sacramento industrial market report 2q 2011

research & forecast reportSacramento region

www.colliers.com/sacramento

overall performance during 2nd Quarter 2011 in the sacramento industrial market was robust. the following is a summary of the market during the quarter.

• Vacancy declined by 30 basis points, ending the three-month period at 13.1%.

• total leasing activity remained active with more than 2.5 million sf of available space being occupied, far in excess of the consolidations and closures occurring during the quarter, eventually yielding more than 613,000 square feet of positive net absorption from april through June.

• though gross leasing during 2nd Quarter remained virtually the same as reported in 1st Quarter, the change in net absorption from negative 304,000 square feet to positive 613,000 square feet from first to second quarter is hopefully a sign of progress up the recovery curve.

• tenants still hold the upper hand in lease negotiations, as concessions still continue to be a strong tenant bargaining tool for getting leases done.

• still see a continued flight up the class chain as lease rates continue to favor tenants.

• Industrial sales continue to get consummated, but on select assets and mostly at favorable buyer prices.

• Lease rates continue to flutter, and will continue to favor tenants until economic stability returns to the region and long-term employment sources are identified.

• there remains no new deliverable industrial space in the market as of June 30, which should help provide relief to the vacancy rate over the next 12-24 months.

2nd Qtr2011

Projected 3rd Qtr 2011*

VacancY

net aBSorPtion

deliVerieS

conStruction

leaSe rateS

sacramento Industrial highlights

2nd Quarter 2011 - induStrial

*3rd Qtr over 2nd Qtr change

market IndIcators

KeY induStrial metricS - 2Q 2011

Vacancy 13.1%net absorption 613,165 sf

deliveries 36,000 sf

average direct rate nnn $4.96 sf

P. 2 | collierS international Sacramento

reSearch & forecaSt rePort | Q2 2011 | IndustrIaL | sacramento

the 613,165 square feet of net positive absorption experienced in sacramento’s industrial market during 2nd Quarter 2011 is a significant improvement from the 304,274 square feet of negative net absorption reported for 1st Quarter, and ends the consecutive quarterly “net negative” performance at 6 quarters. In fact, sacramento’s industrial market suffered more than 2.7 million square feet of negative net absorption from oct 1, 2009 through march 31, 2011, and is hopefully turning the corner on to the recovery curve.

the solid performance during 2nd Quarter is mostly attributable to tenant activities in the warehouse sector, recording almost 525,000 square feet of positive leasing activity in this product type during the three month period. these results are hopefully signs of a service line that is finished meandering along the bottom of the recovery curve, and ready to begin the slow journey up the curve. any true recovery activity will be tempered by the inventory of shadow space, excess square-footage that users are paying for but not currently using due to downsizing, which will hit the market as vacated space upon renewal.

on the flip side, the lack of any new construction over the next few years and strengthening demand should help to minimize the shadow space effect and boost absorption in the market.

as indicated in our last quarterly report, the anticipated slow recovery period is in part from the lack of definitive sources currently identified for future employment growth. employment growth in the six-county sacramento

region has still not turned the “positive” corner and continues to fluctuate, but has generally improved over the last 12 months. as the graph to the lower left illustrates, year-over-year employment growth in the six-county sacramento region shows a decline from may 2010 to may 2011 of 1.60%, but this is an improvement from the 2.56% decline in the regional employment level reported from may 2009 to may 2010.

the good news is that the market is still leasing, and now at a pace exceeding consolidations and tenant departures. In fact, colliers industrial brokers indicate they have been receiving a growing number of tenant inquiries during 2nd Quarter 2011, but users are still reluctant to pull the trigger on their investment plans. the in-house word is that there are many smaller start-ups seeking space in the region and signing short-term leases to open up shop.

We believe in general that tenants are holding steady, but that consolidations and departures are still going to be part of the sacramento industrial landscape for awhile. though recent construction trends will lead to slower delivery activity, it will take some time for sacramento industrial users to absorb the current available space. until that excess space is absorbed, and lease rates achieve levels closer to replacement costs, no new deliveries will hit the market.

the Industrial recovery

Sacramento MSA

2.00%

Sacramento MSAEmployment

0 00%

1.00%

%

Chan

ge

-1.54%-2 16%

-1.60%-1.00%

0.00%

Year

% C

-2.56%-2.19%

-2.63%

2.16%

-2.78%-3.00%

-2.00%

-ove

r-Y

-5.00%

-4.00%

Year

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

20112010

source: Bureau of Labor statistics

...any true recovery activity will be tempered by the inven-tory of shadow space...

...the market is still leasing, and now at a pace exceeding consolidations and tenant departures...

...many smaller start-ups are seeking space in the region and are signing short-term leases to open up shop...


collierS international Sacramento | P. 3

several key leasing events occurring thus far in 2011 include kelleher corporation vacating almost 189,000 square feet in roseville, Genco supply chain solutions moving out of over 65,000 square feet in West sacramento, and tasq leaving almost 65,000 square feet in rocklin. on the bright side, several key adsorption activities have been consummated thus far in 2011 including olam tomato processors moving into 298,028 square feet in Woodland and four Wheel campers moving into almost 117,600 square feet in Woodland as well.

numerous leases were inked in-house during the quarter ranging in size up to 30,000 square feet and at lease periods exceeding 4 years. there are still leases being consummated in sacramento for larger blocks of space including six leases completed during 2nd Quarter 2011 at, or greater than, 30,000 square feet. Leasing activity seems better now than 12 months ago, but only certain user groups have begun to commit to longer lease periods to take advantage of aggressive rates. Brokers in-house see food, health and solar user groups

as remaining active, but believe construction-related companies are running out of time to recover, and “branch” operations remain susceptible to closure. medical and “Green” companies continue to expand in sacramento as well.

sale activity for sacramento industrial space still has a pulse as there are buyers in the marketplace actively seeking attractive acquisition opportunities. all-cash buyers do continue to take advantage of the distressed deals that still exist in the marketplace. In fact, several sale transactions were completed in-house during the quarter. the table at the bottom of the page is a summary of some of the larger industrial sale transactions completed in sacramento during 2nd Quarter 2011.

cap rates on sacramento industrial sales continue to stay above pre-recession levels, but have shown some stabilizing thus far in 2011. as the graph on the right indicates, the cap rate on sales occurring during 2008 bottomed at 6.1%, increased over the next year up to 9.6% as a result of the downturn the

activity round-up

sacramento LarGer IndustrIaL saLes - 2nd Quarter 2011

Property rentable Buildable area Price Price Per Sf Buyer Seller Submarket comments

3301 s street 74,558 $6.5 million $87.18 potter-taylor Watkins company east sacramento class B Warehouse

tasQ tech Building 64,600 $4.5 million $69.66 rocklin academy Longmeadow dev. roseville/rocklin to be classroom

building

5200 Golden foothill parkway 45,415 $2.5 million $55.05 school Innovations rahim morid folsom/

el doradoWill be owner/

user

1835 diesel drive 108,000 $4.75 million $43.98 Libitzky property toolan trust mcclellan 8.73% cap

161 main ave 117,600 $3.33 million $28.33 Balboa funds michael pritchard natomas/ northgate

100% leased 11.86% cap

downturn the sacramento industrial market has been experiencing, and then declined back to 8% where it has remained steady at that level thus far in 2011. Bank reo’s and foreclosure sales have put upward pressure on the average cap rate during this 30-month period, and continue to put pressure on area cap rates. however, as investor interest trickles back to sacramento as a result of escalating market pricing in the Bay area, more market deals are getting done which is having positive implications on cap rates.

...as investor interest trickles back to sacramento as a result of escalating market pricing in the Bay area, more market deals are getting done, which is having positive implications on cap rates...

...medical and “green” companies continue to expand in sacramento...

source: costar



the overall industrial vacancy rate in sacramento declined during 2nd Quarter 2011 down to 13.1%, 30 basis points lower than the 13.4% rate recorded for the previous quarter. the reduction in vacancy is reflective of the substantial positive net leasing activity occurring during the quarter, ending the three-month period with leasing in the black by more than 613,000 square feet. though these numbers do show promise, a second consecutive quarter with similar results will definitely indicate a recovery trend.

Vacancy in both warehouse and flex inventory dropped 30 basis points during the quarter, ending June 30 at 12.2% and 20.9%, respectively. the impact of the latest recession has been felt fairly evenly across both product sectors, with both experiencing negative net absorption for almost every quarter from 2008-2010. during 2nd Quarter 2011, the flex sector recorded net positive leasing activity of approximately 88,400 square feet, while warehouse inventory generated almost 525,000 square feet of positive net absorption.

Vacancy analysis

KeY VacancY metricS - 2Q 2011

current Quarter 13.1%

previous Quarter 13.4%

previous Year 12.8%

VacancY comPariSon - 2Q 2011

warehouSe flex

current Quarter 12.2% 20.9%

previous Quarter 12.5% 21.4%

previous Year 11.9% 20.5%

these submarket leasing results are consistent with our in-house broker sentiment, in that during 2nd Quarter 2011 the submarkets experiencing the most tenant interest included power Inn and northgate. tenant interest in the davis/Woodland and sunrise/highway 50 areas was also strong during the quarter, and interest appears to be more regional than local in nature.

Who’s hot and Who’s not

Strong aBSorPtion - 2Q 2011

SuBmarKet tYPe aBSorPtion

davis/ Woodland Warehouse 325,168 sf

sunrise/ hwy 50 Warehouse 124,092 sf

power Inn Warehouse 115,439 sf

east sacramento Warehouse 54,521 sf

natomas/ northgate flex 52,652 sf

noteable submarket performace

weaK aBSorPtion - 2Q 2011

SuBmarKet tYPe aBSorPtion

West sacramento Warehouse (123,972 sf)

mcclellan/n. highland Warehouse (44,809 sf)

power Inn flex (27,674 sf)

Lincoln/ auburn flex (25,774 sf)

northeast sacramento Warehouse (20,380 sf)

the current development pipeline for sacramento’s industrial market is non-existent, and is unlikely to ramp back up until leasing activity consistently outpaces consolidations and departures, and lease rates climb back towards replacement costs. It could take several years before measurable progress in leasing and lease rates gives way to new speculative construction, creating a much needed breather for sacramento’s industrial market to move up the recovery curve.

market performance during 2nd Qtr 2011 across the various submarkets comprising the sacramento industrial base can best be characterized by stable inventories, vacancies that experienced small swings up and down, and absorption levels both on the positive and negative side with no dramatic gains or losses.

Leasing results in the various submarkets lend further support of a start up the recovery curve, as the table to the left shows more than 2.5 times the positive leasing activity than negative leasing.

...the current development pipeline for sacramento’s indus-trial market is non-existent...

...the most tenant interest included power Inn and north-gate...



at quarter-end June 30, 2011, the average annual asking rent for all industrial properties (all types and all classes of buildings) throughout the sacramento metro was reported at $4.96 per-square-foot (on an annual triple-net basis). this represents a reduction in the rate of only $0.03 per-square-foot from the 1st Quarter level of $4.99, and $0.31 per-square-foot from the $5.27 annual rate reported one year earlier.

please note that these are asking rents of all industrial property types and classes in the sacramento reporting area, and that there is often a wide spread between “ask” and “actual” rents. these rents are not always a reliable indicator of specific property subtypes, as actual rents for specific property types will vary significantly based on a number of factors including office component, condition, age, location, and highly desired amenities such as yard space. these average asking rates can best be used for evaluating trends, are rates increasing or decreasing.

net effective rent levels continue to be impacted by landlord concessions such as free rent. free rent is a rent concession that was virtually non-existent in the sacramento industrial market just a few short years ago, but has become a rather prolific closing tool for landlords to secure new leases. tenants have become all too familiar with their existence as well, and they too use them as a negotiating tool to secure better lease terms. In fact, often times a user will work their broker relationship extremely hard and then use the information to secure better

renewal terms.

as we noted in our last quarterly report, well-informed space users are returning to the marketplace to take advantage of the tremendous pricing opportunities that still exist; they are aware that these sweetheart deals will not be around forever.

With vacancy registering only moderate increases since the 2008 recession, moving from 10.2% to 13.1% since June 2008, and minimal product deliveries over both the last two years and the next 12 months, it shouldn’t take much new demand activity to bring the industrial market back to equilibrium. once this point is reached, rental rates will once again be in a position to experience growth.

Lease rate trends

KeY leaSe rate metricS - 2Q 2011

Q2 2010

current Quarter $4.96/sf/Yr nnn

previous Quarter $4.99/sf/Yr nnn

previous Year $5.27/sf/Yr nnn



expect industrial vacancy, absorption and lease rates to hold steady over the next 12 months, posting minor changes from quarter to quarter. We believe tenants in the sacramento industrial market are now holding their own, but that consolidations and departures will continue to be a part of the industrial landscape. over the next three months net absorption will be close to “net zero”, possibly in the black. Vacancy from July to september 2011 should remain stable, with possibly only a modest change from the 2nd Quarter level. sentiment here at the colliers house is that rents in the industrial market have bottomed and should remain relatively flat for the next three months.

tenants are still driving deals in this market, as landlords will continue to need concessions to make deals happen. Landlords will continue to prefer holding on to cash and thus will give more free and reduced rent in lieu of tenant improvements.

We believe the sacramento industrial market will continue to be a tenant-driven transaction environment for at least the next 12-18 months. tenants and landlords will continue to pursue short-term leases rather than long-term leases, as tenants prefer the lower risk associated with a shorter commitment, and landlords prefer not being locked in at low rates for long periods of time. additionally, there will be an uptick in new businesses that will compete with the current industry giants in various tenant categories, and many of these businesses will survive based on offering superior customer service.

With respect to the industrial investment market, well, “cash is king”, and buyers with cash will continue to seek out acquisition opportunities priced right from sellers just seeking to retire the debt on their assets. It will be a buyer’s market for product other than class a for at least the next 18-24 months. class a assets, and property located in strong areas, will continue to draw a better buyer class, and provide sellers with more leverage in the sale negotiations.

there is definitely more capital available in the marketplace today than 12 months ago, and there are buyers in the market seeking to close deals in sacramento. this interest is in part due to the attractive pricing that currently exists in sacramento (below replacement cost), and is also in part due to substantially high pricing excluding investors in other markets close to sacramento such as in the Bay area. We believe institutional players and local opportunity buyers will put sacramento back on their radar as market conditions improve.

Looking ahead

...expect industrial vacancy, absorption, and lease rates to hold steady over the next 12 months...

...it will continue to be a tenant-driven transaction envi-ronment for at least the next 12-18 months...

...it will be a buyer’s market for product other than class a for at least the next 18-24 months..



EyE on thE MarkEtRecent Deals - Select 2011 Office Leases

Building Submarket Sf transacted tenant lease type

1400 churchill downs ave. davis/ Woodland 298,028 olam tomato processors new

109 pioneer avenue davis/ Woodland 117,590 four Wheel campers new

8451 rovana circle power Inn 78,000 L&u furniture new

8372 tiogawoods drive power Inn 72,000 pepsi Beverage co. renewal

2340 e. main street davis/ Woodland 68,000 updike distribution Logistics new

8825 Washington Blvd roseville/ rocklin 60,004 not available new

3725 cincinnati avenue roseville/ rocklin 55,148 thunder Valley casino new

1345 n. market Blvd. natomas/ northgate 52,500 eZ Loader new

12525 Quicksilver drive sunrise 34,000 military aircraft parts new

3625 cincinnati avenue roseville/ rocklin 33,098 tri-ed distribution renewal

IndustrIaL - aLL cLasses 2Q 20111Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011

total Inventory sf 187,301,374 187,322,374 187,344,034 187,344,034 187,352,482 187,352,482

total Vacancy sf 23,545,653 24,037,819 24,460,939 24,750,561 25,063,283 24,486,118

total Vacancy % 12.6% 12.8% 13.1% 13.2% 13.4% 13.1%

under construction sf 42,660 21,660 8,448 44,448 36,000 0

net absorption (Growth) (414,290) (471,166) (401,460) (289,622) (304,274) 613,165

average direct rate (nnn - annual) $5.52 $5.27 $5.22 $5.08 $4.99 $4.96

Inventory, Vacancy, construction, and absorption

eye on the market



Submarket rentable Buildable area

VacantSf

Vacancy rate

availability rate

net absorption

Sf

Ytd net absorption Sf

under construction

Sf

direct nnn average lease rate $/Sf/mo

auburn/ Lincoln

Warehouse 2,847,703 151,236 5.3% 15.1% (20,001) (23,921) 0 $6.59

flex 612,940 248,079 40.5% 39.6% (25,774) (23,614) 0 $8.84

davis/ Woodland

Warehouse 17,149,357 2,660,843 15.5% 17.9% 325,168 67,391 0 $3.19

flex 674,459 90,873 13.5% 13.8% (16,621) (19,558) 0 $8.35

downtown/ midtown

Warehouse 3,228,557 157,320 4.9% 5.1% 34,448 (7,552) 0 $5.08

flex 258,579 60,500 23.4% 25.1% 0 3,307 0 $19.20

east sacramento

Warehouse 969,189 122,717 12.7% 12.7% 54,521 24,521 0 $9.38

flex 112,915 55,450 49.1% 56.4% 0 0 0 $12.40

elk Grove/ Laguna

Warehouse 6,186,908 848,272 13.7% 17.4% 827 132,140 0 $5.09

flex 455,919 69,929 15.3% 14.6% (1,481) 8.478 0 $9.77

folsom/ el dorado

Warehouse 4,034,820 152,786 3.8% 5.6% 30,488 38,163 0 $7.66

flex 1,951,223 355,511 18.2% 23.9% 40,926 14,775 0 $9.26

marysville/ Yuba city

Warehouse 6,147,295 749,788 12.2% 15.1% (3,447) 90,778 0 $4.90

flex 175,446 16,042 9.1% 12.4% 1,960 1,990 0 $10.56

mcclellan/ north highlands

Warehouse 19,883,876 3,193,940 16.1% 19.8% (44,809) (196,817) 0 $4.66

flex 1,903,987 553,398 29.1% 30.5% 6,002 19,038 0 $7.26

northeast

Warehouse 6,257,857 608,418 9.7% 11.0% (20,380) (32,996) 0 $4.07

flex 1,072,102 191,096 17.8% 19.6% 13,530 10,567 0 $8.10

sacramento office submarket analysis - 2Q 2011

results are from costar, and include all flex and industrial space existing, under construction, under renovation, or proposed in all core areas of sacramento, placer, el dorado & Yolo counties.



Submarket rentable Buildable area

VacantSf

Vacancy rate

availability rate

net absorption

Sf

Ytd net absorption Sf

under construction

Sf

direct nnn average lease rate $/Sf/mo

northgate/ natomas

Warehouse 12,498,031 1,742,759 13.9% 19.8% 30,350 110,346 0 $4.28

flex 2,133,445 527,678 24.7% 28.3% 52,652 89,483 0 $8.48

power Inn

Warehouse 27,288,353 2,958,004 10.8% 15.7% 115,439 72,004 0 $4.09

flex 1,411,818 207,861 14.7% 18.1% (27,674) (25,016) 0 $6.37

richards

Warehouse 5,007,243 616,038 12.3% 12.9% 26,644 (38,619) 0 $3.81

flex 252,481 73,817 29.2% 26.0% 6,960 (18,240) 0 $6.67

roseville/ rocklin

Warehouse 19,429,053 2,925,700 15.1% 18.1% (4,979) 38,074 0 $5.04

flex 3,139,205 565,888 18.0% 21.1% 24,007 28,105 0 $10.80

south sacramento

Warehouse 4,437,787 210,948 4.8% 8.2% 423 11,269 0 $5.21

flex 408,275 60,888 14.9% 15.9% (4,782) (2,478) 0 n/a

sunrise/ highway 50

Warehouse 14,755,981 2,021,338 13.7% 16.7% 124,092 30,616 0 $5.01

flex 3,503,826 718,564 20.5% 27.3% 15,246 21,355 0 $7.72

West sacramento

Warehouse 17,752,729 1,287,758 7.3% 9.3% (123,972) (109,179) 0 $4.28

flex 1,471,767 282,589 19.5% 20.1% 3,402 (4,819) 0 $7.95

overall

Warehouse 167,874,745 20,407,955 12.2% 15.5% 524,812 205,518 0 $4.43

flex 19,513,737 4,078,163 20.9% 24.1% 88,353 103,373 0 $8.76

Overall Market 187,388,482 24,486,118 16.4% 16.4% 613,165 308,891 0 $4.96

results are from costar, and include all flex and industrial space existing, under construction, under renovation, or proposed in all core areas of sacramento, placer, el dorado & Yolo counties.



cOlliers internatiOnal sacraMentO301 university ave, suite 100sacramento, ca 95825dir: +1 916 929 5999fax: +1 916 649 1001 accelerating success.

inDUstrial sales, leasinG anD inVestMents

Bud applegate+1 916 563 [email protected]

John Banchero+1 916 563 [email protected]

steve cippa+1 916 563 [email protected]

Jim dennis+1 916 563 [email protected]

Irv rios+1 916 563 [email protected]

carol sitzenstatter+1 916 563 [email protected]

tom tyer+1 916 563 [email protected]

inVestMents

steve chamberlain+1 916 563 [email protected]

heath charamuga+1 916 563 [email protected]

John Jackson+1 916 538 [email protected]

erik neese+1 916 563 [email protected]

Ben prater+1 916 563 [email protected]

View all exclusive Listings

sacramento industrial market report 2q 2011

Real Estate

sacramento industrial

industrial sales

key industrial metrics

square feetvacancy

negative performance

butindustrial market

absorption tenants

solid performance