California is not an inexpensive place to live or do business. But Sacramento remains one of the state's last bastions of affordable living. In fact, when Silicon Valley and the Bay Area were booming, a lot of consumers cashed out the equity in their expensive houses and headed for the state capital, where land prices are significantly cheaper.

“Even now, as those other valleys suffer, there are still people who come to Sacramento because they can get a spectacular house for $400,000 or $500,000, and in California, that's cheap,” says Randall Lewis, principal and executive vice president at Upland, Calif.-based Lewis Retail Centers. The Sacramento Association of Realtors reports the average home price increased 23 percent to $213,000 in 2002.

The greater Sacramento region is home to more than 2 million people in six counties, including Sacramento, Yolo, El Dorado, Placer, Sutter and Yuba, and includes the cities of Sacramento, Citrus Heights, Folsom, Isleton, Galt, Elk Grove and Rancho Cordova. For statistical purposes, however, most retailers and developers consider the market to be the 30-mile radius surrounding downtown Sacramento. The market's geographic location permits growth in all four directions, including the foothills to the east, the Bay Area to the west and the Laguna/Elk Grove area to the south.

And it's not just homeowners who are storming Sacramento from the Bay Area. Commercial property buyers are emigrating as well, says Don Ellwanger, senior broker associate with investment advisor Marcus & Millichap. “A year ago, properties were selling, on the low end, for an eight-and-a-half, maybe nine-and-a-half (cap rate), and occasionally you would see a 10 cap,” he adds.

“Today, properties are selling from a six-and-a-half to a seven-and-a-half range, and you might find an eight. That tells us there is a huge influx of capital due to what's happening in the stock market, and that there is a huge decrease in inventory. That's the biggest challenge we have. I think a lot of that has to do with interest rates and the general overall economy.” In 2003, 1.8 million square feet of new retail space is set come offline, compared to 1.4 million in 2002 and as much as 2.5 million back in 2000.

“All of Sacramento is on fire because it's the state capital, and there's always a lot of action going on in a state capital,” Ellwanger says. A statewide budget crunch has yet to trigger a wave of layoffs, Lewis says. “Even through budget problems, you need someone to run all these bureaucracies.”

“A lot of businesses have been coming because they can acquire land a lot cheaper and it's a lot easier to hire employees,” Lewis says. “The housing market is looking good for retailers as new housing in the $200,000 to $400,000 range keeps growing. That's upwards of two years ago when you had a lot of new homes in the mid- to high-$100s. These days, most of the new housing starts at more than $200,000.” Lewis says the area is affluent, but not so expensive as to stunt growth. “The $300,000 mark is usually the breaking point,” he notes.

A degree of uncertainty has been added by the theatrics taking place in the political arena as well, as Arnold Schwarzenegger and a big supporting cast vie for the governorship. As Ellwanger relates, “I have an office building that's state-leased, and people are kind of hands off with all the financial devastation that we have.”

The issue we have in Sacramento is that there is “very low inventory, and presently there isn't a lot of property on the market,” he points out. The retail vacancy rate is also “very low,” he adds, “probably about five percent.”

The average rents for various retail property types varies, understandably, depending on the area. “In some areas like Rockland, Roseville and Folsom you'll be paying $2-plus a foot,” he points out. “If you're in Natomas, and even some of the Laguna properties, they're higher, but in the downtown areas and outlying areas there could be $1.25 to $1.50 per foot. It's all over the board. It depends on the area, it depends on if it's new product.”

According to Lewis, his company's North Natomas Town Center is at the epicenter of Sacramento's growth. The planned community, one of approximately five underway in North Natomas, encompasses a thousand acres. Situated near the ARCO Arena, a sports stadium that was in the middle of nowhere only five years ago, North Natomas is now seeing schools, parks, offices, transportation centers and, yes, retail, sprouting up on Greenfield sites. Lewis is negotiating with a market-leading grocer to anchor a 120,000-square-foot neighborhood center in the development, which will feed off of the development's 1,500 dwellings. The city is even planning a rail line to connect North Natomas to downtown Sacramento and the greater Bay Area.

In fact, a study conducted by local appraisal firm Giannelli, Jarette & Waters indicates North Natomas is becoming Sacramento's new hot spot for office construction and job growth, eclipsing downtown. The North Natomas corridor, running along Interstates 5 and 80, includes more than 1,700 acres of office land that could hold more than 21 million square feet of space. About 80 of those acres have been developed so far, but more than 600 acres are being graded for development.

Closer to downtown, Elk Grove is preparing to approve the biggest undeveloped tract of land left in the city — the 1,900-acre Laguna Ridge area, which will be zoned for 7,826 homes and 3.7 million square feet of office and retail space. The area will be Elk Grove's first major master-planned community since it became a city in 2000.

Among the retailers who are showing up and establishing a presence are supermarket chain Raley's, National Dollar Stores and Rite Aid. Says Ellwanger, “Pretty much anybody who's anyone is looking to be in the Sacramento marketplace.” Milwaukee-based Kohl's is entering the market next year with five stores, and Target Corp.'s Mervyn's chain, which operates several stores in the region, is opening its first new store in 20 years in Folsom to shore up its market share. Swedish furniture chain Ikea is also searching for a 250,000-square-foot site.

In short, the Sacramento retail real estate scene has never been better. As Ellwanger concludes, “If a person invests in the Sacramento real estate market and buys a good piece of commercial real estate — ‘B’ or better — even if they're buying it at a seven cap with the increase in the annual rents and the property values, I think it's a win-win situation.”

Market Profile/Sacramento

DEMOGRAPHIC OVERVIEW

  • Total Population: 2 million

  • Estimated Growth Through 2007: 8%

  • Median Home Price 2003: $240,000 (+20% YOY)

  • Median Household Income 2003: $46,602

  • Unemployment Rate: 5.3%

Source: NAI; Marcus & Millichap; Economy.com

RETAIL OVERVIEW

  • Retail Vacancy Rate: 7.6%

  • Total Retail Completions 2003: 1.8 million

  • Average Cap Rate: 6.5-7.5%

  • Average Rent Per Sq. Ft. Triple-Net Lease 2003: $19.27

  • Average Rent Per Sq. Ft. Triple-Net Lease 2002: $18.80

Source: Marcus & Millichap

Going! Going! Gone… in Orange County

The largest undeveloped tract in booming, part of the famed Irvine Ranch Orange County is up for grabs, and the U.S. government is taking to the Internet to auction it off.

Orange County, Calif.'s former Marine Corps Air Station El Toro is set to become Heritage Fields, a 3,700-acre parcel of land designated for mixed-use development and scheduled to be auctioned off via a specially created Website to prospective developers. The acreage will be divided into four pre-determined parcels. Though developers may bid on more than one parcel. The total number of buyers cannot exceed four.

The City of Irvine has already created a land-use plan to which winning bidders must adhere.

The plan, which reserves 60 percent of the land for open park space, includes 3.1 million square feet of R&D, office and retail space; 3,400 residential units; a golf course complex and a 7,800-student university campus, according to Patrick Remolacio, senior vice president at Colliers Seeley International, the real estate services firm selected by the government to market the land auction to developers. Remolacio says the city has earmarked approximately 225,000 square feet for traditional retail development.

Within a five-mile range of Heritage Fields, 49 percent of the population's households earn more than $75,000. The trade area's existing residential population is 102,000, but is expected to grow to 211,000 within four years.

The auction itself will be conducted by the U.S. General Services Administration via an Internet website. Bidding is expected to begin this fall and end before 2004. California Cong. Christopher Cox says the Heritage Fields auction will raise more than four times as much money as previous base closings, and will provide a model for future ones.

While Remolacio is hard-pressed to estimate the ultimate price the parcel will fetch. “Let me just say this, The Irvine Co., which owns virtually everything around it is selling land in the Irvine Spectrum for around $25-$30 per square foot. That breaks down to about $1 million per acre.”