As California’s Primary Markets Price Out Residents, Multifamily Investors Head To Sacramento

California’s capital city may be approaching a golden age. 

As major cities like Los Angeles and San Francisco become less affordable, investors are flocking north to Sacramento. Despite being California’s capital, Sacramento has long been neglected in terms of new development. Now, investors are beginning to seek out untapped potential in Sacramento’s Class-A multifamily market. The city’s growing tech scene and a boost in employment have attracted residents and made it a top destination for investment. 

Trouble In La La Land

Continued development in Los Angeles has prompted cautious optimism among several investors in the Class-A multifamily market, but some worry this growth is not sustainable. As home and rental prices have gradually risen in downtown Los Angeles, so have construction costs.

“Controversy has erupted over the downtown Los Angeles market. Some say it is oversaturated, while others are seeing it as healthy growth,” EBI Consulting’s Leo Bertolino said.

Los Angeles has long suffered from an affordable housing crisis. Overdevelopment in the city’s downtown housing market has resulted in vacant high-rises that few Los Angeles residents can afford. Up to 30,000 new apartments could hit the Los Angeles market over the next three years, and vacancy rates in downtown Los Angeles increased to 12% at the end of 2017, the highest since 2000, according to CoStar. 

“This is the heaviest period in multifamily construction in Los Angeles since the early ’90s,” CoStar analyst Steve Basham said to NREI. “We’re about to hit the peak of the cycle.”

Despite economists’ projections that an oversupply of multifamily units will drive down rent, Los Angeles still remains among the most expensive U.S. cities. 

“Many Los Angeles-based investors have been, or will be, investing heavily in secondary markets,” Bertolino said. 

In The Bay Area, A Similar Struggle 

Multifamily rental prices in the San Francisco Bay area are continuing to soar. 

A Trulia study released in January found that multifamily rental prices have increased significantly across the Bay area. 

Oakland's rental prices increased 51.1% between 2012 and 2017. Across the bridge, San Francisco rent spiked 37.9% during the same period, and remains the most expensive city in which to rent in the U.S. 

Investors Head North

Two hours north of San Francisco, multifamily investment has taken off in the Sacramento region. There are 3,808 units under development, the highest since 2003, according to a Colliers report. 

This demand for multifamily development has led to increased economic growth in the Sacramento region. The city’s economy is improving, University of the Pacific’s Center for Business and Policy Director Jeff Michael said to the Sacramento Bee. Population gains have contributed to an active housing market. 

Architects and developers are following this rental growth with a series of creative concepts in the multifamily sphere. Mirroring the landscape of downtown Los Angeles and San Francisco, high-density projects designed to attract young professionals have entered the Central Sacramento market. Developers are building in revitalized communities downtown and midtown with an eye toward a demographic interested in living in the center of the city. Investors are attracted to secondary markets like Sacramento because they offer market-rate housing at a more affordable price. 

To learn more about this Bisnow content partner, click here.