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Decreased Industrial Construction Mitigates Oversupply Concerns in Sacramento

Vacancy Rates Hit a New High Not Seen Since 2017

In recent years, Sacramento, California, has experienced a notable surge in industrial construction, marking the three most significant years of under-construction activity within the last quarter-century from 2020 to 2022. This boom was largely driven by the escalating needs of major e-commerce entities and logistics companies, prompting developers to rapidly expand the industrial space.

Yet, as 2022 came to a close, the industrial sector witnessed a downturn in demand, sparking fears among developers about potential oversupply and the influx of new spaces into the market. Interestingly, it has been the waning demand, rather than an overabundance of new constructions, that elevated the vacancy rate to 5.8%, the highest since early 2021.

Presently, Sacramento's industrial sector is seeing a significant slowdown in construction, with only 1.6 million square feet currently under development—the lowest since 2018. This includes a mix of build-to-suit and speculative projects, cumulatively contributing less than 800,000 square feet to the market, a quantity unlikely to drastically affect vacancy rates.

Over the last five years, Sacramento's industrial market has seen an average net absorption of 2.7 million square feet annually, indicating robust demand for new constructions. In 2023, the trend continued with a majority of the larger industrial move-ins, specifically eight out of 14 involving spaces over 100,000 square feet, occurring in newly constructed buildings.

The current construction landscape in Sacramento is witnessing a shift towards smaller-scale projects compared to the previous year. Among the 19 ongoing constructions, only one exceeds 200,000 square feet—a substantial 525,000-square-foot project tailored for Target, indicating a strategic adjustment to meet market demands.

Moreover, speculative projects have downsized, reflecting the needs of the smaller industrial tenants predominant in the region. For instance, the largest speculative building underway on Elk Horn Boulevard, designed to be segmented into 70,000-square-foot units, caters to the typical space requirements of local industrial tenants.

Sacramento's industrial developers are swiftly adapting to the evolving market dynamics, focusing on smaller, more demand-aligned projects. This strategic shift is expected to keep the impact on vacancy rates minimal, demonstrating a proactive response to the changing industrial landscape in Sacramento.

Source: MMCG, CoStar, Bloomberg

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