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Ponder

Submitted by Tommy Ponder, sales and leasing associate with the Sacramento office of Colliers International. Posted Online 05-05-08.

What area is your expertise?
I currently have listings throughout the greater Sacramento area including Elk Grove, Power Inn, South Sacramento, West Sacramento, Northgate/Natomas and Rancho Cordova.

What trends do you see presently in industrial development in your area?
The most prevalent trend in industrial development is not to develop on speculation. Since 1999 we have averaged at least 1.9 million square feet of product in the pipeline at any given time. The current decrease in industrial development is certainly benefiting existing landlords during this time of economic softness and is playing a major role in suppressing vacancy levels. This trend was set in motion long before the economic downturn, marking the sixth consecutive quarter in which the pipeline has shrunk.

What type of industrial product is doing well in your area?
Second and third generation industrial properties are doing well during this downturn in the marketplace. Investors are looking for distressed properties while users are concerned with the bottom line. The price of industrial land coupled with high construction cost has made it very difficult for newer developments to pencil.

Who are the active industrial developers in your area?
Cable & Kilpatrick, Massie, Harsh Investments, Jackson Properties, Buzz Oates Company, Mark III, Panattoni Development Co.

Please name one or two significant industrial developments in your area. What impact will these projects have on the market?
Currently there are two major industrial projects underway; the JB Company’s North Freeway Park project in the Natomas /Northgate submarket which will add roughly 110,000 square feet of new industrial space upon delivery in May 2008. Crossroads Ventures Group’s East Elk Grove Industrial Park will add an additional 100,000 square feet to the marketplace in the third quarter of this year. Both of these projects consist of approximately a dozen buildings ranging in size from 6,000 to 12,000 square feet. Once complete with office you can expect to pay a lease rates north of $1 per square foot and a purchase price of $130 to $145 per square foot for the cold shell. The greatest impact of these and other new developments will be driving our industrial lease rates up on existing buildings. The lease rates have to catch up to the cost of construction at some point.

Where is the majority of development taking place? Why is this area doing well?
The majority of development is happening in the Central Valley. To name a few, Panattoni Development Company recently completed a four building industrial project in Lathrop totaling 1,044,947 square feet. Buzz Oates is building an industrial park in Stockton comprised of 519,840 square feet. IDI is constructing 508,800 square feet in Stockton. You can still build quality product affordably and the Central Valley has become an ideal place for many big box users.

What area do you expect to be the next big industrial development market? Why?
There is no significant new industrial construction on the horizon, in part because very little of the entitled industrial land available can be built upon in the next two years. Floodplain issues are behind development encumbrances in most of the Sacramento’s Industrial submarkets. Related to these trends, large land parcels for big box users are also scarce. The submarkets with the greatest strength are North Natomas, Power Inn and West Sacramento.

Please describe the industrial leasing activity in your area.
Leasing velocity is increasing as it becomes cheaper to rent than to own industrial buildings. Lease rates will start to rise as space disappears and property prices should decline slightly as buildings remain vacant. The inventory of “new” buildings on the market currently being marketed for sale will eventually end up on the market for lease.

Please describe the industrial sales activity in your area.
Sales are slowing but there are still abundant buyers for the right property. Cash is still king, however, buyers and sellers are still too far apart.

Please give a measure of industrial vacancy rates and a measure of available sublease space.
As the close of the first quarter 2008, vacancy rates for the industrial product in the Sacramento metropolitan area stood at just 10.4 percent marking the fourth consecutive quarter of declines. Sublease vacancy rate currently stands at .1 percent.

What impact do current interest rates have on the industrial market? What predictions do you have for interest rates and their effect on the industrial market in the next year?
Current interest rates have very little impact on the industrial market. Interest rates continue to remain low which ultimately keeps our CAP rates low. I think the interest rates will remain low and sales prices will also decrease creating opportunities for potential buyers.

What industries do you expect to expand in the next year to absorb a great deal of industrial space? What areas will be affected?
The “green” industries such as solar companies are going to have an impact in all the Sacramento submarkets. In fact, a recently signed deal at McClellan Park alone accounted for nearly one million square feet of occupancy growth.

Would you like to make any additional observations about the industrial market in your area?
The Sacramento region continues to benefit from its location, at the intersection of three main state arterials, an active rail depot and port. These types of services further enhance the region’s appeal as a value added relocation site. The sheer number of closely situated urban amenities and a smaller pool of qualified labor in these areas only further enhance the greater Sacramento area’s beauty!