Top Sacramento brokerage sees sturdy '06

Sacramento Business Journal

From the December 19, 2005 print edition

Top brokerage sees sturdy '06
Mike McCarthy

Staff Writer

The regional market for commercial real estate, already strong in some sectors, should fare at least as well next year, predicted CB Richard Ellis this week.

The downturn started by the dot-com bust five years ago seems to have ended, said CB, Sacramento's largest commercial real estate brokerage. Specifically:

The office market that came back strong in 2005, due to higher demand from business and the state, will do well in 2006.

The housing boom will probably cool a bit further, but deliver enough firepower to drive substantial amounts of leasing by firms connected to real estate.

In a related prediction, CB land broker Pete Nixon sees a slightly lower average price for new homes next year, because housing companies are building more homes per acre. That reduces the cost and value of new homes.

The only blotch on the commercial horizon is the shortage of industrial land.
Overall, said CB regional manager Al Gianini, 2006 should see strength across the board among the various sectors in commercial real estate. The company presented its yearly forecast at an event in Sacramento Tuesday night.

In offices, a year like this one Offices recovered in 2005 after several years of awful leasing. This year should see growth in occupied space (net absorption) of 1.2 million square feet, up from less than 500,000 square feet each of the last three years, said CB office broker Kevin Sheehan.

CB credits the gains to renewed corporate expansion and new jobs, largely in the medical, insurance, real estate and finance industries. More state demand helped. So did sales of small office buildings, which look healthy next year too.

Sheehan predicts net absorption should grow another 1.2 million square feet in 2006. But rents should only edge upward, even though the cost of construction materials will rise by up to 25 percent next year.

The notable office projects for 2006 include Stone Pointe in Roseville by developer Doug Sutherland. Other high-profile ventures are David Taylor's long-awaited high-rise at 6th and L streets in downtown Sacramento -- work should start in 2006 -- and Opus West Corp.'s offices off Truxel Road in North Natomas.

The region's relatively low housing prices will continue to attract tenants from the Bay Area, Sheehan predicted, and Sacramento's traffic should spur more suburban office projects and more telecommuting.

Land prices rose about 15 percent

Goaded by declining supply and rising demand from homebuilders, land prices rose about 15 percent in 2005, said CB broker Nixon.

The deal of the year was the $410 million sale of half of the West Roseville specific plan area by William Falik and his partners to three homebuilders. Other blockbuster deals included two purchases by SunCal Cos., of Bickford Ranch in Placer County and the residential part of Delta Shores in the city of Sacramento.

Entitled land with basic infrastructure now sells for up to $600,000 an acre -- even $800,000, in some cases. And builders' decisions to build more homes per acre this year saw prices for high-density sites reach $1 million per acre, Nixon said.

He predicts about 14,000 sales of new homes in 2006, down from '05 and '04. He doesn't see a price bubble in this region.

Homebuilders, he said, will continue to build high-density projects to keep prices down and sustain the new-home market. He predicted an average new-home price of $485,000 next year, which would be down $8,000 or 1.6 percent from the current $493,000 reported by local housing analyst Greg Paquin.

Demand for land will stay strong, Nixon said, thanks to relatively low interest rates plus a need for homes that exceeds the supply. And, he added, there is still plenty of land to buy.

Scarcity to push industrial rents higher

Industrial land is a foundation of Sacramento's commercial real estate because of the region's location and population growth.

Industrial had slumped this decade, lagging as the overall economy slowed and then gradually recovered. But in 2005 net absorption hit 4.9 million square feet, making it the best year for landlords since 2000, said CB Industrial broker Pat Cummings. The 2004 net was 1.8 million square feet.

Vacancy dropped to 9.7 percent from 10.7 percent in 2004, and the "big box" distribution users finally came back. Demand from owners of boats and RV for space to store their vehicles was significant too.

He expects strong leasing in 2006, but said a scarcity of entitled land will slow construction and push lease rates upward.

Rates will get pushed higher by other factors too. Industrial land that sold for $3 to $4 per square foot in 2003 is now worth at least twice that, Cummings said.

Other forecasts:

The sale of industrial condos to small users will increase, because of their relatively low cost.

The desire of small-business owners to avoid commutes will help sustain sales of small, free-standing buildings in the suburbs at current levels.
Apartment rents headed up

The apartment market is strengthening. Vacancies fell to 5.7 percent by the third quarter, down from 6.4 percent the quarter before, and the average price per apartment this year doubled from its 2001 level to top $100,000, said Marc Ross, an associate on the Deloney-Dailey team.

Next year landlords should be able to boost rents due to declining construction, partly because some apartments are being converted into condos.

The investment market should continue strong as investors opt for real estate over other investments, said broker Randy Getz. The retail market will stay strong too, said broker Craig Burress.