While a potential recession is looming, multifamily investments in Sacramento may weather the storm better than those in other cities. Victor Calanog, Ph.D., Commercial Real Estate Economist, shares his take, leveraging data from Moody's Analytics CRE.
Sacramento rents stagnate, but vacancies remain low
Sacramento vacancies remained among the lowest in the nation in Q1 2023, coming in at just 2.8%. That is just about half the national vacancy rate, Calanog says.
Where the situation seems murkier is on the rent side: Asking and effective rents continued to slide, both declining 0.1%. This is the third consecutive quarter that rent growth was either zero or negative for the Sacramento metro area.
Economic, geopolitical uncertainty could create headwinds
Still, optimists will point out that annual rent growth in 2022 was strong, and that the first quarter tends to be weak, seasonally speaking. What makes it challenging to be very optimistic is that the U.S. economy remains in a precarious state, Calanog says. It barely grew in 2022, with real GDP rising under 1%. Ongoing geopolitical uncertainty combined with the recent turmoil in liquidity means that the probability of the U.S. slipping into a recession in the next 12 to 18 months is exceedingly high. If the U.S. does enter a recession, the Sacramento apartment market is likely to take a hit.
Submarkets like Florin Road West could be a haven in a downturn
But how much of a hit could the local apartment market take? Sacramento has been famously resilient through downturns. And it’s always a story of specific neighborhoods. For example, the Florin Road West submarket boasts a vacancy rate of 1.2%, with levels unlikely to change much for the next two years. With that kind of tight starting point, neighborhoods like these will likely take less of a hit even amid an economic downturn, Calanog says.
In the medium to long term, demographics augur well for rental housing as a whole. We might just be up for an uncertain near term, which multifamily investors would do well to prepare for.
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