graduates opt to try their luck in Silicon Valley instead of pursuing a career in Sacramento.

That said, the Bay Area's exorbitant cost of living may have finally reached a tipping point. Data shows that San Francisco experienced a net outflow of over 15,000 residents in the first quarter of 2017 alone — more than double the net outflow of New York City and nearly triple that of Los Angeles.

Sacramento was far and away the most popular destination for San Franciscans leaving the city during this timeframe, with over 22 percent of the departees relocating to the City of Trees. In fact, of the 4,000-plus people comprising Sacramento's 2017 Q1 net inflow, 35.4 percent came from outside the city's metro area. Only Las Vegas experienced a higher share of out-of-town interest (35.9 percent), and burgeoning real estate hotspots like Phoenix (27.9 percent) and Dallas (22.5 percent) fell far short of Sacramento.

As the JLL report adds, “With a computer programmer talent pool of more than 11,000 people [earning] a median salary of $84,000 per year, [Sacramento offers] Bay Area companies looking to expand an hour north…a 21 percent discount on wages.”

Turning a Profit in Sacramento (No Transubstantiation Required)

As cost-effective as the human capital in Sacramento may be, the city's physical capital promises even deeper discounts — as long as companies (and investors) act quickly.

According to Reonomy's proprietary datasets, total sales of office assets in Sacramento increased by 15.2 percent from 2010 to 2014, with YoY changes ranging from -3.4 percent (from 2012 to 2013) to 9.2 percent (from 2010 to 2011). Sacramento's office submarket accelerated dramatically after this modest, albeit steady, period of growth, boasting a 31.3 percent YoY growth rate between 2014 and 2015 and an even better 52.9 percent YoY growth rate between 2016 and 2017 (sales remained fairly flat between 2015 and 2016).

As one might expect, this volumetric expansion — and Sacramento's increasing popularity — has driven a parallel increase in property values. After bottoming out just below $750,000 in 2014, the median sales price of office assets in Sacramento grew by 116.5 percent between 2014 and 2015. Hewing closely to the fluctuations in the submarket's sales volume, median prices decreased slightly between 2015 and 2016 and then jumped by 51.8 percent between 2016 and 2017.

There are two salient points here. One, Sacramento's office submarket is hot, and both companies and CRE investors would be well-advised to scoop up attractive assets sooner rather than later. Two, as things stand, Sacramento still offers a substantially cheaper alternative to its occidental neighbors.

Even with its recent increases, the median sales price of office spaces in Sacramento in 2017 was 26.3 percent lower than in San Jose, 53.7 percent lower than in Oakland, and 1,073.2 percent lower than in San Francisco.

An Exciting Opportunity All Around

Ultimately, while it would be premature to crown Sacramento “the new Silicon Valley,” it's increasingly clear that the city is well on its way to becoming an exciting tech hub in its own right.

For businesses, this means a chance to establish an outpost — or even a headquarters — that exists in the orbit of Silicon Valley but demands a fraction of the overhead. For CRE investors, this means an opportunity to get in on the ground floor of a market ready to explode.

Richard Sarkis is CEO of Reonomy. The views expressed here are the author's own and not that of ALM's Real Estate Media.