Cassidy Turley Northern California. www.ctbt.com

Observations about the Sacramento Region’s Office Market

Jim Gray, CCIMjgray@ctbt.com(916) 617-4255

WWW.CTBT.COM/Research

• Garrick Brown heads up our research 14 staff and 400 brokers 43 northern California

regional reports Office and Industrial 8 reports –from our retail

division Terranomics Abby Friedman maintains

the Comp Exchange Network (916) 617-4266

• Go check them out!

The Numbers

Positive2012 closed with the best showing in 7 years!Occupancy has increased by almost 1.5 million square feetVacancy has declined from 17.6% to 16.2%A number of large dealsModest employment growth Q4 2011= 920,500 Q4 2012 = 931,200

10.9% 9.8%

The Numbers

NegativeAverage asking rents lower$1.63 full service 2012 vs. $1.67 2011 2% lower than last year18% lower than 2008

2007 2008 2009 2010 2011 2012

0%

4%

8%

12%

16%

20%

24%

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

13.10%14.10%

16.10%17.00%

17.60%16.2%

$1.89 $1.99 $1.91 $1.82 $1.71

$1.63

Vacancy Avg Asking Rate

Va

ca

nc

y

Employment Growth

11 Largest Leases in 2012

Healthcare Call Center

Health Insurance Telcom

Trade Schools

• 11 Leases • 20K to 295K• Average rent of $1.53

PSF, FSG

10 Largest Sales

• Top four were portfolios• Healthnet - 9% cap rate, institutional buyer, long

term, strong quality tenant• Distress and REO a big part of market dynamics

($38 to $90 per square foot) • Value add with hopes for a quick flip or mid-term

cash flow

It’s More than “Just the Numbers”

1. Government

2. Complexity

3. Zombies

4. New Money

5. “Med-Ed”

6. Challenge of Creativity

Government Employment Sacramento

232,100 in Jan 2007 and 223,000 December 2012. Off nearly 4%.

Government Insights

• Sacramento region identified as second most at risk market in the event of the Fiscal Cliff

• State leases termination clause• GSA seeking shorter terms• Passage of Proposition 30 brings relief and a

bottom

Complexity

Dramatic increase

Huge societal and market changes

Examples

Patience, perseverance and expertise

Zombies

• Office buildings 50% vacant or more for longer than 1,000 Days

• Nearly 250 buildings

• Nearly 6 million square feet

New Money

• Acquire a building at market in 2007

• Paid $200/sf, 7.5% cap rate• 65% LTV, 6.25% rate, 25 years• Lose tenant in half the building

Purchase Price   $ 10,000,000

Down Payment 35% $ 3,500,000

Balance 65% $ 6,500,000

Rate 6.25%  

Amortization 300  

Payment   $ (42,879)

Occupied 25,000  

Average Rent $ 1.85 $ 46,250

Operating Expenses $0.60 $ (15,000)

Net Income 1.25 $ 31,250

Vacant 25,000 $ -

Operating Expenses 0.45 $ (11,250)

Monthly Cash Flow 50% Vacant   $ (22,879)

Annual Loss   $ (274,542)

What Do I Do?

• Broker brings a tenant• 5 year lease at $1.50• NO TI’s AS-IS• 6% commission for 5 years =

$135,000 • Net operating income =

$645,000• Building loses $2 million in

“value”• ROE 3.73%, ROA 1.3%• Loan comes due in 3 years • Kick down the road?

Monthly Cash Flow 50% Vacant   $ (22,879)  

Rent 50% @ $ 1.50 $ 37,500  

Additional Operating Expense $ 0.15 $ (3,750)  

Gross Rents   $ 83,750  

Operating Expenses $ 0.60 $ (30,000)  

Debt Service/Amort   $ (42,879)  

Cash Flow   $ 10,871  

ROA   1.30%  

ROE   3.73%  

Net Operating Income   $ 645,000 Value

Cap Rate 7%   $ 9,214,286

  8%   $ 8,062,500

  9%   $ 7,166,667

$30 in additional TI’s = $750,0005 months of free rent$1.40 FSG Rent Rent reduction for current tenant to $1.50/sf and a $6/sf refurbishment allowance. =$150,000Renewal commission at 5% = $105,000New Money = $1,140,000NOI = $510,000 @ 8% Cap Rate = $6,375,000Adj. NOI with 15% Vacancy @ 8% Cap Rate = $5,418,750Loan balance $6 to $6.5 MillionMore Zombies?

But It Can Get Worse!

“ED-MED”

Healthcare and educational real estate have been a huge part of the marketRegion blessed with large systems.

Sutter, Dignity, UCDMC, Kaiser, AdventistSmaller: Marshall, Ride-out, North-Bay Hill Physicians, Radiological Associates, etc.

Real estate influence and trendsStrong demand on campus of hospitalsBig systems competition for capital

Pension liabilities, electronic health records, physician alignment

Obamacare/Medicare

Greater coverageMore accessIncreased reliance on public fundingAccording to Congressional Budget Office, Medicare will cost a trillion dollars by 2020Average wage earner pays in $109,000 but will receive $343,000Healthcare delivery system will get bigger and bigger, more concentrated, complicated, and regulated!

Education and Health Care Employment

For Profit Colleges Losing Their Luster!

• California lawmakers this summer decreed that students at 154 schools—nearly all of them for-profit colleges—will no longer be eligible for the state's need-based Cal Grants, citing the schools' low graduation rates and students' heavy debt burdens.

Student Loan Debt Unsustainable!

Creative Space

Not this But this

Sample Sacramento Office Google’s Office Menlo Park

More Than Design

• Sense of place• Mixed use• Ubiquitous connectivity – (Bring Your Own

Device)• Dynamic and collaborative workplace• Our industry and landlords need to compete for

a changing workforce and changing space needs