2018 Commercial Real Estate Recap and 2019 Forecast Bob Shanahan, - - PowerPoint PPT Presentation

2018 Commercial Real Estate Recap and 2019 Forecast

Bob Shanahan, Senior Research Analyst Randy Dixon, Managing Director

January 25, 2019

Presentation Title

Agenda

▪Employment Growth ▪Population Growth ▪Office Market ▪Industrial Market ▪Multifamily Market ▪Retail Trends

Employment & Population Growth

Presentation Title

Employment Snapshot

• Government and

Education/Healthcare make up 41% of the Sacramento region’s 1,002,000 jobs

• 69% of the new jobs

added in the last 12 months were in Government, Healthcare, or Education

• Slower annual job

growth in 2019 closer to 1%

Source: California Employment Development Department

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 700,000 750,000 800,000 850,000 900,000 950,000 1,000,000 1,050,000

Sacramento MSA - Total Nonfarm Jobs & Unemployment Rate

Total Jobs Unemployment Rate California Unemployment Rate

3.5% 4.1%

Presentation Title

Bay Area Business Migration

Penumbra

Alameda-based

Leased 160,000 SF in Roseville (expansion) in October 2017 Medical technology manufacturer 250-300 jobs ($50K avg. salary)

Anton DevCo

Foster City-based

Leased 5,000 SF at the Ice Blocks where it will move its HQ from Foster City Multifamily developer will employ about 20 at Sacramento HQ

Corefact

Hayward-based

Leased 4,546 SF in Roseville Real estate marketing company named one of fastest-growing privately-held companies in the Bay Area for three years in a row

CPUC

San Francisco-based

Future hiring to occur in Sacramento 800 San Francisco employees 100 Sacramento employees

And …

Presentation Title

U-Haul Growth Cities are calculated by the net gain of

• ne-way U-Haul trucks

entering a city versus leaving that city during a calendar

• year. Migration trends data is

compiled from more than 2 million one-way U-Haul truck sharing transactions that

• ccur annually.

Population Growth

• 1. Sacramento/Roseville, CA
• 2. Spring, TX
• 3. Manhattan, NY
• 4. Harrisburg, PA
• 5. Grand Rapids/Wyoming, MI
• 6. San Francisco, CA
• 7. Greenville, SC
• 8. Fort Lauderdale, FL
• 9. Madison, WI
• 10. Kissimmee, FL
• 11. McKinney, TX
• 12. Pittsburgh, PA
• 13. Springfield, VA
• 14. Palm Springs/Cathedral City, CA
• 15. St. George, UT

U-Haul U.S. Growth Cities for 2018

“This market is an attractive

• ption for those who have

been priced out of the Bay Area,” stated Aaron Anderson, U-Haul Company of East Sacramento president. “There has been out-migration from parts of the Bay Area in recent years, but many movers are remaining in-state because they can find affordability in Sacramento and Roseville. Commuters can be 90 minutes from their jobs and enjoy close-knit communities.”

20,000 people each year relocate from the Bay Area to the greater Sacramento region (US Census Bureau)

+25,000 residents from July 2017 to July 2018 (+1.1%)

Presentation Title

Millennial Migration

Sacramento ranks third in the nation in net Millennial migration

Presentation Title

Bay Area Spillover

Sacramento #1 for San Francisco households looking to relocate

Table: Top 10 Metros by Net Inflow of Users and Their Top Origins

Rank Metro* Net Inflow Net Inflow 2017 Top Origin Top Out-of- State Origin 1

Sacramento, CA

7,029 5,081 San Francisco, CA Las Vegas, NV 2 Atlanta, GA 5,466 2,993 New York, NY New York, NY 3 Phoenix, AZ 5,258 3,200 Los Angeles, CA Los Angeles, CA 4 Portland, OR 3,904 983 San Francisco, CA San Francisco, CA 5 San Diego, CA 3,206 5,979 Los Angeles, CA New York, NY

Office Market Off The Charts

Presentation Title

Annual Rent Growth

+5%

Annual Net Absorption

807k SF

Vacancy Rate

12.4%

Office Market Fundamentals

Q4 2018 Market Statistics

Office

13.0% 13.7% 15.3% 17.2% 19.2% 20.2% 20.6% 19.2% 17.7% 16.4% 14.7% 13.9% 13.4% 12.4%

• 12.0%
• 8.0%
• 4.0%

0.0% 4.0% 8.0% 12.0% 16.0% 20.0% 24.0% 28.0%

• 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Colliers International Research

Total Net Absorption New Supply Total EOY Vacancy %

Presentation Title

Class A / B Office Rents & Sale Prices

Office

$176.67 $183.33 $241.07 $207.94 $178.05 $116.21 $116.39 $83.66 $114.24 $143.06 $139.50 $163.52 $151.19 $174.27 $1.87 $1.95 $2.05 $1.87 $1.81 $1.73 $1.70 $1.69 $1.71 $1.76 $1.79 $1.84 $1.84 $1.94 $2.27 $2.34 $2.48 $2.27 $2.17 $2.10 $2.11 $2.09 $2.08 $2.19 $2.23 $2.30 $2.30 $2.42

$1.00 $1.20 $1.40 $1.60 $1.80 $2.00 $2.20 $2.40 $2.60 $50 $100 $150 $200 $250 $300 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Colliers International Research

• Avg. $ Paid/Bldg. SF

Class B Class A

Presentation Title

Downtown Class A Rates vs. Suburban Class A Rates

Office

$2.16 $1.82 $2.08 $3.07 $2.70 $2.66

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Suburban Class A Downtown Class A

Presentation Title

2018 Office Headlines

Ice Blocks

1610 R Street / Midtown

• 100,000 SF office completed May 2018
• 100% leased to EA, Spaces, Accenture, Dudensing Law

Firm, Anton DevCo, ConSol/CHEERS

• Heller Pacific developed three-block mixed-use project

including 142 apartment units, 60,000 SF retail

Office

Centene West Coast Headquarters

4201 E Commerce Way / North Natomas

• 1.25M SF two-phase office campus (540K SF first phase)
• Hines closed on 68-acre site in September
• St. Louis-based Centene will bring as many as 5,000 jobs to

the new campus

• 1,500 new apartment units proposed within a three-mile

radius of Centene campus

Presentation Title 14

Demand driven by government and healthcare

Office

629,970 157,119 115,000 45,000 30,000

Government Insurance Healthcare Coworking Education

Office Tenant Demand by Industry

67 active 5,000-plus square foot tenants in the market as of January 2019 totaling 1.85M SF of demand

5 of the 10 largest leases signed in 2018 were government or healthcare tenants

Presentation Title

Top Sales of the Year

621 Capitol Mall

336K SF Class A / Downtown

Sale Price $161M Price / SF $439.49 Buyer Shorenstein Properties Seller David S Taylor Sale Date January 9th

The Senator

163K SF Class A / Downtown

Sale Price $46.9M Price / SF $260.38 Buyer Seagate Properties Seller Swift Real Estate Sale Date December 28th

770 L Street

170K SF Class A / Downtown

Sale Price $44.5M Price / SF $261.35 Buyer New York Life Seller AMP Capital / PB&J Sale Date February 20th

HP Innovation Center

Three building portfolio / Roseville

Sale Price $93.5M Price / SF $209.00 Buyer Stonemont Financial Seller Strada Investment Sale Date June 7th

Office

Presentation Title 16 Presentation Title

Lorem Ipsum

State of California

• P Street Building = 700K SF
• 1215 O Street = 255K SF
• State Occupies 9.6M SF, or

41%, of Downtown’s existing inventory (23.4M SF)

New Development Dominated by Build-to-Suits

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Office

Healthcare BTS

• Adventist Health = 242K SF
• Kaiser Roseville = 194K SF
• Dignity Health = 68K SF (October)

New Natural Resources Building Adventist Health

Presentation Title 17

Future Development Pipeline

Tower 301

301 Capitol Mall / Downtown

Owner / Developer CalPERS / CIM Group RBA 730,000 SF Pre-Lease Requirement 40% (292,000 SF) Timing 2022 Completion

Office

The Foundry at The Railyards

5th/6th @ Railyards Blvd / Downtown

Owner / Developer LDK Ventures RBA 300,000 SF (two buildings) Pre-Lease Requirement 30-40% per building Timing 2023 Completion

Presentation Title

What will 2019 bring?

Office

• New spec development, under 100K SF
• More Bay Area migration of companies and

residents

• Increased attention from investors seeking

higher yields

• New coworking space
• Decreasing vacancy rate
• Downtown vacancy will drop below 10% for

the first time since 2003

• Rising rents (4-6% annual growth)
• Fewer landlord concessions

Urban Hive’s new coworking space in The Cannery on Alhambra Blvd

Presentation Title

Annual Rent Growth

+5%

Annual Net Absorption

807k SF

Vacancy Rate

12.4%

Office Market Fundamentals

Q4 2018 Market Statistics

Office

13.0% 13.7% 15.3% 17.2% 19.2% 20.2% 20.6% 19.2% 17.7% 16.4% 14.7% 13.9% 13.4% 12.4%

• 12.0%
• 8.0%
• 4.0%

0.0% 4.0% 8.0% 12.0% 16.0% 20.0% 24.0% 28.0%

• 500,000

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Colliers International Research

Total Net Absorption New Supply Total EOY Vacancy %

Presentation Title

What will 2019 bring?

Office

• New spec development, under 100K SF
• More Bay Area migration of companies and

residents

• Increased attention from investors seeking

higher yields

• New coworking space
• Decreasing vacancy rate
• Downtown vacancy will drop below 10% for

the first time since 2003

• Rising rents (4-6% annual growth)
• Fewer landlord concessions

Urban Hive’s new coworking space in The Cannery on Alhambra Blvd

Increasing Industrial Development

Presentation Title

Annual Rent Growth

+37.2%

Annual Net Absorption

3.5M SF

Vacancy Rate

4.2%

Industrial Market Fundamentals

Q4 2018 Warehouse Market Statistics

Industrial

Presentation Title

Industrial Rents & Sale Prices

Industrial

• Nov. 2016: California voters

approve to legalize cannabis for recreational use starting in 2018

Presentation Title

Impact of Cannabis on the Power Inn Submarket

Industrial

$0.32 $0.36 $0.86 10.3% 5.1% 3.7%

$0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 2 4 6 8 10 12 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 Average Warehouse Asking Rates Total Vacancy Rate

+65% rent growth year-over-year + 139% rent growth since Q4 2016,

when California voted to legalize cannabis

Presentation Title

Colliers International

Industrial Trends

Transportation 50.30% Inventory Carrying 21.80% Labor 9.50% Customer Service 7.80% Rent 4.30% Supplies 2.70% Other 1.20% Administration 2.20%

Supply Chain Cost Breakdown

Top U.S. Industrial Growth Markets (percentage of net absorption vs. overall warehouse inventory, as of Q2 2018)

Market Total Whse Inventory 2018 YTD Absorption Growth % 1 Inland Empire 513,735,100 14,358,400 2.8% 2 Stockton 109,146,490 2,731,582 2.5% 3 Central New Jersey 325,568,003 6,043,351 1.9%

4 Sacramento 157,400,804 2,834,810 1.8%

5 Charlotte 213,897,209 3,733,787 1.7%

Industrial

Presentation Title

2018 Completions

3510 Carlin Drive

387K SF Warehouse / West Sac

Developed by Ridge Capital Completed June 2018 100% occupied by Veritiv Bixby Land Co. acquired for $33.4M

7701 Foothills Blvd

316K SF Warehouse / Roseville

Developed by Panattoni Completed June 2018 100% occupied by McKesson 10-year lease expires in 2028

920 Stillwater Rd

105K SF Warehouse / West Sac

Developed by Harsch Completed May 2018 Factory Motorparts (41,441 SF), ArjoHuntleigh (10,058 SF), and 27,560 SF still available for lease Industrial

New 2018 supply = 861,788 SF (97% leased) Under construction (Q4 2018) = 1,043,894 SF

Presentation Title

2019 Development

2400 McClellan Park Drive

417K SF spec development / McClellan Developer McClellan Park / LDK Tenant Spec (100% available) Completion May 2019

Sacramento Logistics Center

500K SF development / Metro Air Park Developer Buzz Oates Tenant Spec (100% available) Completion Q4 2019

3085-3095 Mary Place

348K SF spec development / West Sac Developer Ridge Capital Tenant Spec (100% available) Completion Q4 2019

3575-3640 Ramos Drive

407K SF spec development / West Sac Developer NorthPoint Tenant Spec (100% available) Completion February 2019

Industrial

Presentation Title 28

An emerging industrial submarket

Metro Air Park

• 1,320 developable acres
• 7.34M SF proposed
• 855K SF Amazon distribution center
• 500,770 SF ready to start construction

Presentation Title

Industrial

Presentation Title

What’s going to happen in 2019?

Industrial

• More spec development will break ground

(500K+ SF to start construction by Q2 2018)

• Approx. 1.5M SF of new supply – 75% of

which (1.12M SF out of 1.5M SF) will be leased by year-end

• Slight increase in vacancy in the first six

months as new spec product delivers

• Moderating rent growth with cannabis’

impact lessening, but still double digit growth

• Increased attention from investors
• Strong tenant demand and new occupiers

coming to the market

Making Sense of Multifamily

Presentation Title

Multifamily Market Fundamentals

5-year quarterly average

• ccupancy rate = 96.2%

Multifamily

#1 annual rent growth market in the nation from Q4 2015 – Q4 2017 Q4 2018 Monthly Rent = $1,405 (+4.6% YOY)

Presentation Title

Multifamily Development

Multifamily

2,503 units under construction as of December 2018

Presentation Title

2018 Completions

The Crossings

225 units, 750 beds / Southeast Sac Developer AMCAL Type Student Housing Lease-Up 95.6% Completion August 2018

Ice House

142 units / Midtown Developer Heller Pacific Type Market-Rate Lease-Up 95% Completion July 2018

The Hardin

137 units / Downtown Developer CFY Development Type 61% Affordable Lease-Up 91% Completion June 2018

BDX at Capital Village

199 units / Rancho Cordova Developer AG Spanos Type Market-Rate Lease-Up 50% Completion July 2018

Multifamily

Presentation Title

Urban Apartment Development

34 Presentation Title

Multifamily

Apartment projects under construction in Downtown, Midtown, East Sac, and West Sac 1,097 units under construction as of December 2018

Presentation Title

Suburban Apartment Development

Units Under Construction

• 1. Folsom = 650 units
• 2. Roseville = 486 units
• 3. Natomas = 232 units

Multifamily

Pique at Iron Point

HUB Apartments Talavera Ridge

Mesa at Laguna Ridge

Sutter Green

Presentation Title

Top 2018 Sales Transactions

Slate Creek at Johnson Ranch

Roseville Sale Date May 29 Price $148.7M Price / Unit $242,973 Units 608 Buyer Blackstone Seller Kennedy Wilson

The U

Davis Sale Date December 3 Price $76M Price / Unit $575,757 Units 132 Buyer Tilden Properties Seller Carmel Partners

3-Property Portfolio

Citrus Heights & Elk Grove Sale Date December 1 Price $170M Price / Unit $237,430 Units 716 Buyer MG Properties Group Seller Fairfield Residential

Villagio Apartment Homes

North Natomas Sale Date September 5 Price $70M Price / Unit $257,352 Units 272 Buyer Oakmont Properties Seller JCM Partners

Multifamily

Presentation Title

Sacramento multifamily sales volume hit $1.72 billion in 2018, finishing the year with a strong $591.9 million in fourth quarter sales volume

Multifamily Sales Volume

Multifamily

$591.9M

Presentation Title

In November, California voters rejected Prop 10, the repeal of Costa Hawkins, which would have allowed local jurisdictions to implement rent control in apartment properties built prior to 1995. As Sacramento renters continue to spend more than the recommended amount of their incomes on rent, local activists have put a rent control initiative on the ballot for 2020 that would tie rent increases to regional CPI and cap annual increases at 5 percent.

STUDIO RENT GROWTH YEAR- OVER-YEAR ONE-BEDROOM RENT GROWTH YEAR-OVER-YEAR TWO-BEDROOM RENT GROWTH YEAR-OVER-YEAR THREE-BEDROOM RENT GROWTH YEAR-OVER-YEAR

4.1% 4.8% 4.9%

Rent Growth or Rent Control?

4.8%

Multifamily

According to the City of Sacramento’s Comprehensive Housing Affordability Strategy, of the 94,055 renters in the city of Sacramento, 51% (47,505) spend more than 30% of their income on rent and 27% (25,770) spend more than 50%

Presentation Title

In 2019, we will see…

Multifamily

• Rent control continue to be an ongoing

topic of conversation

• Moderating rent growth in the 5 to 6

percent annual range

• 2,000+ new units complete and 1,000

more units break ground

• Condos coming to Capitol Mall,

apartments in the Railyards, and a new apartment project at 8th & K

• Occupancy levels will drop closer to 95%

with new units coming online

• Less annual sales volume than 2018, but

still more than $1B for the year

New apartments under construction at 3675 T Street

Retail’s Renaissance

Presentation Title

Annual Rent Growth

+3.0%

Annual Net Absorption

778K SF

Vacancy Rate

7.8%

Retail Market Fundamentals

Q4 2018 Retail Market Statistics

Retail

Presentation Title

Bars and Restaurants

42 Presentation Title

Retail

There are 37 new places to eat and drink at DOCO, The Bank, and the 700 K Block

Presentation Title

Other thriving retailers?

• Bargain grocery stores
• Grocery Outlet
• Dollar Tree
• Discount apparel stores
• TJ Maxx
• Fitness centers / health clubs
• LA Fitness
• 24 Hour Fitness
• Orangetheory Fitness
• Planet Fitness
• Entertainment / experiential concenpts
• Movie theaters
• Trampoline parks
• Bars with mini-golf
• Bars with axe-throwing?

Retail

Questions?