Central Valley Retail Investment Trends for 2024: Industry Insights

The real estate market in California’s Central Valley is evolving, with retail property investments undergoing significant shifts. Rising cap rates, new state legislation, and changing seller motivations are reshaping the landscape. Whether you’re an experienced investor or new to the market, understanding these trends is key to maximizing returns and navigating opportunities effectively.

Market Overview: The Shift in Cap Rates

Since 2022, retail property values in the Central Valley have steadily declined, driven by rising cap rates. As of 2024, the average cap rate for multi-tenant retail properties is 7.05%, a 65 basis-point increase from the recent peak of 6.40% in 2022. While this may seem significant, the current average is still slightly below the 10-year historical average of 7.10%, aligning with pre-COVID figures from 2018-2019.

This adjustment signals a return to normalcy in many respects, but investors must remain vigilant. Rising cap rates can offer opportunities for higher yields but may also indicate broader economic shifts affecting property values.

Key Takeaway: Stay informed about cap rate trends to assess the right time for purchasing or selling investments.

Understanding Seller Motivations

The motivations behind selling multi-tenant retail properties are evolving. According to Visintainer Group’s research, the most common reasons include:

1. Upcoming Loan Maturities & Rising Interest Rates: Increasing interest rates make it more challenging for property owners to refinance loans.
2. Reducing Management Responsibilities: Some sellers aim to minimize the effort and unpredictability tied to managing multi-tenant properties.
3. Navigating Legislative Changes: California’s changing regulatory landscape is prompting many to utilize a 1031 Exchange to purchase property in other states.

Insight: Sellers looking to escape income volatility or burdensome management responsibilities may find opportunities to optimize returns in different markets.

Impact of Minimum Wage Increases (AB 1228)

California’s new wage legislation (AB 1228) has introduced a $20 per hour minimum wage for fast-food workers as of April 1, 2024. This is a significant jump from the average $16.21 hourly wage in 2022 and applies to fast-food chains with 60 or more locations nationwide.

Implications for Investors:

• Rent Collections: Landlords are reporting increased tenant struggles with rent payments.
• Lease Renewals: Some tenants are leveraging this change to negotiate lower rents or shorter terms.
• Business Growth: New store openings and lease signings are slowing down in response to higher operational costs.

For further details on AB 1228, visit the California Director of Industrial Relations.

Strategic Considerations for Investors

With market conditions in flux, how should investors respond?

1. Stay Informed: Regularly track cap rate trends and market dynamics to identify optimal opportunities.
2. Evaluate Property Conditions: Consider whether rising operational costs and tenant challenges might affect the value of potential acquisitions.
3. Consult Experts: Leverage industry expertise, such as the services provided by the Visintainer Group, to navigate complex decisions effectively.

Pro Tip: Staying proactive about legislative updates and economic indicators will give you a competitive edge.

Why Partner with the Visintainer Group?

Navigating the complexities of multi-tenant retail investments requires a trusted partner. The Visintainer Group offers unparalleled expertise in the Central Valley market, helping investors buy, sell, and manage retail properties strategically.

Services Include:

• Comprehensive market analysis
• Customized investment strategies
• Support for navigating legislative impacts

Whether you’re looking to expand your portfolio or adjust your strategy, the Visintainer Group provides the insights you need to succeed.

Wrapping Up

The Central Valley retail investment landscape presents both challenges and opportunities. By understanding market trends, evaluating property dynamics, and staying informed about legislative changes, you can position yourself for success. Don’t navigate these changes alone—reach out to the Visintainer Group for advice tailored to your unique needs.

Contact Us Today

• John Kourafas, CCIM
• Email: [email protected]
• Phone: 559.890.0419

CENTRAL VALLEY REAL ESTATE NEWS

The multi-family investment market in the Central Valley has slowed significantly from its peak just a few years ago. This year has seen only 47 transactions, 56% fewer than the 107 transactions recorded during the same period in 2018.

Despite the sharp decline in deal velocity, average CAP rates today are very similar to those in 2018: 6.00% in the first three quarters of this year compared to 6.26% in 2018.

IMPACT OF TREASURY YIELD ON MARKET DYNAMICS

Historical Treasury Yield Comparison

A significant rise in the 10-year Treasury yield has reshaped the investment landscape. The median yield increased from 2.78% in 2018 to 4.03% in 2024—a 125 basis point jump. This has compressed the spread between CAP rates and Treasury yields, reducing transaction activity.

Delta in CAP Rates and Treasury Yields

The spread between CAP rates and Treasury yields shrank from 348 basis points in 2018 to 197 basis points in 2024, a 151-basis point reduction. This has two key impacts:

• Loan-to-Value Ratios: A smaller spread leads banks to tighten lending, offering lower loan-to-value ratios and requiring investors to put down more cash, thus limiting buyer activity.
• Investor Returns and Leverage: Wider spreads help preserve returns when using debt and can even create positive leverage, where returns increase through the strategic use of debt. However, the reduced spread in 2024 has made debt financing less appealing for investors.

Contact us to discuss market insights or strategies to enhance and preserve the value of your investments.

In today’s dynamic commercial real estate landscape, investors are increasingly choosing to sell their properties. Whether motivated by financial shifts, partnership changes, or new legislation, many commercial real estate owners are opting to liquidate their assets for a variety of reasons. Below, we explore the top five motivations we have observed in today’s market behind why commercial real estate investors are selling.

1. Upcoming Loan Maturity and Rising Interest Rates

One of the primary reasons driving commercial real estate owners to sell is the impending maturity of their loans. As interest rates have risen over the last two years, refinancing becomes less favorable, resulting in higher debt service and lower income. This financial strain is causing many investors to reconsider holding their properties. In some cases, refinancing may even require additional funds, prompting owners to fire sale rather than absorb higher costs.

2. Reducing Day-to-Day Management Responsibility

As investors age or their personal priorities shift, the responsibilities tied to managing commercial real estate can become burdensome. Properties that demand hands-on management—such as retail centers, office buildings, and industrial spaces—can weigh heavily on owners who are looking to simplify their portfolios. Many investors are selling their assets to reduce the daily management obligations associated with these properties and have elected to re-invest in single tenant net lease properties with longer leases, with zero to minimal LL responsibility within the lease, and guarantees from regional/national tenants to achieve truly passive cash flow.

3. Navigating New Legislation in California

California, in particular, is seeing a significant impact from changing laws and regulations. Legislation aimed at altering property values, income generation, and operational expenses is forcing some owners to rethink their investments. For many, the complex legal landscape and the increased costs of compliance have led to the decision to sell. Many owners have elected to 1031 exchange their current California assets out of state. Additionally, these market conditions create opportunities for new buyers who are prepared to navigate these challenges.

4. Portfolio Diversification in Response to Market Fluctuations

Recent market volatility has led many commercial real estate investors to diversify their portfolios. Some investors are selling their current holdings to invest in different asset classes or geographical areas. By spreading risk across multiple investments, owners aim to safeguard their capital while taking advantage of new opportunities in alternative markets or sectors.

5. Partnership Splits and Asset Distribution

As business partnerships evolve or dissolve, selling properties often becomes the easiest way to equitably divide assets. Partnership splits can occur for various reasons, such as retirement, differing financial goals, or the desire to pursue other ventures. Selling the property ensures a clean exit strategy for all involved parties and allows for the equitable distribution of any proceeds.

How Visintainer Group Can Help

At Visintainer Group, we understand the complexities of commercial real estate transactions and are committed to helping investors make informed decisions. Our team offers a range of services designed to help your clients navigate the acquisition, hold or disposition of properties, with confidence and ease.

Complimentary Property Valuations

For investors considering a sale or simply curious about where their property stands today, we provide no-cost property valuations. These valuations allow property owners to assess the current market value of their assets and explore reinvestment options. Our team works closely with each client to ensure they receive the most accurate information, helping them make well-informed decisions.

Expertise in 1031 Exchange Transactions

One of the most effective strategies for investors looking to defer capital gains taxes after a sale of their property is through a 1031 Exchange. This beneficial tax code allows an owner to sell one piece of profit-making real estate and use the proceeds to purchase other profit-making real estate.

At Visintainer Group, we offer a uniquely tailored approach to protect your assets, guiding you through the complex and time-sensitive 1031 Exchange process. Our proprietary system ensures a seamless transaction, minimizing the risks associated with tight deadlines. With our extensive national network, you also gain exclusive access to off-market properties, providing unparalleled opportunities to diversify your portfolio and maximize returns.

Navigating Today’s Market with Confidence

Selling commercial real estate in today’s market can be a strategic decision influenced by many. At Visintainer Group, we specialize in guiding investors through this process, offering tailored solutions that align with their individual needs and long-term goals. From complimentary property valuations to expert assistance with 1031 exchanges, we provide the tools and insights necessary for investors to achieve their objectives.

CENTRAL VALLEY REAL ESTATE NEWS

KEY MARKET TRENDS

Market Price Trends

Since Q3 2023, the Central Valley real estate market has been impacted by high interest rates, resulting in a 14.5% decline in the median price per unit, now at $112,500. However, prices remain higher than the median pricing in 2021, which was $99,000.

Rent Growth

Rent growth in the region has been modest, ranging between 2-3% over the past year. Many investors are choosing not to raise rents due to concerns over potential vacancies, as the cost of renovations often outweighs the benefit of modest rent increases.

New Construction Slowdown

New construction starts have slowed significantly. Projections from CoStar indicate a nationwide reduction in new unit deliveries, with a 38% decrease expected in 2025 and another 16% in 2026. While some investors are optimistic that reduced supply could boost rent growth, the long-term effects remain uncertain.

REGULATORY UPDATES

Legislation Watch: California’s Proposition 33

Looking ahead to November, there is growing concern over Prop. 33, also known as the Justice for Renters Act. If passed, this legislation would allow local governments to impose rent controls on vacant units, which could discourage investment in property maintenance and renovations, ultimately impacting the quality of available housing.

RISING INSURANCE COSTS

Insurance premiums have surged in recent years, becoming a significant financial burden for property owners. Over the past four years, many premiums have tripled, with some reaching nearly $1,000 per unit—especially for properties built before 1990. This trend further complicates the economics of property ownership in the region.

WRAPPING UP

The dynamics of the Central Valley’s multi-family market present both opportunities and challenges. Understanding these trends is essential for making informed decisions—whether you’re managing investments or supporting them through strategic partnerships. Our team is here to help you navigate these developments with tailored expertise.

*Data courtesy of Visintainer Group and CoStar Analytics

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/

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].

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].

One of the most important parts of a commercial real estate acquisition or disposition is the underwriting that takes place during a transaction. Underwriting in commercial real estate is commonly associated with the analysis that investors and real estate professionals use to measure the cash flow, risk, and most importantly, the value of an asset. Real estate professionals and investors will create an analysis that determines the feasibility of each property and its income. Once the NOI (net operating income) is established, the value can be determined.

Underwriting can be complicated, but it is a crucial part of the transaction process. When analyzing a property, accuracy is imperative. If done correctly, an owner or buyer can maximize their value and return, whereas an inaccurate analysis can cost thousands to millions of dollars. Detailed below, is an examination of the three biggest mistakes investors/brokers make when underwriting properties.

1.Inaccurate Assumptions

One of the most common mistakes made by investors and brokers when underwriting is inaccurate assumptions in an analysis. When underwriting properties, there’s a significant amount of forecasting and assumptions that need to be made to measure an investment. The more uncertainty in a property, the more assumptions needed in the analysis. It’s easy for investors to be drawn in by a high potential return on a property. Often, we see assumptions with little to no data to support the numbers. However, if the numbers aren’t accurate, you can find yourself upside down in a property after making a substantial investment. Common assumptions in commercial real estate are:

– Market Rent – Applied when filling vacancies or forecasting potential rental growth

– Deferred Maintenance (Capital Expenditures) – Repairs to parking lot, roof replacements, paint, landscape, interior spaces, facade

– Re-Tenanting Costs – Leasing Commissions, Tenant Improvements

– Loan Info – Interest rates, amortization, term, pre-payment fee

– Closing Costs – Escrow costs, broker commission, taxes, attorney fees

The real estate world can move fast and if you’re not in tune with the market, it’s easy for investors to make decisions on inaccurate data that can lead to poor investments.

2. Expenses

Failure to account for all expenses and reimbursements is another common mistake that occurs in underwriting. Property taxes are perhaps the biggest operating expense in a property and yet, people still forget to update them in an analysis to reflect the reassessment after a sale occurs. Other common line items that can be impacted by a sale are insurance, management fees, inflation, existing service contracts, and expense reimbursements from tenants. Understanding tenant reimbursements can be complex. It is imperative that each lease is read in detail to understand the current reimbursement guidelines and how this may change after a sale. If expenses are not accounted for properly, this can sway a property’s value greatly.

3. Vacancy and Credit Loss

Vacancy and credit loss is the amount of money or the percentage of net operating income that is estimated to not be realized due to vacating tenants or spaces. We see frequently throughout the industry that this is a key component in underwriting that is often overlooked. Common oversights may include general vacancy and credit loss being omitted from an analysis or inaccurate vacancy rates applied but aren’t indicative of the local leasing climates. When an investor purchases a building, the goal is to lease the entire property or maintain its occupancy at 100%. However, it’s inevitable that vacancy will be incurred at some point over the term for a lot of properties. Applying an accurate vacancy rate provides owners with a realistic snapshot of their income over the hold period and account for unforeseen vacancies that may arise.

Consult with an Investment Professional  

Underwriting has complexities and requires in depth market knowledge to perform successfully. Consult with an advisor who has comprehensive underwriting capabilities, market expertise, and an understanding of elements that impact value.

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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 $580 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].