As Sacramento’s economy expands, the city is attracting millennial professionals and young families in record numbers. But Sacramento multifamily market property investors can rejoice that it has not completely caught up with national trends. As development activity increases in secondary markets, and the city remains in the throes of an acute housing shortage, ‘Sactown’ shows exceptional promise for investors interested in both property development and acquisition.
Sacramento Multifamily Market Steaming Ahead
All indicators suggest that the city’s economic performance is strong, but not exceptional. Due to its affordability, Sacramento is seeing strong population growth driven by expanding employment opportunities and migration from the San Francisco Bay Area.
Sacramento was the fastest growing city in California and the 28th fastest growing large city in the country in 2017. Its population has grown at a rate of 1 percent annually since 2010, and it is expected to continue at that rate through 2022. In 2016, 2.4 million people called the Sacramento metropolitan area home, with just under 500,000 residing in the city proper. An average of 7,300 people will move to the city annually between now and 2022, according to state estimates.
Last year, 22,700 net new jobs were added in Sacramento. Economists forecast employment to increase 1.1 percent annually through 2022, with professional and business services, educational and healthcare, and hospitality expected to show the greatest growth.
Another source of economic growth is a new Amazon distribution center, which opened in October 2017 and will provide 1,500 jobs when it reaches capacity. The city now hopes to lure the West Coast office of Fortune 500 health insurance company Centene Corporation to suburban North Natomas through incentives of up to $13.5 million. That new office would bring 5,000 new jobs with it. A final decision is expected early in 2018. The company already employs 3,000 locally.
The Sacramento Multifamily Market Remains Tight
By mid-2017, Sacramento had experienced 8.2 percent rent growth year-on-year and placed fifth for rent growth nationwide. In December, the city showed 8.1 percent annual growth, while the rest of the country trended downward to a 2.8 percent average. Sacramento ended the year in first place. Rents in Sacramento have increased 40 percent since 2014. Analysts predict that Sacramento rents will grow 4.6 percent in 2018, with growth slowing as new properties come onto the market. Nationally, rents are expected to rise at a rate slightly exceeding inflation (2.1 percent) in 2018.
In 2016, 50.3 percent of Sacramento’s population was comprised of renters, which is somewhat above the national average for large cities. Vacancies stayed steady at 3.6 percent throughout the second half of 2017. Economic modeling suggests that vacancies will fall to 2 percent and not climb over 2.4 percent until after 2021. The average monthly rent for an apartment in late 2017 was $1,352, only a few dollars below the national average. A two-bedroom apartment in Sacramento last year cost an average of $1,414.
In 2018, 1,429 units are expected to be added in Sacramento, compared to 868 in 2017. In Q4 2017, 3,808 units (25 properties) were in the pipeline, the highest number since 2003. In January of this year, the city planning commission approved the construction of a building with 159 units in the Midtown neighborhood. The developer of that project seeks to take advantage of city and state incentives to incorporate affordable housing units.
Rents for the nine properties now under development in central Sacramento will exceed the city’s average. Revitalization of the city’s Downtown and Midtown neighborhoods is creating higher population density and a concentration of shopping and entertainment choices. This is seen as a draw for young professionals and transplants from the Bay Area. For example, the new mixed-use Ice Blocks development offers an attractive variety of urban lifestyle activities and is easily accessed by light rail.
The acquisitions market has been quite active for the last few years. Sales totaled $1.65 billion in the Sacramento area in 2017, with five transactions in Q4 2017 alone worth over $20 million. Much of that activity was the repositioning of underperforming properties.
Sacramento needs multifamily housing investors. The demand for housing there is not being met effectively, even though opportunities are diverse and abundant. Tax incentives are available to developers who choose to incorporate affordable housing in their properties, but doing so is not mandatory. The acquisitions market has yet to be depleted.
CWS Capital Partners specialize in assisting clients with acquisitions, development, repositioning, and 1031 exchanges. It owns one property in Sacramento.
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