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Sacramento’s Downtown Office Market Keeps Chugging Along

CoStar Market Insights: Few Construction Gains and Healthy Demand Leads to Tight Vacancies
September 12, 2018
California State Lottery Commission's headquarters at 700 N. 10th St. in Sacramento, California.

Downtown, greater Sacramento’s premier office market, is performing at a high level.

The area of choice for many high-profile office tenants in Sacramento, the downtown occupancy rate is 92 percent. This mark is outperforming downtown’s 10-year average of 90.2 percent, but closely mirrors the metropolitan area’s office market overall -- the occupancy rate for greater Sacramento is 90.5 percent. Both downtown and greater Sacramento continue to benefit from a healthy economy, and a dearth of new office construction since 2010.

The downtown area features the most office complexes in Sacramento, with more than 20 million square feet of inventory. And almost half of inventory is of the high-end variety: 9.8 million square feet, or nearly half of all product, is Class A-rated.

With its proximity to the state’s capital, government dominates the list of downtown tenants. Noteworthy occupants include the California Environmental Protection Agency, California Department of Water Resources and the California Department of Education. Some non-government tenants with a significant footprint include Kaiser Permanente and AT&T Wireless.

In addition to a tight vacancy rate, downtown lacks large, available spaces in upper-tier buildings -- only two Class A properties currently have at least 50,000 square feet of contiguous space for lease.

Also, there is little relief on the way in the form of new construction, as no projects are currently under way. In fact, the sight of new office buildings has been rare since the end of the Great Recession. Only three properties, totaling 183,825 square feet, have completed construction this decade downtown. And most of the new inventory can be attributed to a single project, the California State Lottery Commission's 155,000-square-foot headquarters.

In contrast, from 2000 to 2009, inventory increased by 3.7 million square feet, and included the addition of some of Sacramento’s most iconic office towers. Among them were the 445,984-square-foot Bank of the West Tower, CalPERS 560,000-square-foot headquarters and the 366,337-square-foot U.S. Bank Tower.

Vacancies downtown have historically fallen below the regional average, due in part to the stable demand from government tenants. Demand has remained high in this decade as a result of the area’s healthy economy, and, in contrast to previous periods of economic growth, minimal inventory gains have kept a lid on any supply driven rise in vacancy. Vacancies are expected to remain limited, as downtown remains Sacramento’s premier area for office tenants.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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