Manulife US REIT - Annual Report 2021

MANULIFE US REIT 66 • Sacramento’s status as the capital of California and lower exposure to volatile economic sectors has led to a much less severe economic contraction and faster recovery. Employment is 1.9% below pre-pandemic levels, while unemployment has fallen to 4.7%. • Government, health and regulatory tenants remain the primary drivers of leasing activity, although largely through renewals rather than expansions. • The construction pipeline is exceedingly thin. A lack of new supply will challenge occupiers looking for quality space and may accelerate groundbreakings to accommodate changing tenant preferences. • Vacancy is likely to be at or near a cyclical peak, with few new blocks to hit the market through give-backs or deliveries. Office Market Trends Sacramento’s counter-cyclical and government, health and education-heavy office market kept fundamentals more balanced than other geographies in not only California but throughout the country in the face of numerous economic and public health headwinds. Net absorption over the course of 2021 totalled -819,418 sq ft, bringing vacancy to a cyclical high of 18.1%, but this is still below the financial crisis peak of 24.5%and vacancy in submarkets such as Folsom and Midtown remains below 12%. Leasing activitywas overwhelmingly in the formof renewals from government anchors, although the largest deal of the second half of the year was healthcare company Penumbra’s 96,505-square-foot expansion at 620 Roseville Parkway, bringing its total footprint to 254,000 sq ft. Outside of this deal, California’s Department of Health Care Service, State Comptroller’s Office and Department Overall market statistics Forecast YTD net absorption (s.f.) -819,418 Under construction (s.f.) 124,471 Total vacancy (%) 18.1% Sublease vacancy (s.f.) 793,434 Asking rent ($ p.s.f.) US$26.28 Concessions Stable Little new supply is keeping vacancy in check 1.5 30% 10% 20% 0% 0.5 1.0 0.0 -0.5 -1.0 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Net absorption (m.s.f.) Total vacancy (%) Midtown and Folsom remain the tightest submarkets 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Class A cap rates have dipped only slightly in recent years 10% 9% 8% 7% 6% 4% 5% CBD Class A cap rate (%) 23.0% 23.0% 19.3% 19.0% 17.9% 17.3% 17.1% 11.0% 9.3% South Natomas Highway 50 Roseville Point West CBD North Natomas Rocklin Folsom Midtown Sacramento Table refers to overall market, while charts refer to Manulife submarkets Independent Market Report By JLL as at 31 December 2021