The New Players In Town

Ben van der Meer
Sacramento Business Journal

In the next few years, the shadows cast in Downtown Sacramento by towering new residential projects will be both literally and figuratively bigger than ones in the past.

Literally, because in many cases the projects being built are taller and have more units than most new projects. And figuratively, because the companies behind them are players on a national or even international basis, but relatively new to the Sacramento market.

To put it another way, the new contenders in the development ring are most definitely heavyweights.

Everything’s relative, of course. Riaan de Beer, vice president of development at Vancouver, British Columbia-based Anthem United, said his company is relatively small in the multifamily development world, with “only” 40 to 50 projects active at any time.

“We’re a large company for Canada,” said de Beer, whose firm plans to have as many as four active projects in Sacramento by the end of 2022. Two of them, Anthem Cathedral Square at 11th and J streets and 1500 S at 15th and S streets, are already under construction.

For perspective, most of the biggest local players in urban multifamily projects, like D&S Development or SKK Developments, typically have somewhere from three to six local projects on their drawing boards at any given time.

But as Sacramento rose on the national radar in recent years as both a red-hot multifamily market and having high potential for its downtown to take on new life, bigger companies took notice.

How they came to Sacramento

Executives at each company describe slightly different paths to discovering development possibilities in Sacramento. For San Francisco-based Shorenstein, it was noticing the neighborhood of a potential development site at 601 Capitol Mall, said John Boynton, managing director for the company’s West Investments Group.

Shorenstein was familiar with Sacramento through owning first Park Tower at Ninth and J streets, and more recently US Bank Tower at 621 Capitol Mall, next to what was then a parking lot at 601 Capitol Mall. “Sacramento is a market that’s always been on our radar, but maybe not a high-priority market,” he said.

During the building boom of the 2000s, 601 Capitol Mall was the proposed site for Aura, a 37-story condominium tower that never made it beyond planning approvals. When Shorenstein looked at the .89-acre site, Boynton said, a high-rise didn’t make sense. But a multifamily project with ground-floor retail did.

The result is The Frederic, a nearly completed 162-unit apartment project where future residents will be walking distance to Golden 1 Center, Downtown Commons and the state Capitol.

Another developer planning what would be the city’s tallest residential building took stock of migration patterns. Nashville, Tennessee-based Southern Land Co. has a philosophy of building where people want to live, said Parker Larson, the company’s Bay Area-based director of acquisitions.

“There are a lot of metrics that don’t have flash-in-the-pan attributes,” he said, noting how cheaper real estate has for years drawn Bay Area residents to Sacramento. That trend accelerated when the coronavirus pandemic gave more office and tech workers the chance to work from home, regardless of where that was.

Next year, Southern Land Co. will make its local bet with a project on what’s known as Lot X, the southwest corner of Capitol Mall and Third Street. The current plan is for construction to start then on a 30-story residential tower with 232 apartments. A neighboring five-story office building of mass timber framework is also planned.

Both Boynton and Larson said the development of Golden 1 and Downtown Commons also was a factor, providing selling points for housing nearby.

But for Anthem United, discovering Sacramento as an urban market with potential was almost by happenstance, de Beer said.

The company wanted to diversify into more multifamily in the United States, and started looking for good markets to do so, de Beer said.

Anthem United considered hot markets like Austin, Texas, Denver and Seattle, he said. But then its management realized they were already established in another one: Sacramento. The company already had a presence here after its 2015 acquisition of GBD Communities, a Roseville-based single-family residential developer.

“It was a pleasant surprise at the time,” de Beer said, adding the migration patterns from the Bay Area were a big factor. “The major markets are increasingly competitive, and Sacramento is an easier market to get your arms around.”

Like 601 Capitol Mall, the Anthem Cathedral site was entitled for a high-rise from more than a decade earlier that wasn’t realistic anymore, de Beer said. But seven-story Anthem Cathedral Square, with 153 apartments and 10,000 square feet of retail, seemed like a bite the company could swallow.

Since then, Anthem has also scooped up the land and started work at 15th and S streets, planned for six stories of 137 apartments and 9,700 square feet of retail space. De Beer said his company hopes to announce a third project site in the region within the next couple months.

Not a one-time deal

In addition to being from out of town, the big development firms have another trait in common: They appear to plan to stick around. Anthem’s de Beer said his company typically keeps ownership of its properties after building them. And Larson, of Southern Land Co., said it doesn’t usually enter a market to just do one project.

“At Lot X, our intent is to build and hold for a long time,” he said.

Shorenstein’s Boynton said the company isn’t openly targeting further local projects at this point, but the company would keep a close eye on potential opportunities.

“Our fund is focused on office, but they can also be mixed-use investments,” he said.

Some of those firms’ interest in Sacramento may be by necessity. Larson said that in many larger cities, there’s not only more competition but a higher barrier to entry.

To entice development, Sacramento officials and planners have streamlined approval processes for many kinds of projects, especially those providing denser housing, near transit or both. That was a factor in Anthem United’s decision to get active here, de Beer said.

In the 2000s, the hot real estate market both locally and nationally also brought in out-of-town developer interest, such as in projects like Aura. When the Great Recession ended that boom, their interest largely evaporated.

This time around, projections suggest Sacramento will remain a region with more demand for housing than supply years into the future, with new apartments making up less than 1% of all apartment stock.

Such demand has already pushed rents up across the region, including in the central city. One-bedroom apartments in new projects often rent for more than $2,000 a month.

So far, though, the high figures aren’t affecting demand for those shiny new spaces. Projects opened in the last few years like SKK’s Eleanor and The Press at Midtown Quarter in Midtown Sacramento have about two dozen available units between them, according to Apartments.com, out of more than 300 apartments overall.

Jessica Chase, asset manager for the residential portion of Shorenstein’s investments, said pre-leasing for The Frederic began in September, and the first residents moved in just before the end of 2021. The company didn’t share exact figures on leasing to date, however, and tenants for the retail spaces are still being negotiated.

Locals say, come on in

With bigger companies seeking their piece of Sacramento pie, local developers specializing in urban infill could be resentful of interlopers at a party they’ve largely had to themselves in the last couple decades

But the most prolific of those local developers, SKK Developments founder and President Sotiris Kolokotronis, said he’s happy to have the help in addressing an overall shortage of housing.

“We have been really behind on new product,” said Kolokotronis, who currently has a few hundred new urban apartments in the works and hundreds more not far from the central city across four or five projects. “I welcome bringing new capital to the market.”

When he began developing in the 1980s, he said, the Sacramento region saw as many as 9,000 new apartments a year. Companies based elsewhere built most of them, he said. Now, even with new developers finding Sacramento, the need is still not being met, he added. Last year, just under 2,000 apartment units were built, according to commercial real estate brokerage Colliers.

Regardless of where the developers come from, they’ll face the same local challenges: fierce competition for contractors, higher materials costs and fees that are much higher than the 1980s, Kolokotronis said.

Far from being discouraged, advocates for Downtown Sacramento are happy to see new players in town. Michael Ault, executive director of the Downtown Sacramento Partnership, said the projects by Southern Land Co., Anthem United and Shorenstein make good on the bet placed nearly a decade ago when the plan for Golden 1 Center and Downtown Commons began to come together.

“We’re seeing capital markets and developers look at Sacramento a different way,” he said. “I think it’s validating for us, but we have to match it with an environment that’s welcoming.”

Ault said he’s not concerned about the new companies to town leading to oversupply. On a weekly basis, he said, he still gets calls from people interested in living downtown, but stymied by a lack of options.

In another way, new residential spaces could be a key factor in Downtown Sacramento’s future vitality. The coronavirus pandemic has left many office spaces at far from full capacity because their workers are now doing the same jobs from home much of the time.

More people living downtown could at least change the feel of many downtown streets, which have been noticeably light on traffic for the last two years.

“Everything is on the table with where we’re trending,” Ault said. “Some of these are pretty nice products. But we need to have a variety of price points.”

For their part, the new developers in the city’s urban fabric said they’re not looking to upset or change the market. They’ll take what they’ve made work elsewhere and fit it to what works here.

“Our attitude is, we’re the new guys,” de Beer said. “We’re there to learn.”

View the original article by Sacramento Business Journal here.