Thursday, July 03, 2014

Lofty Proposals

Sacramento Skyline
I'd like to say that downtown development is on the rise, proposals emerging every other week for high-rise housing and other wise anticipating that the market will continue to improve. Some believe this is all due to the arena being built on K Street while others see the overall market coming back and the economy will prosper for years to come.

Over the years, a trend I have keep my eye on during several economic cycles is how downtown Sacramento is always late getting major projects started before the economic cycle busts. Many big projects never getting past the proposal stage. While many cities had projects rising out of the ground, Sacramento’s proposals were still on the drawing board when the market started to tank. In the last three economic cycles, Sacramento seemed to be 1 ½ years behind getting projects started before the economy dipped into recession compared to other cities. While most other cities reaped the benefits of getting out of the gates early with their projects while the economy was good, Sacramento was still on the sidelines.

The 2008 recession left eight sizeable projects on the drawing boards and many small projects. A few of the large were Metropolitan, Aura, Epic, Capitol Grand, St. Anton, Towers on Capitol Mall, 700i, and the second Capitol Towers proposal.  The 1990 recession left even more high-rise proposals on the drawing board than I listed above including the first Capitol Towers proposal.

If the current (sluggish) economic cycle softens even more and the Fed continues to reins in its monthly QE3 printing of money, and other factors, it’s likely that many of the current proposals won't move beyond the drawing board. The first quarter of this year saw GDP shrink by -2.9%. It’s anticipated that the Feds will raise interest rates in the First Quarter of 2015. It’s fun to cheer these proposals through the process, but I’m highly cautious as to how many proposals will break ground only because of where we are in the current economic cycle.

If Sacramento sees half the current proposals completed, I would count that as an enormous success. I’m glad to see the arena being built downtown, but I’m highly skeptical about the city’s financing numbers and why they still don’t want to talk about it… like when the bond payment rate nearly doubles in a few years.

Regarding 301 Capitol Mall, my contact within CalPERS say we should not expect to see a proposal for the site for at least 12 to 16 months because of uncertainty about the economy. If the latest press release from a few months ago draws enough positive attention, we might see combination of sectors in the proposal that include office, residential, retail or hospitality. 

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