WESTERN SNAPSHOT, MARCH 2006

Sacramento Multifamily Market

Steve Nelson

After a period of sluggishness brought on by a sagging economy and the home-buying fever, Sacramento's rental market was recharged in 2005 by job growth of 2.1 percent or 18,300 jobs, which pushed unemployment down to 4.1 percent. Third quarter 2005 average multifamily vacancy was 5.7 percent, down from 7.1 percent a year earlier. Rent growth for the year ending in September climbed to 2 percent, up from just 0.6 percent the year before.

A big reason behind the rental market's recovery has been declining housing affordability. As of November 2005, only 19 percent of households in the region could afford a median-priced home of $379,930. In contrast, affordability stood at 24 percent the prior year. However, Sacramento remains much more affordable than the Bay Area (12 percent) and the Golden State as a whole (14 percent affordability), meaning that it will continue to draw homebuyers from its more expensive coastal neighbors.

Sales of condos and smaller homes have come on strong as builders attempt to provide more affordable ownership options. The apartment market has benefited as many properties were converted to for-sale product, thus eliminating excess supply. Through the first 9 months of 2005, an estimated 1,500 units were converted to condos, three times the previous year's total. In 2006, conversions may abate but will still make their presence felt. Including both rental and for-sale units, multifamily permits measured 1,851 units for the first three quarters of 2005, compared to a total of nearly 2,900 units permitted in 2004.

The local investment market has remained active, even as prices climbed in 2005. The year saw 82 transactions exceeding $1 million, fueling a total market volume of nearly $787 million, with an average price-per-unit of $105,694. Notable transactions included the 426-unit Falls at Willow Creek, built in 2004, which sold for $59 million. Also built in 2004, the 288-unit Jefferson Commons, a student-housing complex, sold for $51.5 million.

In 2004 and 2005, new apartment development was concentrated in the areas of North Sacramento and Roseville/Rocklin. These areas will see continued new rental and for-sale multifamily housing projects in the next few years, with current projects totaling about 500 condos and 500 apartments in North Sacramento and 500 apartments and condos total in Roseville/Rocklin. Overall, condo development will continue to eclipse apartment construction across the metro area. Over 2,500 for-sale multifamily units are currently in the pipeline, versus apartment projects totaling approximately 1,500 units.

A key factor in the region's growth is the recently adopted Blueprint plan, a market-wide development guideline that calls for limiting sprawl and congestion through the construction of urban villages combining employment centers, retail space and services, and housing. The plan also encourages infill projects. Downtown Sacramento has already emerged as a center for high-rise residential projects, with 2,500 units in various stages of the proposal and planning process. Perhaps the most ambitious is developer John Saca's plan to build two 53-story condo/hotel towers totaling more than 800 units. If built, the towers would be the West Coast's tallest residential buildings.

With residential mortgage rates expected to climb in 2006, home sales are expected to slow. Although Sacramento could see some job losses in real estate-related industries, such as mortgage lending, construction employment is expected to be supported by commercial projects. Sacramento's cost advantage, transportation network and position as a higher education center will continue to draw both businesses and residents from the Bay Area.

Work on the 1,900-acre Metro Air Park, one of Sacramento's most significant commercial developments in years, is expected to begin in earnest this year. Located near the Sacramento International Airport and Interstate 5, the massive development could comprise 8.6 million square feet of industrial and office space when completed, and will also include a hotel and golf course. More than 36,000 people will be permanently employed at the site, which could generate an additional 30,000 jobs indirectly. The project is expected to be worth more than $2 billion.

Growth will continue in the Roseville/Rocklin area as well. The proposed Placer Ranch project would encompass 2,200 acres and nearly 5,000 housing units, while also including 10 million square feet of office and industrial space supporting 25,000 jobs. A branch campus for California State University-Sacramento is part of the project; the school could ultimately enroll 25,000 students. Nearby, the proposed Placer Vineyards project could contain more than 21,600 housing units at build-out.

As the single-family market stabilizes in 2006, with sales softening and price appreciation at more normal levels, the rental market will see further improvement into the second quarter. Vacancy rates should fall under 5.5 percent by the middle of the year. In turn, concessions will largely disappear from the Sacramento market, save in areas with high concentrations of new product. Rents will register stronger rates of appreciation, in the 3 to 4 percent range.

Steven Nelson is a partner with Hendricks & Partners in Rancho Cordova, California.

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