Industrial property across the nation has thrived throughout the pandemic from strong leasing demand. In California, this has led to decreasing vacancy rates, rapidly rising asking rents and increasing sales volume. However, while the Golden State has long been associated with a real estate pricing premium, that is no longer the case in some California industrial markets.
Sacramento, with its nearly 2.6 million people, is reporting the second-highest market capitalization or cap rate in the state at 6.2%, trailing behind only Fresno and putting it on par nationally with such industrial markets as Denver and Nashville.
In terms of rate compression, Sacramento has ranked toward the middle of California, while Stockton, the Inland Empire and the East Bay regions lead the state in terms of lower cap rates, decreasing 180 basis points in the past decade. The average sales cap rate in Sacramento has decreased by 40 basis points over the last three years, however no change has been recorded in the past 12 months.
Given the increased industrial leasing velocity seen recently with large deals from tenants such as Amazon, Walmart and Costco, Sacramento’s market performance is increasingly resembling those of Stockton, whose market cap rate is currently 90 basis points lower.
Looking at the region’s growth combined with current leasing and sales activity, cap rates for sales of Sacramento industrial property are inflated compared to the rest of the state. Other locations such as Bakersfield and Modesto, which do not have as large a local population or immediate proximity to bigger markets, both have consistently reported lower cap rates over the past decade.
There is little indication of activity slowing in the industrial property sector near to medium term. Demand remains at record levels with year-to-date net absorption, the difference in square feet between the number of tenants moving into and out of buildings, nearly reaching 8 million square feet, almost double the previous record set in 2005. Meanwhile, there is still 4 million square feet under construction, which will likely lease prior to or shortly after completion, indicating the runway for growth has yet to peak.