The government has historically propelled the Sacramento area economy, but the private sector continues to expand. As a result, the regional economy continues to diversify, creating additional demand for rental housing. WeWork, for instance, signed a lease for 47,316 square feet at downtown’s Wells Fargo Center, marking the company’s entrance into Sacramento. In addition, tech startups continue to relocate to Sacramento from their more expensive neighbor to the west, San Francisco. Even tech stalwarts, such as Apple, Intel, Micron Technology and Hewlett Packard Enterprises have operations in the Sacramento area.
Sacramento Economy Continues to Diversify
Government employment constitutes 25% of all jobs in the metro, the highest share of public sector employment in the country, leading Washington, D.C. Professional and business services, as well as the leisure and hospitality sectors, have been among the strongest growth sectors this cycle. The education and health services sector has been also continues to contribute to job growth, ranking among the metro’s best-performing sectors. Total employment in this sector is approximately 35% above its pre-recession peak.
Sacramento’s relative affordability remains one of the metro’s biggest draws. Household growth in the region surpasses the rate of single-family home and apartment deliveries, and population growth is expected to outpace the national average over the next five years. Furthermore, Bay Area, Los Angeles and San Diego residents continue to express interest in Sacramento rental housing to escape exorbitant housing costs in those markets.
Sacramento Rent Growth Soars Above 4%
Rent growth in Sacramento continues to rank near the top of the U.S. among major metros. Elevated demand has far outpaced the limited number of deliveries this cycle, boosted by the healthy economy, rising home prices and exodus of Bay Area and Southern California residents searching for affordable housing alternatives. These dynamics have created tightened rental market conditions, providing property owners with leverage to push rents aggressively in recent years.
Rent growth averaged almost 9% from 2015 to 2017 and reached an all-time peak of more than 10% in 2016. Rent in the Davis submarket, where the University of California, Davis is located, commands some of the highest rents in the metro area, according to a new CoStar report. Asking rents in Davis are about 30% higher than the metro average because of strong student housing demand and air-tight vacancies. Elk Grove and Roseville/Rocklin also feature rental rates well above the metro average, at about a 20% premium to Sacramento.
New additions to the area have had a minimal impact on lowering rents: Average asking rents for properties built since 2010 is approximately two times higher than the national average. Rent growth since 2015 has far outpaced income growth, consuming approximately 25% of the area’s median household income. Long known for its affordability, Sacramento may lose some of its luster if rent growth continues to exceed income gains. However, despite the surge in recent years, Sacramento’s average rent remains a fraction of average rents in the Bay Area. As a result, ex-patriots hailing from the Bay Area, Los Angeles and other expensive metros, should continue to relocate to the region in upcoming years.
Bay Area and SoCal Exodus Pushes Vacancy Rate Down
Sacramento’s lack of new rental housing construction, positive demographic trends and solid economy have placed downward pressure on vacancies. Vacancies have remained under 5% for many years, and that trend has continued in 2019. In fact, rental market vacancy metrowide stands at 4.3%. Since 2013, the average vacancy rate is about 150 basis points below the U.S. average. Consistent with historical trends, Sacramento draws some of the strongest per capita migration in California, particularly from the Bay Area and Southern California, thus boosting demand. A combined 30,000 residents relocated to Sacramento from the San Jose and Los Angeles metros between 2012 and 2016.
For more insight on the Sacramento rental housing market, download our latest State of Mynd Sacramento report today.