Logistics space posted the strongest increase as demand grows for e-commerce distribution space.
SACRAMENTO—The industrial rent growth in Sacramento ranked first in the nation through the first two quarters of 2019 and nearly doubled the national average for rent appreciation at 10.7%, according to Newmark Knight Frank's I-80 Industrial Report. This figure is slightly lower than growth for 2018 (12.9%), which was an all-time historical high for the region.
Logistics space for warehousing and distribution has posted the strongest increase as demand for e-commerce distribution space continues to grow. During the past three years, average asking rents have risen from $0.40 per square foot per month triple net to $0.63 as of the end of last quarter, says NKF associate director Jeff Kvarme.
This is seen as good news for landlords, investors and developers, though it has caused serious growing pains and concern for area tenants. On the other hand, industrial sales volume has plummeted through the first six months of 2019. Through the first half of this year, the market recorded $226 million in industrial sales compared to $948 million in 2018 and more than $1 billion in 2017 (another all-time high for Sacramento). This can largely be attributed to a severe shortage of inventory for purchase, which in turn, limits transaction volume.
"Land acquisition activity is up and land prices have recently begun to rise," Kvarme tells GlobeSt.com. "There is also very little industrial zoned land ready to develop currently since there is a preference within most municipalities for housing, office or retail development which tend to offer higher revenue and density per acre."
Moreover, land acquisition activity is expected to continue as rents stay on the rise and thus justify increased speculative development and build-to-suit activity. One example of this activity was Buzz Oates' acquisition of two parcels totaling approximately 20.92 acres at 1690 Bell Ave. in fourth quarter 2018. The developer is currently moving forward with plans to build two properties on this site totaling 339,549 square feet including a 79,800-square-foot building that could potentially be divided into 20,000-square-foot bays.
Should this come to fruition, it will be only the second building constructed during this cycle that would accommodate smaller tenants (Harsch Properties' building at 920 Stillwater being the first). Buzz Oates also has plans to develop 219,336 square feet at 24 Wayne Court in the Power Inn submarket and additional buildings slated for construction within Metro Air Park in Natomas.
"Other developers have been actively searching for land along the I-80 corridor with plans for similar industrial parks that may include space that could be demised from 10,000 to 30,000 square feet, which should help alleviate pressure for industrial tenants in the years to come," Mike Smith, NKF director, tells GlobeSt.com.
Also of note during the past quarter was the announcement that GLP's entire US industrial portfolio would be acquired by Blackstone for $18.7 billion. Blackstone's industrial arm, Link Industrial, is expected to close by the fourth quarter of 2019 and take over operation of GLP's more than 988,000 square feet in Sacramento including Striker Industrial Park in Northgate.
Though this transaction likely means higher operating expenses that will be passed through to tenants in these parks (as a result of an increased tax basis for those tenants on triple net leases), it could also signal increased tenant improvement allowances and flexibility in getting deals done as compared to GLP. If Blackstone's acquisition of the Westcore portfolio and Depot Park are any indication, it should also be expected that asking rates will increase, says the report.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
