The reduced office demand in Sacramento could spell an opportunity for a big change. A new report from Marcus & Millichap suggests that challenges in the office market and a dearth of apartments could create an opportunity for apartment redevelopment.

The office market across the country has been severely impacted by the pandemic, and Sacramento is no different. The market has a record level of sublease supply—driven even higher in the second quarter by Sutter Health, which placed 200,000 square feet of sublease supply on the market. So far, there has been limited demand for the sublease stock, and Marcus & Millichap notes few executions of subleases since the start of the pandemic.

Looking ahead, the report expects office vacancy in the market will increase another 100 basis points this year, pushing it up to 14.5%, the highest level since 2016. However, the market also expects office rents to increase .4% this year. This is largely due to the delivery of new office buildings, which could help to seal the fate of older office stock. With increasing sublease supply and limited demand, older privately owned offices could become residential redevelopment opportunities.