Sacramento, California
California’s Capital City Remains an Anomaly…In a Good Way
By Carole VanSickle Ellis
Just before the start of the 20th century, the residents of Sacramento decided to enact a sea change in the local geography. Believing the “City of Plains,” as the area was called in 1855, to be too flat and swampy, locals began planting cottonwoods and imported eucalyptus trees to help dry out swampy areas and create a greener landscape.
Later, locust trees, willows, elms, palm trees, and fruit trees would also become part of the program until Sacramento was no longer known for its flat, treeless plains and became known as the “The City of Trees.” By then, the city boasted “more trees per capita than Paris,” according to local historian and ecologist Paula Peper. The result of this concerted botanical effort would ultimately be one of the world’s largest, most closely managed, and highly concentrated urban forests: a living, growing example of how residents of this city prioritize certain beliefs about nature, diversity, and even energy savings.
Understanding the local population’s innate drive to at least attempt to control and manage every aspect of the Sacramento landscape is crucial for investors entering this real estate market. Community planning plays an outsized role in home values in Sacramento just as it does in any municipality where urban planners (or arborists) effectively leverage government resources and funding as well as public sentiment, but the city also remains what Clint Lien, vice president of cost research and product development at residential repair-cost estimation platform The Bluebook International, Inc., calls simply “an anomaly” in the broader California landscape.
“Sacramento has always been a mix of urban, suburban, and farming communities,” Lien said. “It is right on the river, the state capital, has many popular museums, and maintains a solid tourist draw. With the many resources and diversity [in the Greater Sacramento area], housing has always been considered a solid investment there, and it has generally been considered a great place to raise a family.”
Lien explained that Sacramento traditionally offered Bay Area families seeking “more affordable, urban lifestyles” the opportunity to own a home or rent in an area that would otherwise be financially out of reach.
Of course, Sacramento is not immune to modern problems like unaffordable housing and homelessness, which investors must bear in mind when operating in this market.
“Like many other California cities, Sacramento has found itself in quite the predicament recently,” Lien said, citing fallout from the COVID-19 pandemic’s work-from-home trend, a 67% increase in the unhoused population over the past three years, and slowing new construction as problems that must be addressed in order to shore up the area’s housing market.
“There is definitely a need for change, and the next two or three years will dictate how well the demand for housing and influx of community investment will play out,” he concluded.
U.S. News & World Report real estate editor Devon Thorsby agreed, noting that the Sacramento area’s approved permits for new-construction, single-family residential properties came close to a five-year low in January of this year at 352. This represented a 44% drop over January 2022. “Considering that Sacramento hit a five-year peak for single-family permits in June 2022 at 989, the drop in plans for construction activity is even more stark over a relatively short period of time,” she said. Thorsby noted “builders are struggling to offload new-construction homes that have already been completed.”
If history is to be believed, if any city’s population can effect lasting change on the economic and real estate landscapes, it will be the population of Sacramento. While the future of the “City of Trees” may no longer hinge on whether local policymakers favor fruit trees or hybrid sycamores, residents’ belief in their ability to improve the local economic and literal climate and track record in doing so makes any community initiatives and unusual local trends worth watching for investors.
The “Two Housing Market Bottoms” Coming to Sacramento
In February of this year, Sacramento appraiser and local market analyst Ryan Lundquist predicted that the local market would face “two market bottoms” in the coming months. “I recommend watching for a price [bottom] and volume bottom [that] may not happen at the same time,” he wrote on his blog. Lundquist emphasized the need for improved housing affordability in order for home sales volumes to increase, observing that as the end of Q1 2023 neared, the Sacramento market was “missing about 40% of buyers.”
By June 2023, Lundquist appeared to be feeling more optimistic, calling the first half of the year “stunning,” but warning, “Sellers are still sitting back” as listings remained down about 40%. He added, “Low mortgage rates are keeping many sellers in their homes, and higher rates have been keeping many buyers from purchasing [and]… lower supply has met lower demand.
Thorsby noted in March of this year that Sacramento tends to look “relatively affordable compared to Golden State counterparts San Francisco, San Jose, and Los Angeles,” but emphasized that investors using these metrics alone risk overlooking the area’s high costs compared to other parts of the country. With just over two months’ worth of inventory slightly easing tension on the buyers’ side of the equation, there is still a significant imbalance between supply and demand in the area. For renters, inventory is even tighter; the U.S. Census Bureau reported in January that Sacramento rental vacancies were below 1%. By comparison, the national housing supply is hovering around 3% and national rental vacancies are about 6%.
Sacramento May be the Best West Coast Option for Many
The question for investors, potential homebuyers, and sellers in Sacramento remains: When will the market actually “hit bottom” and, in this post-pandemic environment, what will that actually mean? For those who experienced the housing crash and subsequent financial meltdown in the mid-2000s and are eagerly awaiting the deals that come with a “foreclosure tsunami” type of crash to the bottom, this downturn is likely to feel very unlike their previous experiences. In Sacramento, where relative affordability in its own state, if not elsewhere, fortifies demand and creates an environment where there are able buyers as well as willing ones even as the lack of affordable housing options and inventory continues, the market may already be poised to swing upward once more.
“The question is not really ‘Why would you come here?’ The question now more becomes ‘Why wouldn’t you come here?’” explained local agent Tina Suter in an interview with local news station Fox40 at the end of 2022. At that time, Redfin listed Sacramento as the top destination in the country for “people on the move.” Suter brightly cited “affordable homes, year-round sunshine, and proximity to the Bay Area and Lake Tahoe” as well as a nationally “expanding remote-work lifestyle” as elements that make the market attractive to many living (and renting) elsewhere in California as well as elsewhere in the country.
A Population & Industries on the Upswing
While many analysts continue to wonder aloud how California will sustain itself when faced with a substantial, statewide exodus, Sacramento’s population is set to remain anomalous, as usual. In May 2022, the Greater Sacramento Economic Council and Newmark released a study finding the region to be “one of the fastest growing in California” in terms of population, business growth, and investment capital.
“The Greater Sacramento region is on a major growth trajectory as investment, population increase, and expanding opportunities for talent go into overdrive,” wrote the research team. They added year-over-year net migration “soared 56% in 2020.” Thanks to the presence of UC Davis and other educational institutions with strong STEM programs, Sacramento is the beneficiary of large groups of incoming young professionals that are increasingly unlikely to leave after graduation and a rising number of local businesses poised to employ them. This combination led to pandemic-era economic resilience, wrote the team, observing, “While areas of California and the nation have struggled, Greater Sacramento’s regional economy…continued to attract investments and make progress on significant projects.” They added, “The region is growing faster than all major California markets and the state as a whole” and predicted the Greater Sacramento population would increase by 5.4% by 2027.
This population growth is fueled in substantial part by Sacramento’s educational institutions. Local universities not only produce strong graduates ready to enter recession-resistant fields like the life sciences, technology, and fintech; they also fuel a great deal of research and development on their own. Emerging industries like foodtech and agtech are powered locally by UC Davis, the top agricultural sciences university in the United States, and dozens of startup incubators, pitch competitions, and business accelerators support the local startup community.
Urban revitalization projects in downtown Sacramento could ultimately provide more housing options for incoming employees in the area, but the biggest opportunities will likely revolve around an investor’s ability to create more housing options out of existing inventory either through new development and construction or by converting stagnating office space, where vacancies still hover around 12%.
“[There has been] a noticeable shift in demand from suburban areas to neighborhoods to the urban core,” observed financial and investment portfolio analyst Kirandeep Sekhon in May 2023. He added, “Sacramento is currently experiencing a substantial upswing in its real estate market, marked by urban renewal projects and the rise of new structures, including luxury condominium towers.
“Sacramento is bucking the bad trends plaguing California,” observed Norada Real Estate Investments founder and CEO Marco Santarelli. “The Sacramento real estate market is much healthier since it contains a true income mix [and] allows real estate investors more options than luxury homes and densely packed affordable units, which are the primary types of housing you see in other California metros.”
