Suburban Rancho Cordova has become the epicenter of the office vacancy crisis in the Sacramento region.
The office vacancy rate in the suburban community was 31.8% as of June 30, far surpassing the overall 20.5% regional rate for the four county area of Sacramento, Yolo, El Dorado and Placer counties, shows data from brokerage firm Colliers.
Even downtown Sacramento, with its heavy concentration of state workers who have flexible remote or hybrid work arrangements, has a lower vacancy rate of 20.8%, more in line with the overall regional vacancy rate , the Colliers data show.
The Rancho Cordova market concentrated along Highway 50 was hard hit because many of the office buildings along the corridor housed medical and insurance firms whose employees could easily do their work remotely, said Bob Shanahan Sacramento area research director for Colliers.
“People across all industries and sectors are implementing more hybrid and remote work but especially in the insurance and health care fields where work and productivity can be tracked from a home office,” said Shanahan.
One example is optical Insurance company, Vision Services Plan, which has moved out three of its five buildings on International and Quality drives, and has been attempting to sell them since late last year.
“A large segment of VSP’s workforce now works remotely,” states marketing material from brokerage firm CBRE, which is selling the buildings. The brokerage firm said the remaining VSP employees have been consolidated into the company’s other two buildings.
A VSP spokeswoman said in a statement that remote work is the preference of many employees.
“While we have moved to a largely remote workforce, productivity remains high and employees enjoy the flexibility it offers,” she said. “In addition remote work enables us an employer to have access to a much larger and more diverse talent pool when hiring.”
The VSP buildings, two that are two-story and one three-story, total 232,000 square feet and sit just south of Highway 50 on Zinfandel Drive.
The buildings, constructed in the late 1990s and early 2000s, are typical of many of the office facilities in Rancho Cordova.
Plenty of land for free parking, lower rents than downtown and access off a main artery between downtown and Roseville originally attracted tenants, said Shanahan.
He said the central location in the Sacramento region was a big sell.
Of course, Shanahan noted, that was before the pandemic charged the way people worked.
COVID-19 normalized not going to the office
In the Rancho Cordova market, many of the jobs were back office jobs, such as claims processors. Once people got accustomed to the flexibility of working from home, the genie was out of the bottle, and it was hard to convince them to come back, brokerage firm officials said Will Austindirector of market analytics for the Sacramento region at the CoStar Group.
They say the proposition wasn’t entirely one way after companies realized they could save on office space.
Following the VSP move, three major companies left office space in Rancho Cordova earlier this year.
In the period between April and June of this year, health plan company Centene/HealthNet’s moved out of 10730-10734 International Drive, two buildings they leased in 2017 with almost 200,000 square feet of office space.
Meanwhile, Sutter Health moved out of 10470 Old Placerville Road, where it occupied almost 88,000 square feet
The companies didn’t respond to requests for comment.
Other office buildings in Rancho Cordova have large empty spaces. Even tenants that have remained have seen many of their employees involved in remote or hybrid work, Shanahan said.
Future of vacant office space
Many office building owners are holding on to their Rancho Cordova properties even with buildings that are only partially filled, hoping for a rebound in several years, said Austin
He said the problem is that even if the market rebounds, many of the office buildings in Rancho Cordova are two-to-four story buildings that are dated because they were built more than two decades ago.
“They’re bland to look at, they’re boring, they look like concrete boxes,” said Austin.“It’s hard to get your employees to want to go to work if that’s where they’re going.”
Austin said one solution is to convert the buildings to housing but it may be too costly. He said the original design of the buildings, with limited bathrooms stacked on top of each other, and heating and air conditioning reconfirmations needed to serve different apartments, might be economically unfeasible.
Austin said his guess is that some buildings will remain empty or only slightly occupied while building owners hope for new demand in several years.
One investor in two Rancho Cordova office buildings took a major loss when he sold them earlier this year.
Cupertino-based investor Brent Lee sold 2868 Prospect Park Drive in the Highway 50 corridor for $12.65 million, about half of what he paid to acquire it in 2018.
The 165,000-square-foot building was 43% leased, according to Colliers.
The brokerage film also said Lee also sold 10901 Gold Center Drive this year, also in the Highway 50 corridor, for $10.1 million, a $8.27 million loss from a 2018 purchase.
The 115,000-square-foot building was only 15% occupied.
Neither Lee nor the acquirer, Burlingamebased Chavez Management Group responded to requests for comment.
The new owners of office buildings acquired for large discounts will have a major advantage over other office buildings owners in Rancho Cordova in that they will be able to afford to lure office tenants with substantial rent reductions, said Randy Getz,executive vice-president for the Sacramento region at brokerage firm CBRE.
Getz, whose firm is the sales agents for three buildings being sold by VSP said that there has been strong investor interest in one of the buildings and he was hopeful that the other two would be generating potential buyers.
He said he could not discuss whether the buildings, which he called the “finest in Sacramento”, would sell for a discounted price, because of the struggling office market.
“These buildings are going to be successful for someone who needs them,” said Getz “VSP doesn’t need them. VSP is doing fine with just the two buildings. People are working from home and VSP is in a position where they can diminish their overhead and stay highly profitable and productive.”