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  • Randall Benton / rbenton@sacbee.com

    Designers work at the Wallrich Creative Communications office on Wednesday in Sacramento. Wallrich moved into the renovated midtown building in order to accommodate a growing workforce. The uptick in the office market is likely a sign of a slowly strengthening economy.

  • Randall Benton / rbenton@sacbee.com

    Wallrich Creative Communications moved into a restored mid-century building, above, in midtown Sacramento after selling its 5,000-square-foot midtown building for $220 a square foot. The new lease was at an advantageous rate, says Tom Walcott, senior vice president at Colliers International in Sacramento.

Sacramento office market sees 'mind blowing' shift

Published: Sunday, Aug. 18, 2013 - 12:00 am | Page 1D
Last Modified: Tuesday, Aug. 20, 2013 - 10:42 am

During last decade's housing boom, the Sacramento region went on a construction spree of office buildings to accommodate the financial, insurance and real estate businesses that served the housing sector.

When the housing bubble burst in 2006, many of those businesses disappeared, creating a wave of office vacancies that plagued the region with falling rents and half-empty buildings.

Today, some experts in the office sector say the market may have finally turned the corner, with more offices being occupied than vacated and a significant upturn in leasing and buying activity.

"Compared to the last six years, it's mind-blowing," said Jason Goff, managing director in the Sacramento area for commercial brokerage Jones Lang LaSalle. "We're cautiously optimistic, but optimistic nonetheless."

The upturn in the office market is likely a sign of a slowly strengthening economy and rising employment, said Suzanne O'Keefe, an economist at California State University, Sacramento.

Total payroll employment in the four-county Sacramento region has gradually recovered from its low point of about 805,000 in 2011 to more than 850,000 in June, according the state Employment Development Department.

Office vacancy rates typically lag a larger economic upturn or downturn, O'Keefe said. When business plummets, tenants may still have to fulfill their lease terms. When things improve, businesses may be slow to rent additional space for their growing workforces.

"As the economy picks up, small businesses might be run from home offices, or businesses may expand within existing space until they reach capacity, at which time they will need to go out and search for more space," O'Keefe said. "Employers may be reluctant to sign a new lease for office space because of the long-term commitment typically required by landlords.

"All of these factors demonstrate that the improvement in the employment situation eventually trickles down to more spaces being leased, but it takes some time."

That's starting to happen, said Tom Walcott, senior vice president at Colliers International in Sacramento. He said he knows brokers in many offices across the region and that they're all busier than they have been in years.

"The market's turning," Walcott said.

The glut of office space built for the housing industry is slowly being taken over by "brick-and-mortar tenants," including state government and health care providers, he said.

Colliers' research wing said the vacancy rate in the Sacramento region fell to 15.5 percent in the second quarter of 2013 from 15.9 percent in the first three months of the year. It was the eighth straight quarter of declining vacancies since the high of more than 17 percent in the second quarter of 2011, the brokerage said in its latest market report.

Net absorption – the amount of office space leased minus the amount vacated in the same period – reached nearly 337,000 square feet in the greater Sacramento region in the second quarter of this year.

In contrast, from early 2010 to the first few months of 2011, new vacancies far outpaced new leases, causing negative absorption, the firm's data showed.

Some parts of the region are faring better than others. Vacancy rates ranged from less than 8 percent in midtown Sacramento to more than 28 percent in Rio Linda-North Highlands in the second quarter, Colliers said.

The brokerage predicts the region's overall vacancy rate will continue falling to 14.9 percent by the second quarter of 2014.

While vacancies are improving, rents aren't keeping pace. After steadily falling since 2009, lease rates remained stagnant at about $1.65 a square foot in the second quarter of 2013, Colliers said.

Sales prices, however, are showing slight improvement. The average sales price rose from about $105 per square foot in the first quarter of this year to nearly $108 in the second quarter.

The recent sale of an office building at 770 L St. in Sacramento for more than $29 million was among the largest transactions in recent years.

The building's proximity to the state Capitol, and the prospect of a new Downtown Plaza arena and adjacent development were among the attractions, said CenterSquare Investment Management, which helped acquire the building for an institutional investor.

"This investment reflects our focus on top-tier secondary markets that are poised for growth and beginning to attract significant capital flows," Jeff Reder, senior vice president for private real estate at CenterSquare, said in a statement.

Walcott said one of his clients, Wallrich Creative Communications, sold its 5,000-square-foot midtown building late last year for $220 a square foot and moved into a restored mid-century building in midtown Sacramento that could accommodate its growing workforce.

The lease, he said, was at an advantageous rate. "Tenants still rule the market," Walcott said.

The trend of cheap leases could continue for some time, O'Keefe said.

While vacancy rates likely will continue to decline, she said, "there is a lot of extra capacity out there, so this will not put pressure on the market for quite a while."

Call The Bee's Hudson Sangree, (916) 321-1191.

© Copyright The Sacramento Bee. All rights reserved.

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