The Significance of Effectively Managing Your Tenant’s Occupancy Cost

May 16, 2024 |

John Kourafas, CCIM

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].

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

November 07, 2023 |

The Business Journal

As originally reported by The Business Journal , Fresno-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 |

Brett Visintainer, CCIM

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 |

Brett Visintainer, CCIM

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.