Sacramento/Central Valley

Economic forecasts for central California in 1996 paint an optimistic picture, and recovery is expected to continue at a moderate pace in most sectors of the commercial real estate market.

The Real Estate and Land Use Institute, at California State University, Sacramento, predicts this year will be the best for the region since the recession hit, with a gain of 25,000 jobs. "This isn't going to be a 1991 that was the daddy of all boom years in Sacramento," says research director Dr. Robert Fountain at the institute's annual forecast forum. "But it's an extraordinary recovery so things are looking very, very good."

Fresno, the Central Valley's other major urban area, experienced a good economic year in 1995."Our very strong agricultural-based economy continues to do well," says Stephen S. Woolery, senior vice president and Fresno manager for Grubb & Ellis. "We had a great year last year, and the prospects are that with all the rain and water we're getting, that we're going to have another good year this year. We have not, however, had any real robust growth in the marketplace."

R. Neil Smyth, executive vice president and Sacramento region managing officer for CB Commercial, reports an increased optimism in the marketplace. "The first 3 1/2 months of this year, we've definitely seen a pickup of activity, which would lead me to think that our absorption in office and industrial will be greater than last year," he says. "The retail activity has been strong for the last couple of years, and that will continue."

Smyth, whose areaof responsibility also includes the Stockton metropolitan area, thinks that the area's commercial real estate market too will experience continued improvement but perhaps at a slower rate.


Robert D. Dean, senior vice president and district manager for Grubb & Ellis, notes an other positive sign in the Sacramento office market. "We saw, last year, what I consider to be a significant uptick in speculative construction," he says.

When the bottom dropped out of the market in 1991, spec construction of offices plummeted from more than 2 million sq. ft. a year to 200,000 sq. ft. or less. Last year, seven projects totaling more than 400,000 sq. ft. were started, and three developers are now poised to start spec projects, one of them a downtown high rise of around 235,000 sq. ft.

Grubb & Ellis projects a net absorption of more than 800,000 sq. ft. this year and expects the overall vacancy rate, already a low 12%,to dip another percentage point by year's end.

CB Commercial predicts that office rents will remain in the $4 to 2.40 per sq. ft. range for Class-A space downtown, $1.55 to $1.85 for Class-A suburban space and $1.30 to $1.40 for business park space.

Kris Pigman, president of the Pigman Cos., Sacramento, has begun his $5.5 million Sunrise Corporate Park at U.S. Highway 50 and Sunrise Boulevard in Rancho Cordova. He is constructing seven office buildings from 4,000 to 5,500 sq. ft. each on the five-acre site along with a fast food restaurant.

I'm cautiously optimistic," says Pigman, who was the local head of the Koll Real Estate Group for eight years before founding his why organization in mid-1995. "That's why I'm building the Sunrise Corporate Park project. I'm building buildings that will all fall into the SBA programs for acquisitions by small businesses. Each building will be priced less than $1 million."

Earlier in the year, Pigman broke ground in Folsom on a 105,000 sq. ft. corporate headquarters for C&K Systems Inc., the world's second largest manufacturer of alarm systems. The $8 million building also will house the firm's research and development, engineering departments and some distribution.

At the end of March, Lincoln Property Co., Dallas, re-entered the marketplace after a 20-year absence and bought C&K Systems, existing 58,000 sq. ft. Folsom building. Lincoln also purchased a $9 million South Natomas building, fully leased by Northern Telecom, and plans to acquire more office properties.

Mark Hefner of Brown, Stevens, Elmore & Sparre, Sacramento, and partner Chris Strain handled both deals. Hefner terms Lincoln's return a very significant re-emergence of institutional capital into the Sacramento marketplace."

John Stewart, senior vice president and Fresno managing officer for CB Commercial, thinks the office market there may be poised for a turnaround. "A lot of the factors needed to stimulate office development are in place in the north Fresno area: low vacancy rates, a fair amount of absorption - and that would be increased if there was newer product available," he says.

The 10.0 million sq. ft. Fresno office market had a net absorption of about 100,000 sq. ft. in 1995,down from 220,000 sq. ft. in 1994. The overall vacancy rate declined to 12.5%from the 13.1% figure for 1994. Monthly lease rates ranged from a low of $0.60 per sq. ft. for fully serviced downtown space to a high of $1.85 per sq. ft. in Class-A suburban buildings.

Grubb & Ellis reports that the @ [email protected] lion sq. ft. Stockton office market has a Class-A vacancy rate of under 10% and rental rates as high as $1.65 per sq. ft., fully serviced. New office condos are asking as much as $145 per sq. ft. for shell space. Office land prices range from [email protected] per sq. ft. to $ 10 per sq. ft. depending on location. Class-B properties have lagged behind. Vacancy rates have soared to over 20%, and rental rates remain flat in the $1 to $1.10 range.


Grubb & Ellis, Dean says the Sacramento industrial market "seems to be (like) the Energizer Bunny, it just keeps going, and going and going." He attributes most of this energy to megabuilder Marvin T. "Buzz" Oates, who builds about million sq. ft. of warehouse/distribution space per year, doing his own financing and leasing.

Overall vacancy in the 135 million sq. ft. Sacramento industrial market reached a 10-year low of 7.2% in 1995, according to CB Commercial. Net absorption decreased to 2 million sq. ft. from 2.7 million sq. ft. in 1994 Rental rates firmed up and there were no concessions. Base monthly rent for shell space is expected to rise this year to $0.25 per sq. ft., triple net.

The Stockton industrial market, with a base of more than 35 million sq. ft., saw, vacancy levels drop below, 9% in 1995 and experienced 900,000 sq. ft. of new construction. Rental rates were $0.18 to $0.40 per sq. ft. gross.

Industrial activity in Fresno continues to be predominantly, in the distribution sector. Of the 30 million sq. ft. in the market, all but 5 million is warehouse/distribution. The market had a net absorption of 225,000 sq. ft. in 1995, extremely strong compared to the last few years. With new and planned construction minimal, the vacancy rate dropped to 6.3% from 6.5% in the previous year.


Sacramento's retail market is something of an anomaly, according to Dean. "Retail sales rebounded in the first quarter of 1991 nationally. Sacramento did not see the up-kick of retail sales until the first quarter of 1994." he says,"Despite this three-year lag, the market still experienced growth of the retail inventory." Dean attributes this to the change i shopping pattern from malls to big box discounters and power centers. "The one thing that's tagging is our housing starts have not come back," he says. "Building permits for new homes are still hovering around 6,000 or 7,000 a year when there used to be 15,000 to 20,000."

Of special note is the entertainment sector where larger theater complexes are proliferating. Two have been located in the Laguna area and one each in Folsom and Roseville. And three more are proposed in the city of Sacramento.

CB Commercial forecasts continuing moderate retail growth in 1996. Rents are expected to increase slightly for anchored centers to $1.35 to 1.85% per sq. ft., triple net for newer properties and $0.85 to 10% in older centers. Rents for unanchored shops will remain stagnant at $0.75 to $1. The vacancy rate will stay below 10%.

Big box retailers also are driving the Stockton market, forcing smaller shopping centers to adapt or perish.

Fresno is experiencing an influx of national retailers, and Grubb & Ellis, Woolery describes retail as "probably the hottest part of the market."


The apartment market in Sacramento was down across the board in 1995. Sales slowed significantly. The average price per unit was down from $38,000 in 1990 to $28,000 last year. Gross rent multipliers averaged 5.7, compared to 7.7 in 1990. The only thing to rise was the cap rate, which averaged 9.1% compared to 8% in 1990.

New multifamily construction in Fresno last year increased 30% over the previous year, according to Grubb & Ellis. New apartment construction had reached an all-time low in 1993 when permits were issued for only 160 units, compared with an average of 1,278 per year over the previous 18 years. In 1995, a total 600 units were recorded.

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