REACTIONS

SACRAMENTO INDUSTRIAL MARKET

ISSUE NO. 1 | 1ST QUARTER 2012

Colliers commitment to market excellence is transparent through our core values of service, expertise and
community. In our efforts to extend these values to the
local real estate community, we are pleased to share our
Industrial Report for 1st Quarter 2012.

Sacramento Industrial Market

Q1 HIGHLIGHTS
Overall performance during 1st Quarter 2012 in the Sacramento industrial market
was very strong, confirming recovery is underway; we continue to see this
recovery being a slow process. The following is a summary of the market during
the quarter.
Vacancy declined by 50 basis points, ending the three-month period at
12.6%.

Our recovery is about jobs. The

current employment picture is not
optimistic, especially given the State
budget challenges, however we are
seeing strong expansion and growth
in the Health Care sector. While we
do not see a significant change in the
overall commercial real estate landscape, we are seeing more activity
and believe we are in a slow positive
recovery.
Randy Dixon
Managing Director

Total leasing activity continues to remain active with almost 2.5 million
SF of available space being occupied during the quarter, yielding
717,293 square feet of positive net absorption from January through
March.

Tenants still hold the upper hand in lease negotiations, and continue
negotiating favorable concessions.

Sales continue to get consummated, but on mostly favorable buyer

prices; however, average pricing during the quarter increased by
almost 15% from the previous quarter level.

Lease rates continue to remain soft, and will continue to favor tenants
until economic stability returns to the region and long-term employment
sources are identified.

KEY INDUSTRIAL METRICS - 1Q 2012 (See NOTE Below)

There remains only one deliverable industrial building under

construction in the market as of March 31, a 200,000 square-foot
build-to-suit in Davis scheduled to be completed during 2nd Quarter
2012.

Vacancy

Over the next 90 days we expect vacancy to increase and net absorption
to be net negative as a result of Hewlett Packards vacating almost
800,000 square feet in Woodland, while lease rates should remain
unchanged.
2012 will look quite similar to 2011, with more sustainable recovery
activity waiting for 2013 and 2014.

TOTAL
MARKET

ADJUSTED

12.6%

15.8%

717,293 SF

848,557 SF

0 SF

0 SF

Construction

200,000 SF

0 SF

Average Direct
Asking Rate NNN/Mo

$0.39 / SF

$0.39 / SF

Net Absorption
Deliveries

Note: Statistics in the Total Market column include all flex & industrial
buildings in the Sacramento MSA. Statistics in the Adjusted column
does not include owner-occupied & government buildings.

Second Quarter FORECAST

VACANCY

12.8%
UP 0.2% FROM
1Q 2012

ASKING RATES

NET ABSORPTION

DELIVERIES

$0.39 (250,000) 200,000

SQUARE FEET

NO CHANGE
FROM 1Q 2012

VS. 717,293 SF
1Q 2012

SQUARE FEET

VS. 0 SF
1Q 2012

CONSTRUCTION

SQUARE FEET

VS 200,000 SF
1Q 2012

VACANCY
The overall industrial vacancy rate in Sacramento improved significantly during 1st Quarter
2012, declining 50 basis points to end the three month period at 12.6%. This decline is indicative
of the slow, but steady, recovery activity Sacramentos industrial market continues to experience.

Total Inventory Breakdown

Flex

Key Vacancy Metrics - 1Q 2012

10.5%

Current Quarter (Q1 2012)

12.6%

Current Year (Q1 2012)

12.6%

Previous Quarter (Q4 2011)

13.1%

Previous Year (Q1 2011)

13.5%

187 MillionSF
187,141,890
SF

User requirements in Sacramentos industrial sector will always be correlated to the health of
the local economy, measured predominantly by employment. Unfortunately, Sacramentos employment continues to struggle, as there remains a lack of definitive sources identified for future
employment growth. The graphic below illustrates the relationship that has existed between
industrial vacancy and local employment over the past three years.

89.5%
Warehouse

Vacancy Comparison

Metro Employment vs. Industrial Vacancy

25.00%

Employment in Thousands

Forecast Period

20.00%

850

13.8%

840

13.6%
13.4%

830

13.2%

820

13.0%

810

12.8%

800

12.6%

15.00%
10.00%
5.00%
0.00%

Warehouse

Flex

12.4%

790

12.2%

780

12.0%

770

11.8%

# Employed

Vacancy

Sources: Bureau of Labor Statisics & CoStar

As the graph above indicates, vacancy escalated in early 2009 as employment growth declined.
With no new material job sources identified on the near-term horizon, the employment outlook
for Metro Sacramento is relatively flat. There will likely be just a few thousand new net jobs
created each quarter over the next year. Industrial vacancy in Metro Sacramento is projected
to increase in the next quarter due to HP vacating almost 800,000 square feet in the Woodland
submarket. This movement, partially offset by other positive leasing activity during the quarter,
should result in a short-term, 20 basis point, increase in vacancy. We, however, further anticipate an overall decline in the industrial vacancy rate by approximately 40 basis points by March
31, 2013, ending the next 12-month period at 12.2%.
Vacancy in flex inventory showed strong improvement during 1st Quarter 2012, declining by 60
basis points to end the quarter at 20.2%. Warehouse space ended the quarter with vacancy
down 50 basis points to end March 2012 at 11.7%, the lowest level since late 2009.
It is worth noting that the 1st Quarter 2012 vacancy rate for both flex and warehouse product
remains almost 100 basis points below their respective recorded levels from one year earlier.

Large users continue to represent the bulk of the activity. For

the small, local users, it is like a
child learning to swim - a lot of
gasping & splashing but very little
forward progress.

Tom Tyer SIOR

Senior Vice President

ABSORPTION ANALYSIS

The 717,000 square feet of positive net absorption experienced in Sacramentos industrial market during 1st Quarter
2012 is the second largest single-quarter total since early
2008. Though the quarterly total was significant, the recovery in this sector will still be at a slow pace. A review of the
last four quarters of net absorption performance shows two
quarters with net negative results and two with net positive
leasing activity. The market is still a bit erratic from quarter
to quarter, but overall showing recovery activity.

Net Absorption
Forecast Period

Square Feet
1,000,000

500,000

(500,000)

(1,000,000)

Much of the leasing activity accounting for the strong performance during 1st Quarter 2012 is the result of almost 60
(1,500,000)
2Q
3Q
4Q
1Q
2Q
3Q
4Q 1Q 2011 2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
move-ins during the quarter that involved at least 10,000
2009 2009 2009 2010 2010 2010 2010
2011 2011 2011 2012 2012F 2012F 2012F 2013F
square feet of space, with the largest of these accounting
Sources: CoStar & Colliers Research
for almost 65,000 square feet. This type leasing activity
will continue to be tempered by consolidations and closures, as well as by the excess space owners have been sitting on that they bring
back to the market, referred to as shadow space.
From a submarket perspective, some submarkets during 1st Quarter 2012 recorded strong net leasing activity, while others struggled to
generate positive leasing results. The following tables summarize which submarkets garnered the most and least tenant activity during
the quarter.

Hot Submarkets - 1Q 2012

SUBMARKET

Cold Submarkets - 1Q 2012

CLASS

ABSORPTION

SUBMARKET

CLASS

ABSORPTION

Warehouse

(69,305 ) SF

Flex

(16,420) SF

McClellan / North Highlands

Warehouse

173,620 SF

Roseville / Rocklin

Sunrise / Highway 50

Warehouse

123,815 SF

McClellan / North Highlands

Power Inn

Warehouse

111,346 SF

Folsom / El Dorado

Warehouse

(10,036) SF

Davis / Woodland

Warehouse

108,136 SF

West Sacramento

Warehouse

(5,699) SF

Northgate / Natomas

Warehouse

103,388 SF

East Sacramento

Warehouse

(4,400) SF

There are still leases being consummated in Sacramento for larger blocks of space including 10 leases completed during 1st Quarter
2012 at, or greater than, 20,000 square feet. In fact, in-house brokerage is currently working with several users seeking large blocks
of space, up to 350,000 square feet.

LEASE RATES

As of March 31, 2012, the average annual direct asking rent for all
industrial properties (all types and all classes of buildings) throughout the Sacramento metro was reported at $0.39 per-square-foot
(on a monthly, triple net basis).
Note that these are the direct asking rents of all industrial property
types and classes in the Sacramento reporting area, and that there
is often a wide spread between ask and actual rents.
Lease rates among the various product classes continue to slowly
decline, a byproduct of the prolonged weakened market also still
exists in the region. Distressed sale activity also continues to put
downward pressure on lease rates as new ownership takes advantage of its low cost basis.

Key Direct Rate Metrics PSF/MONTH/NNN

Current Quarter (1Q 2012)

$0.39

Current Year (1Q 2012)

$0.39

Previous Quarter (4Q 2011)

$0.40

Previous Year (1Q 2011)

$0.41

Lease Rate Comparisons PSF/MONTH/NNN

SUBMARKET

1Q 2011

1Q 2012

% CHANGE

Warehouse

$0.37

$0.36

-3.6%

Flex

$0.73

$0.71

-2.6%

LEASE RATES CONTINUED

With movement in lease rates tied so closely to vacancy, and vacancy in the market continuing to
improve, rates should be bottoming sometime in the near future. The rate in both warehouse and
flex inventory is forecasted to remain level over the next four quarters.

Direct Average Asking Rate

FULL SERVICE
Forecast
Period

FLEX

Forecast
Period

WAREHOUSE

Sources: CoStar & Colliers Research

While there continues to be a decline in lease rates it is important to note that the magnitude of rate
reductions continues to steadily decline, another sign of an improving market.
With respect to submarket lease rate activity, some submarkets during the past 12 months experienced an increase in their average direct rate, while others posted a decline.

Monthly$0.84
Lease Rate Comparison
$0.27
$0.18

Increases

INCREASES

$0.76

$0.10

Monthly Lease Rate Comparison

Reduction
($2.00)
DECREASES

($0.61)

($0.47)

Elk Grove /
Laguna

South
Sacramento

($0.41)

($0.33)

Annual Lease Rate

$1.05
Annual Lease Rate

$0.45

$0.35

$0.25
McClellan/
North Highlands

Northeast
Q1 2011

West
Sacramento

Davis /
Woodland

Downtown /
Midtown

$0.95
$0.85
$0.75
$0.65
$0.55
$0
$0.45
$0.35
$0.25

East
Sacramento

Q1 2012

CONCESSIONS
The first three months of 2012 look familiar as it relates to tenant
allowances and free rent, as well as lease recasting. Tenants still
have the leverage, but with rates essentially bottoming and concessions maxed out, landlords are likely to find some relief in the next
12 months. However, the market is still saddled with high vacancy
buildings that will keep pressure on existing ownership to use these
tools to keep tenants upon renewal and attract new tenants.

Q1 2011

Richards

Marysville /
Yuba City

Q1 2012

Owners seem eager

to offer rent abatement
vs. further discounting
for high quality/good
credit tenants.
Trent Thomason, Vice
President

CONSTRUCTION SUMMARY
The current development pipeline for Sacramentos industrial market still includes only one
recent project start, a build-to-suit manufacturing plant for Mori Seiki in Davis that totals
200,000 square feet and is expected to be completed in mid-2012. Other project news
includes the following activity at McClellan:

The 500,000 square-foot cold-storage facility planned by US Foods is expected to

break ground in early 2013, and employ at least 300 when fully completed.

A 30,000 square-foot build-to-suit Federal facility is expected to get started during

2nd Quarter 2012.

Repurposing efforts were recently completed on buildings 700 and 640, totaling
235,000 square feet, primarily including $4 million of exterior improvements. A
35,000 square-foot lease was recently signed in Building 700, and other prospects
continue to show interest in the space.

INVESTMENT CLIMATE
Sale activity for Sacramento industrial space remained active during 1st Quarter 2012 with
the majority of the sale activity during the quarter for buildings 20,000 square feet or smaller
(70%), with only 11% of the sales for buildings greater than 50,000 square feet.
With respect to the industrial investment market, cash is king, and buyers with cash will
continue to seek out acquisition opportunities priced right. It will be a buyers market for
product other than Class A for at least the next 18-24 months, but still challenging to get
buyers to make a decision. Financing will continue to be a challenge.

Cap Rate Analysis

TRAILING-12 RATE
10.0%
9.0%

8.3%

8.1%

8.0%

7.5%

7.0%

6.7%

6.0%
5.0%

2007
Dec

2008

2009

2010

2011

2012
Mar

Source: Real Capital Analytics

Source:CoStar

Cap rates on Sacramento industrial sales continue to stay above pre-recession levels, but
continued to show more stabilizing during 1st Quarter 2012 despite the bank REOs and
foreclosure sales. As investor interest trickles back to Sacramento as a result of escalating
market pricing in the Bay area, more market deals will get done which will have positive
implications on cap rates.

TO

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T
O
H

MEDICAL CARE
In fact, several large medical expansion projects have been ongoing in the Sacramento region, including the following:
the recent completion of Kaiser Permanentes new 67,000
SF Promenade Medical Office Building in Elk Grove.

TO IN S
A
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RA

ACRAMENT
IN S
O

d
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fi
rti

EN
AM
CR

MENTO
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IN
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the state-of-the-art, 65,000 square-foot, Mercy Medical

Plaza being developed by Catholic Healthcare in Elk Grove.
the $724 million renovation/expansion of the Sutter
Medical Center in Midtown.
Healthcare currently comprises over 12% of the regional
employment base. Employment growth in this sector has totaled
more than 48% over the past 10 years.

IN SACR
A
M
TO
EN
EN
M

Kaiser Permanentes Elk Grove Promenade Medical Office Building

Rendering of the Sutter Medical Center renovation in Midtown

CLEAN ENERGY TECHNOLOGY

It is estimated that the Sacramento region is home to over 200 green firms and organizations. Currently,
renewable energy and clean energy technology industries are investing in the region at unprecedented levels.
Some of these companies headquartered in the Sacramento region include N Solar, Inc., OPIDE Group US,
ETIMEX Solar USA, Inc., SMA America, and Pacific Ethanol, Inc.
The Sacramento region has emerged as a national hot bed of green job growth and activity for several reasons:
the region is home to a number of research institutions that are associated with UC Davis, including the
California Wind Energy Collaborative, California Solar Energy Collaborative, and the California Biomass
Collaborative.
The U.S. Department of Energy awarded a $127.5 million grant to a partnership formed by several
Sacramento organizations.
The Sacramento Region is home to three of the top ten most progressive utility companies in the U.S.
including SMUD and PG&E.
It is worth noting that Next10 ranked Sacramento at the top of their list for green job growth from
19952008, and it is also estimated that during the 15-year period from 1995 to 2010 that green
employment expanded in the Sacramento area by 113%.

Sacramento Industrial Market

FEATURED DEALS
SALE COMPARABLES
MAP #

PROPERTY LOCATION

RENTABLE SF

SALE PRICE

PRICE/SF

SUBMARKET

BUYER

SELLER

11

3805 Faraday Ave

71,175

$13,650,000

22

5121 Hedge Ave

14,000

$2,000,000

33

850 F Street

19,770

$1,570,000

$79.41 West Sacramento William Applebee

44

4741 Watt Ave

153,000

$4,500,000

$29.41 N. Highlands

Recycling
Industries

Clara Massie

9656 Jackson Rd

10,900

$650,000

$59.63 Mather

Aguilera Trust

Richbaw Trust

$191.78 Davis/Woodland

James Didion

John Buckel

$142.86 Mather

Transportation
Srvcs

David Nickum
850 F Street
LLC

LEASE COMPARABLES
MAP #

PROPERTY LOCATION

LEASED SF

CLASS

TENANT

Fireside Hearth &

Home
CA Prison Industry
Authority

SUBMARKET

TYPE

START RATE

Natomas/
Northgate

New

N/A

Power Inn

Renewal

N/A

11

3780 Pell Circle

72,005

22

8681 Younger Creek Dr

63,630

33

1620 W. National Dr

61,360

N/A

Natomas/
Northgate

New

N/A

44

340 Hanson Way

47,840

N/A

Davis/Woodland

New

N/A

55

8399 Luzon Ave

43,560

CA Dept of Corrections Power Inn

New

N/A

COLLIERS COMPARABLES
MAP #

PROPERTY LOCATION

LEASED SF

CLASS

1309 Melody Rd

37,000

2561 Mercantile Dr

4
5

TENANT

SUBMARKET

TYPE

START RATE

Satellite Composites

Marysville/
Yuba City

New

$0.23

28,000

Paper Processors

Rancho Cordova

New

$0.40

2541 Land Ave

22,000

Precision Truck Lines

NE Sacramento

New

$0.25

2445 Front St

11,300

Sacto Wire Rope

West Sacramento

Renewal

$0.39

11375 Sunrise Park Dr

9,720

RETECH

Rancho Cordova

New

$0.38

1
OLIVEHURST, CA

4
3

4
3

2
5

3
1

4
5 2

25

SUBMARKET ANALYSIS
1Q 2012
Submarket
Auburn / Lincoln
Warehouse
Flex
Davis / Woodland
Warehouse
Flex
Downtown / Midtown
Warehouse
Flex
East Sacramento
Warehouse
Flex
Elk Grove / Laguna
Warehouse
Flex
Folsom / El Dorado
Warehouse
Flex
Marysville / Yuba City
Warehouse
Flex
McClellan / North Highlands
Warehouse
Flex
Northeast
Warehouse
Flex
Northgate / Natomas
Warehouse
Flex
Power Inn
Warehouse
Flex
Richards
Warehouse
Flex
Roseville / Rocklin
Warehouse
Flex
South Sacramento
Warehouse
Flex
Sunrise / Highway 50
Warehouse
Flex
West Sacramento
Warehouse
Flex
Overall
Warehouse
Flex

Overall Market

Rentable
Building Area

Direct
Vacancy Rate

Overall
Vacancy
Rate

Availability
Rate

2,902,280
612,940

203,715
239,433

7.0%
39.1%

16.6%
39.6%

12,225
(636)

12,225
(636)

0
0

$0.54
$0.69

17,321,229

2,073,335

12.0%

21.1%

108,136

108,136

200,000

$0.26

675,033

82,107

12.2%

11.4%

15,310

15,310

$0.81

3,248,865

163,126

5.0%

5.9%

33,576

33,576

$0.43

241,779

63,700

26.3%

28.2%

(3,200)

(3,200)

$1.70

943,985

137,355

14.6%

16.5%

(4,400)

(4,400)

$0.68

109,253

49,976

45.7%

45.7%

$1.06

6,211,742
395,919

761,251
56,763

12.3%
14.3%

16.2%
13.2%

2,759
3,106

2,759
3,106

0
0

$0.38
$0.74

4,278,766
1,940,360

188,089
295,704

4.4%
15.2%

7.1%
20.6%

(10,036)
9,868

(10,036)
9,868

0
0

$0.67
$0.73

6,294,013
201,886

761,518
16,942

12.1%
8.4%

16.8%
14.1%

9,680
900

9,680
900

0
0

$0.43
-

18,520,039
2,178,281

3,143,860
534,060

17.0%
24.5%

18.5%
27.6%

173,620
(16,420)

173,620
(16,420)

0
0

$0.41
$0.58

Net
YTD Net
Under
Absorption SF Absorption SF Constrcuction SF

Direct FS
Average Lease
Rate $/SF

6,272,508

531,479

8.5%

10.3%

(2,641)

(2,641)

$0.39

1,092,514

197,547

18.1%

24.9%

(4,171)

(4,171)

$0.72

12,639,078
2,229,530

1,763,127
591,230

13.9%
26.5%

18.5%
28.1%

103,388
3,694

103,388
3,694

0
0

$0.33
$0.69

28,518,809
1,323,355

3,196,094
182,666

11.2%
13.8%

16.3%
20.0%

111,346
(383)

111,346
(383)

0
0

$0.33
$0.50

4,969,908
251,681

559,348
42,922

11.3%
17.1%

12.2%
17.1%

1,515
11,472

1,515
11,472

0
0

$0.30
$0.55

19,419,549
3,201,434

3,005,628
508,194

15.5%
15.9%

18.6%
19.9%

(69,305)
66,275

(69,305)
66,275

0
0

$0.40
$0.93

4,549,509

172,617

3.8%

6.4%

1,392

1,392

$0.40

408,275

63,592

15.6%

15.6%

198

198

14,670,534
3,488,714

1,826,485
800,917

12.5%
23.0%

16.7%
28.3%

123,815
21,635

123,815
21,635

0
0

$0.39
$0.62

16,679,744
1,350,378

1,162,003
249,245

7.0%
18.5%

12.7%
19.0%

(5,699)
20,274

(5,699)
20,274

0
0

$0.41
$0.60

167,440,558

19,649,030

11.7%

16.1%

589,371

589,371

200,000

$0.36

19,701,332

3,974,998

20.2%

24.1%

127,922

127,922

$0.71

187,141,890

23,624,028

12.6%

16.9%

717,293

717,293

200,000

$0.39

Results are from CoStar and include all industrial space existing, under construction, or under renovation greater than 5,000 square feet located in all core areas of Sacramento, Placer, El Dorado and Yolo counties.

BROKERAGE SERVICES
Industrial Specialists

Bud Applegate

Senior Vice President

bud.applegate@colliers.com
+1 916 563 3003
Industrial Sales & Leasing

Steve Cippa

Senior Vice President

steve.cippa@colliers.com
+1 916 563 3047
Industrial Sales & Leasing

Jim Dennis

Trent Thomason

Steve Chamberlain

Heath Charamuga

Associate Vice President

jim.dennis@colliers.com
+1 916 563 3019
Industrial Sales & Leasing

Vice President
trent.thomason@colliers.com
+1 916 563 3011
Industrial Sales & Leasing

Investment Specialists

Tom Tyer SIOR

John Banchero

Senior Vice President

tom.tyer@colliers.com
+1 916 563 3027
Industrial Sales & Leasing

Senior Vice President

john.banchero@colliers.com
+1 916 563 3050
Investment Sales

John Jackson

Ben Prater

Vice President
john.jackson@colliers.com
+1 916 563 3033
Investment Sales

Investment Advisor
ben.prater@colliers.com
+1 916 563 3060
Investment Sales

Colliers Management

Randy Dixon

Managing Director
randy.dixon@colliers.com
+1 916 563 3023

John Shaffer

Senior Research Analyst

john.shaffer@colliers.com
+1 916 563 3035

Senior Vice President

steve.chamberlain@colliers.com
+1 916 563 3006
Investment Sales

Senior Vice President

heath.charamuga@colliers.com
+1 916 563 3094
Investment Sales

Colliers International
301 University Avenue, Suite 100
Sacramento, CA 95825
www.colliers.com/sacramento