The Significance of Effectively Managing Your Tenant’s Occupancy Cost

May 16, 2024 | 

The Business Journal

In today’s challenging economic climate, it is crucial for property owners to maximize their returns and safeguard their cash flow. We are consistently having these conversations – owners are facing difficulties in filling vacancies, borrowing costs are skyrocketing during refinancing, and every expense on the sheet is rising each year due to inflation. Consequently, owners are witnessing a sharp decrease in their cash flow and property value.

Often, we see owners overlook their operating expenses when their tenants are on a triple-net (NNN) lease structure. In NNN leases, the operating expenses, commonly including property taxes, insurance, and common area maintenance, are passed through to the tenants for reimbursement to the owner. With most operating expenses covered by tenants, owners are not directly impacted by increases in expenses unless they have a vacancy.

Looking at this through the lens of the tenant, higher operating expenses put a strain on their business’s profitability, making them a less stable tenant. Through the owner’s lens, a less stable tenant can affect rent collection, ability to increase rents and lowers your probability of future lease renewal.

We advise owners to consider reducing a tenant’s occupancy cost, which can enhance their business, boosting their chances of a lease renewal. Additionally, it can assist in the leasing of vacancies and provides owners the ability to increase rents.

What does total occupancy cost mean?

In triple-net leases (NNN), there is base rent which is the contract rent per your lease then there are triple-net expenses (operating expenses) which are calculated on the tenant’s pro rata share of a building/center. These charges are treated as additional rent which then get added on top of the base rent. The two numbers combined are what we refer to as a tenant’s total occupancy cost. For example, if a tenant’s base rent is $1.00 PSF and their NNN monthly charges are $0.75, their total occupancy cost is $1.75. Occupancy costs are imperative for owners to understand to stay competitive in the market.

5 Ways Owners are Lowering Their Triple-Net Lease Expenses

1. Property Taxes – Property taxes are usually the largest expense for an owner as they are calculated on what your property’s “assessed value”, and gradually increases annually. During shifts in the real estate market, it’s not uncommon to see owners paying property taxes on an assessed value that is greater than what the property is currently worth in the market. In some cases, these owners have been able to lower their taxes by filing a tax assessment appeal through their local county and providing evidence supporting their claim. More information on this can be found through your local county assessors’ office.

2. Installing Trash Compactors – Trash pickups can be a significant expense for owners with high trash users in their building. Increased trash usage leads to more frequent pickups by waste companies, resulting in higher costs. Trash compactors are a great way to optimize bin storage and minimize the need for frequent pickups. We know some owners in the market who have installed trash compactors for each tenant as a way to significantly reduce their expenses, in some cases cutting their bill in half. We have also observed owners who have chosen to rent them out to their tenants, thereby generating additional income.

3. LED Light Conversions – LED Light Conversions have become increasingly popular among owners looking to combat rising electricity costs. By switching their building, parking lot, and common area lighting to LED, they have reduced their utility bills considerably. Some owners have been able to reduce their annual bill by as much as 70%. In addition, LED lights offer a significantly longer lifespan compared to traditional incandescent, halogen, and fluorescent lights, reducing the need for frequent replacements.

4. Installing Water Submeters – Installing water submeters allows owners to track the water consumption of individual tenants. This motivates tenants to be more conscious of their water usage as they are held accountable for their consumption expenses. This can result in substantial decreases in total water consumption, which can help reduce utility costs for the property. Additionally, it promotes sustainability, benefiting both the owner and tenants.

5. Bidding Out Property Insurance – Insurance costs in California have seen significant increases due to many carriers exiting the state. Additionally, certain carriers are choosing not to renew policies upon expiration for buildings they have previously insured for an extended period. It’s crucial to prioritize bidding out your insurance in this current environment. Collaborating with an insurance broker can offer the advantage of accessing multiple quotes and receiving valuable recommendations to enhance the building’s appeal to carriers.

Consult with an Investment Professional

Working with a knowledgeable investment specialist who understands the market will maximize the benefits of your property and safeguard your cash flow. With our extensive resources and data insights, we have successfully assisted property owners in gaining a comprehensive understanding of their property’s performance relative to the market. This enables them to develop a strategic action plan to stay ahead of the ever-changing market trends. If you would like us to evaluate your property or gather more information about the market, please find my contact details below.

John Kourafas, CCIM, is a Commercial Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $825 million in transactions across the United States. John specializes in commercial property acquisitions and dispositions for owners in the Central Valley, Sacramento, and Central Coast markets. He can be reached at 559.890.0419 or[email protected].

Central Valley Multi-Family Insights

January 31, 2024 | 

Central Valley Multi-Family Real Estate Market Analysis

Over the past three years, there has been a significant shift in the multi-family real estate market within the Central Valley as well as nationally. The pandemic spurred fundamental changes for the industry as demand for housing surged in the following years to the great benefit of owners and developers eager to meet that demand. As of late, inflation, much higher interest rates, and a record number of delivered units have given tenants stronger leverage in the rental market.

New Development Trends

The rate of new construction has fluctuated drastically in the Central Valley since the start of the pandemic. In 2020, the multi-family market saw low vacancy and rents skyrocketing at never-before-seen rates, sparking large amounts of new development projects. Today, we are expecting 1,585 units to be completed in the Central Valley over the next 3 years. However, interest rate increases, along with softening market fundamentals, rising vacancy rates and more stagnant rent growth, have reversed that construction trend. While current projects are still being completed, there are significantly less new developments coming into the pipeline. In 2023, only one new multi-family project broke ground throughout the Central Valley. This trend is also a nationwide phenomenon. According to the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, the country’s new multi-family construction starts fell by 33.7% over the past year.

Rent Growth Fluctuations

The Central Valley has also seen major swings in rent growth in the recent past. Between 2020 and 2022, rent growth exceeded 12% annually in certain areas. In contrast, going into 2024, projected rent growth is expected to be much more modest. It ranges from 1.1% YoY in Modesto to 3.4% YoY in Madera. National rent growth projections are also down as Freddie Mac projects a moderate 2.5% national increase in rent for the coming year, largely due to over a million units set to come online nationwide.

Rise in Landlord Concessions

The market is witnessing a rise in landlord concessions. To remain competitive against similar properties, owners are increasingly utilizing rent concessions to attract tenants. Common strategies include offering the first month free or providing a discount equivalent to one month’s rent, distributed across the year. These tactics reflect the intensifying competition within the rental market.

Impacts on Property Owners and Tenants

Reflecting on these changes, owners of multi-family properties have experienced both great prosperity and challenges. Property owners enjoyed significant growth in NOI and returns following the pandemic, with strong rent growth and low vacancy, along with robust development. Now, as the market evolves, tenants are emerging with greater influence, as evidenced by moderate rent increases and more rental choices. These developments signify a new chapter in the multi-family sector, balancing the interests of both owners and tenants and paving the way for future growth.

*Data courtesy Visintainer Group and CoStar Analytics, U.S. Department of Housing and Urban Development

Visintainer Group Represents Buyer on Riverpoint Marketplace, Largest Retail Transaction by a Central Valley Company in 2023

November 07, 2023 | 

As originally reported by The Business JournalFresno-based commercial real estate brokerage Visintainer Group announced it has completed the largest retail center transaction by a Central Valley firm this year. 

About the Transaction

The Visintainer team represented the Los Angeles buyer of the Riverpoint Marketplace in Sacramento, a 113,967-square-foot shopping center that sold for $36 million.

CoStar reported that the sale is the largest transaction by a Central Valley firm for a retail center in 2023, according to the Visintainer Group.

Visintainer Group is a real estate brokerage and advisory firm specializing in commercial investment property sales.

The property is part of West Sacramento’s Riverpoint Shopping Center, encompassing over 1 million square feet with anchors including Walmart, Home Depot and the region’s only IKEA location.

Brett Visintainer, principal of Visintainer Group, represented the buyer. JDM Funding Corporation of Los Angeles provided the financing.

Eric Kathrein and Warren McClean with JLL Capital Markets represented the seller, Excel Riverpoint, L.P.

Click to view available properties at Riverpoint Marketplace.

Last year, Visintainer Group represented a buyer in a $36 million retail transaction in Rancho Cordova, California.

Navigating the Commercial Real Estate Slowdown of 2023

April 14, 2023 | 

Impact of the Slowdown on Commercial Real Estate

As originally covered in The Business Journal

The world of commercial real estate has been a rollercoaster of trends and shifts, with 2023 proving to be no exception. After a robust 2022 marked by strong investment sales, the current year has brought about a significant deceleration. Investors find themselves grappling with heightened uncertainty in the economic landscape, rising interest rates and tighter debt markets. These factors have led to a decline in sales, leasing, and financing, impacting prominent brokerages’ profitability by staggering margins of 50% to 100%.

A notable barometer of the commercial real estate market’s health is the RCA Commercial Property Price Index, which reveals a dip of 8% in the value of commercial real estate over the past year. The situation is even more pronounced in the multi-family sector, where values have shrunk by 10%. This decline shows the market’s current fragility, prompting investors to ponder a central question: How much longer will this trend continue?
 

Central Valley Multi-Family Market Analysis

In contrast to the strong apartment investment sales in 2022, 2023 activity in Q1 and Q2 has cooled down considerably. A significant change in the investment landscape has manifested through an increase in capitalization rates (cap rates), which now average 5.61%. This marks the fourth consecutive quarter of cap rate escalation. Alongside this, there has been a remarkable 62% year-over-year decrease in sales volume, plummeting from $353,960,818 in 2022 to $133,484,774 in 2023. The number of transactions has also decreased, with just 25 transactions recorded in the first two quarters of 2023 compared to 61 in the previous year. Multi-family was the darling of the dance after COVID but the music seems to be fading. The significant decline in sales raises questions about the impact of the new normal and higher interest rates on the once-thriving multi-family market.

 

 Central Valley Retail Market Trends

Similar to the multi-family sector, the retail market has witnessed a substantial reduction in sales volume, affecting both single and multi-tenant properties. Multi-tenant properties, in particular, have experienced a significant drop of 66% in sales volume year-over-year, while single tenant properties have seen a 43% reduction over the same period. The average cap rate for multi-tenant properties, 6.86%, is the highest average cap rate since the early stages of COVID recovery in Q1 2021. Further, transactions have decreased by a staggering 58% year-over-year. The data illustrates that sellers can expect a reduced buyer pool, prompting pricing adjustments aligned with the debt market, given buyers’ inability to match the previous year’s prices; consequently, the coming months are likely to reveal a notable shift in pricing expectations.

Potential Effects of the Exchange Extension on Market Activity

The recent extension granted by the Internal Revenue Service (IRS) for 1031 exchanges in regions affected by severe storms might hold promise for increased market activity. The extension is until October 16th for the 45-day identification period and 180-day closing term for 1031 exchanges. Investors who were awaiting this extension could potentially unleash pent-up demand, leading to an upswing in transactions. This scenario has historical precedent, as a similar IRS extension during the summer of COVID prompted a surge in activity as the deadline approached.

Charting the Future Course for Investors

The combination of rising interest rates and divergent seller-buyer perspectives on property values has left investors hesitant to commit to new investments. This will likely curtail sales activity as the year progresses, extending into 2024. Apart from the anticipated effects of year-end exchanges, investors are adopting a patient stance, observing how the economy and interest rates unfold before committing to major investment decisions. 

Consulting with an Investment Advisor for Strategic Decisions

Market volatility can create complexities in commercial real estate investing. Consult with an experienced advisor who understands your financial goals and can provide market expertise, with an understanding of elements that impact value.

 

Brett Visintainer, CCIM is a Commercial Investment Advisor and the Principal of Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $715 million in transactions across the United States. Brett specializes in commercial property acquisitions and dispositions and 1031 exchanges for owners in the Central Valley, Sacramento, and Central Coast markets. He can be reached at 559.890.0320 or [email protected].

Commercial Real Estate Investment Market: Following a Record Year, What Lies Ahead?

May 08, 2023 | 

The Business Journal

The commercial real estate investment market in 2022 experienced a record year, particularly in the retail and multi-family sectors, as investors capitalized on the recovering economy and increased consumer spending. On the heels of Q1 wrapping up, it’s time to examine the performance of the market and explore how factors such as interest rates could impact the remainder of 2023 and beyond.

 Q1 2023 Performance in the Central Valley

In Q1 2023, the real estate market started the correction from the record-breaking year in 2022, attributed to raising rates, not seeing pricing adjustments, and buyer sentiment in the market. Here’s a breakdown of Q1 for each of the major sectors in the Central Valley:

Retail Sector Performance

  • The multi-tenant retail investment market experienced significant reductions in volume and transactions. Q1 2023 sales volume was $121.4m, a 72% reduction from the $425.9m sales volume Q4 2022, while transactions were down 28% quarter-to-quarter.

Multi-family Sector Performance

  • The multi-family sector saw a similar reduction in volume as Q1 dropped 75% from Q4 2022 – $183.2m down to $45.8m. The $45.8m total sales volume is the lowest since Q2 2013. With the $14,750,000 sale ($300k per unit), the median price per unit was pushed to the highest point we’ve seen – $125,000 per unit.

 Interest Rates and Their Impact on the Real Estate Investment Market

Interest rates play a crucial role in the market, influencing both borrowing costs and investment decisions. In Q1 2023, the Federal Reserve began implementing gradual rate hikes to curb inflation and stabilize the economy. These rate hikes are expected to have the following impact:

  • Cost of Borrowing: As interest rates rise, the cost of borrowing for investors also increases. This could lead to a decline in investment activity, as higher borrowing costs may result in lower returns on investment.
  • Capitalization Rates (Cap Rates): Higher interest rates can also lead to an increase in cap rates, which are used to determine the value of income-producing properties. As cap rates rise, property values may decrease, potentially making commercial real estate investments less attractive.
  • Investment Alternatives: With higher interest rates, alternative investments such as bonds and fixed income securities may become more attractive to investors. This could result in a shift of capital away from the real estate market, affecting transaction volumes and property values.

Market Outlook for the Remainder of 2023 and Beyond

Considering the current economic climate, interest rate trends, and increasing competition from alternative investment options, the commercial real estate investment market is expected to face some moderate headwinds moving forward:

Retail Sector Outlook

  • Despite the interest rate hikes, the retail sector is projected to maintain steady growth, driven by the continued demand for brick-and-mortar retail spaces and warehouses.

Multi-family Sector Outlook

  • The multi-family sector is expected to remain attractive to investors, primarily due to the consistent demand for rental housing and affordable housing projects.

Office Sector Outlook

  • Flexible office spaces and coworking models are expected to continue gaining popularity, potentially driving moderate growth in this sector.

Industrial Sector Outlook

The industrial sector is anticipated to continue thriving, fueled by e-commerce and supply chain optimization.

Strategies for Investors in a Rising Interest Rate Environment

As the market navigates the challenges of rising interest rates, investors need to adopt suitable strategies to ensure continued success. Here are some tips to consider:

  • Focus on Quality Assets: It’s crucial to invest in high-quality assets with strong fundamentals, such as prime locations, creditworthy tenants, and long-term leases. These assets tend to hold their value better and generate stable cash flows, even in uncertain market conditions.
  • Diversify Investment Portfolio: Diversifying your investment portfolio across various property types and geographic locations can help mitigate risks associated with a single sector or region. This approach allows you to capitalize on the growth potential of different sectors while reducing exposure to potential downturns.
  • Explore Value-Add Opportunities: Value-add opportunities can help generate higher returns and improve the overall performance of your investment portfolio, offsetting the impact of higher borrowing costs.
  • Consider Debt Strategies: It’s important to carefully manage your debt exposure. Consider refinancing existing loans to lock in lower rates or explore interest rate hedging strategies to mitigate the impact of rate fluctuations on your investment returns.

There continue to be opportunities for buyers, but they need to focus on the fundamentals when investing in commercial real estate in 2023. By focusing on quality assets, diversifying their portfolios, and exploring value-add opportunities, investors can navigate these challenges and continue to find success in the commercial real estate market. As we move through the remainder of 2023 and into 2024, keeping a close eye on market trends and adjusting investment strategies accordingly will be key to thriving in this ever-evolving landscape.

Consult with an Investment Advisor

Market volatility can create complexities in commercial real estate investing. Consult with an experienced advisor who understands your financial goals and can provide market expertise, with an understanding of elements that impact value.

Visintainer Group & Team Named CoStar’s 2022 Power Award Winners

March 07, 2023 | 

CoStar Group, Inc., a leading provider of commercial real estate information, analytics and online marketplaces, announced the recipients of the 2022 CoStar Power Broker Award, recognizing professionals and firms who closed the highest transaction volume in commercial real estate deals in their respective markets.

For the Fresno market, Visintainer Group was named as a Top Sales Firm and Brett Visintainer and John Kourafas have been recognized as two of the most active local dealmakers in 2022.

Great job, Team!

For more information, visit: https://www.costarpowerbrokers.com/winners/

We’re Growing! Join Our Team of Commercial Investment Brokers

February 18, 2023 | 

Visintainer Group is looking for motivated individuals interested in joining a successful Commercial Real Estate Investment Firm!

Investment Advisor Job Summary: As a Commercial Investment Advisor or a Multi-Family Investment Advisor for Visintainer Group, the goal is to build long-term relationships with investment property owners. Investment Advisors thrive in a fast-paced, high-energy, collaborative environment. This position will assist clients on real estate strategies during the acquisition, hold, disposition, or exchange of an asset. Working within a team-selling environment, you will be given the tools and resources to become a high performing advisor.

Positions Available:

Central Coast Commercial Investment Advisor (this position will be a hybrid of working from the Fresno office and conducting client meetings on the Central Coast)

Central Valley Multi-Family Investment Advisor

Ideal candidates are professional, self-motivated, and will thrive in a positive team environment. For a full job description or to submit your resume and cover letter (specify position of interest), please contact Elizabeth Helon at [email protected]

2022 proves to be record year for retail, multi-family investment sales

February 13, 2023 | 

The Business Journal

At the beginning of the year there was a lot of concern surrounding rising interest rates’ effect on commercial real estate. As it turned out, this looming fear fueled buyers to get into the market and buy at record pace for retail and multi-family properties. In fact, in 2022, the Central Valley saw record cap rates, sales volume, and transactions, based on data provided by The Visintainer Group and CoStar. 

Interest Rates’ Impact on the Market

Interest rates were the main discussion in 2022, so let’s dive deeper into that before reviewing the market data. The 10-year treasury was at 1.50% in January, then slowly climbed to ±1.80% by the end of March. Though not directly correlated with the Federal rate hikes that began in March, investors took notice and the 10-year treasury market shifted quickly — never looking back as it reached 4.20% in October and ending the year in the 3.90% range. For reference, interest rates usually hover around 200-250 basis points above the 10-year treasury. While buyers were able to borrow in the mid-3% range in first quarter of 2022, they found themselves getting quotes around 6.00% in December. This increase played a significant role — higher lending costs forced buyers to pay lower prices, thus increasing cap rates.

Red Hot Multi-Family Market

multifamily graph

Apartment complexes came into 2022 as one of the hottest investment sectors and continued to garner attention through the 4th quarter. The largest deal of the year was the sale of Ascent Townhome Apartments, a 248-unit complex in Fresno which sold for $82 million ($330,645 per unit) — the highest sale price ever for our market! We saw the median price per unit eclipse $100,000 for the first time as well in 2022, with it reaching $112,587. The average cap rate dropped below 5.00% for the first time and we saw an impressive $656 million in total sales volume (second only to the $773 million in 2017). There was a total of 119 transactions that surpassed each of the past two years and falls more in line with pre-pandemic activity. Buyers from other markets in California found the Central Valley as a hot bed to invest after skyrocketing prices for apartments in their markets made it difficult to find investments. 49% of the buyers came from Southern California while 26% came from Northern California — totaling 75% of all the buyers in 2022. It was a huge year for apartment sales and it will continue to be one of the most watched sectors in real estate going into 2023.

Retail Investments Reach Historical Highs

retail sales graph

The retail investment market did not slow down, even as interest rates increased throughout the year. The largest deal of the year was Monte Vista Crossing, a 467,131 square-foot shopping center in Turlock, that sold for $124 million and 7.49% cap rate. With so much liquidity in the market, and a surplus of all cash buyers, the record numbers poured in. This last year didn’t only see the most transactions ever with 306, but also an astonishing sales volume of $1.881B – surpassing the previous peak in 2015 by $160 million. Along with record transactions and sales volume, the average cap rate dropped below 6.00% for the first time as it was 5.61% in 2022. Multi-tenant retail centers reached some notable milestones — 146 transactions, $1.277 billion in sales volume, and the lowest average cap rate since 2007 at 6.46% for the year. The single tenant market saw the lowest average cap rate drop to 5.04%, the second most historical transactions with 160, and third most volume with $604 million. Until cash dries up and more buyers need loans, the retail market will continue to be highly sought out by investors.

5 Commercial Real Estate Trends to Watch for Heading into 2023

October 22, 2022 | 

The Business Journal

As we enter the final months of the year, the future is uncertain for the commercial real estate market as there are multiple factors that can change the landscape of the market in the coming months. Here are five important trends that investors will be watching closely as we enter the final quarter of the year and head into 2023:

 

1. Rising Interest Rates – If you have been following the debt market this past year, you are probably aware of the sharp increases in interest rates that have taken place over the last couple of months. At the start of the year, it was common for investors to achieve sub 4.00% interest rates which help increased market activity. As inflation and recession fears have continued to mount, the debt market has shifted considerably, and interest rates are now well above 6.00%. The Federal Reserve has increased the federal funds rate multiple times this year to combat inflation. In addition, bond/treasury yields, a key metric for CRE interest rates, are the highest they have been since 2007. Over the next couple months, it will be important to watch if interest rates continue to ascend aggressively and if lenders will tighten their loan parameters – both of which can have a significant impact on property values.

 

2. Inflation – Inflation is another key metric to watch over the closing months as it has continued to remain historically high. As a result, this can have a direct impact on the real estate market in a multitude of ways. This includes construction, debt, operating expenses, rent, vacancy, and other items that are related to ownership. As the cost of goods remain high, investors are forced to find ways to mitigate the risk of rising costs. According to the Consumer Price Index September publishing, inflation inched up to 8.2%. If inflation numbers continue to rise or remain stagnant, this can reverberate throughout the market heading into 2023.

 

3. CAP Rates/Property Values – For many asset classes over the last year, CAP rates have been lower than they have ever been, resulting in a seller’s market for many owners (CAP rate = net income ÷ purchase price). For multi-tenant retail in theCentral Valley, Q2 of this year featured the lowest average CAP rate of 6.11% since 2008. At the beginning of the year, buyers were plentiful as interest rates were low and there was a shortage of quality product on the market. As the year progressed, buyer conditions softened, interest rates climbed, and investor sentiment about the economy has grown increasingly uncertain. Traditionally speaking, commercial real estate values tend to lag external changes in the market. Leading into 2023, it will be important to watch if property values decline showing the impact of the abrupt changes in the economy and debt market that occurred over the summer.

 

4. Midterm Elections – No matter which side of the aisle you are on, elections always seem to have an impact on the real estate market. Often, investment activity in real estate slows as elections approach, as many await the outcome before investing their capital. A shift in political power federally and locally can change the landscape of the market and either bolster activity or halt it completely.

 

5. Looming Recession Fears – This year, the economy has experienced two negative quarters of GDP growth, although it is widely debated by economists and real estate professionals if we’re currently in a recession or trending that way. A recession can have a direct impact on commercial real estate in a variety of ways resulting in vacancies, rent collection, unemployment, weakened property values, and pessimistic investor sentiment softening the buyer pool. The economy can influence the commercial real estate market greatly and its performance these final months could offer investors a glimpse of what lies ahead in 2023.

 

Consult with an Investment Professional

Consulting with a local investment specialist that is in sync with the market will ensure you are receiving relevant information to help stay ahead of the market. The market changes daily and having accurate data specific to your market is vital to making successful real estate decisions. Understanding the underlying fundamentals of current market conditions as well as identifying trends are key components in determining which of three choices each investor faces — sell, buy, or hold.

 

John Kourafas, CCIM, is a Commercial Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $600 million in transactions across the United States. John specializes in commercial property acquisitions and dispositions for owners in the Central Valley, Sacramento, and Central Coast markets. He can be reached at 559.890.0419 or [email protected].

Rising Insurance Premiums: What Multifamily Investors Should Know

September 22, 2022 | 

The Business Journal

Regardless of whether you are just starting your journey into multifamily investment real estate, or a seasoned professional with many units in your portfolio, operational costs are a constant area of focus.  Rising operational costs are having a vastly different impact on returns depending on size of the property, its age, and its location.

 

Operational expenses are typically grouped into two categories: non-variable and variable.  Non-variable costs are defined as those that you have limited or no control over such as property taxes, insurance, and utilities.  Variable costs are those that change over the course of the year and can be easily influenced by the decisions you make.  Some examples of variable costs are repair and maintenance, landscaping, pest control, turnover costs, renovations, and marketing and advertising.  These costs can all be shopped, and you can decide which vendor to use based on price and quality.

 

One of the primary threats to multifamily investment returns is rising insurance costs. Insurance premiums for this industry have significantly increased over the last two years, dating back to early 2021 and intensifying in 2022. Multifamily investors have reported 40-50% increases in premiums, and in certain cases, insurance premiums have doubled. Moreso, apartment owners are also faced with increased deductibles and self-insurance limits. The combined impact? Not only are apartment owners realizing a lower net operating income, but they may also face the inability to secure financing for new investments. Higher deductibles will require larger capital reserves, forcing some property owners to sell.

 

Factors driving insurance premium increases

Insurance professionals are attributing the following factors to the change in premium rates:

  • Natural disasters have become more frequent and more damaging, causing major losses for insurers.
  • Inflation and supply chain challenges have dramatically increased the cost of building materials. These costs shift to the insurer in the case of a claim. Hence, increased costs result in increased rates.
  • Properties with unfavorable claim history.

 

How to mitigate rising costs

Property owners should develop and implement a loss prevention strategy to negotiate deductibles and minimize premium increases.

  • Simply put, maintain your property. Monthly or even weekly preventative maintenance schedules are critical to minimizing costs.
  • Have a documented risk management plan. Owners who show reduced hazards and efforts to minimize the frequency and severity of potential claims, have a greater chance of securing a lower rate.
  • Improvements to the property: additional lighting, gating the property or installing security cameras will improve tenant safety and reduce the risk of liability claims.

 

Economies of scale minimizes the negative impact

One of the most effective ways to minimize the rising costs of operating multifamily investments is by owning multiple properties.  The ability to spread operational expenses over several properties and units can be substantial compared to a single property with a few units.  Many larger operators with 100+ units have not experienced the same increases in insurance costs as those owners with only a few properties or units.  The benefit economies of scale have on the operational costs for investors can be advantageous in maintaining costs and/or minimizing increases. Larger operators have only reported standard 10-15% increases in expenses like insurance premiums.  In contrast, single property operators and/or owners with a few rental units have reported 40-50% increases in those insurance premiums over the last 12-18 months.

 

The importance of persistent monitoring of your portfolio

Operational costs are a major component to any investment real estate asset.  Having a consistent approach to monitor trends that will impact expenses can be a key contributor to maintaining positive cash flow throughout the life of your investment.  Market conditions are constantly changing and so too are the costs associated with investment real estate.  It is important to consult with a knowledgeable commercial real estate professional who can detect deficiencies in your operations and help identify the most appropriate steps to maximize income.

 

 

 

Dustin Ilic, CCIM is a Multi-Family Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $580 million in transactions across the United States. Dustin specializes in multi-family property acquisitions and dispositions for owners in the Central Valley and Central Coast markets. He can be reached at 559.890.0319 or [email protected].

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