Over the past two years, a common perception has been that there is little to no inventory of available multifamily properties on the market in the Central Valley. If you compare the volume of transactions year over year to 2019 (the year preceding Covid), that perception is proven true. The pandemic year, 2020, saw a reduction in total sales transactions in the Central Valley by 18.1% compared to 2019. Last year saw an even further reduction in transaction volume, down 26.3% from 2019. This downward trend has reversed itself so far in 2022.  During the first half of this year, Central Valley multi-family transaction volume is 51.1% higher when compared to the same period in 2021.

Here are some of the economic factors we have been tracking that further explain this trend:

• Inflation has surpassed a 40-year high and has been accelerating faster than anyone could have expected
• The Fed has been slow to react, and they are now playing catch-up
• Much of this volume is hang over as many buyers were able to lock in interest rates before increases.
• Lenders have adjusted quickly to the Feds’ actions by raising interest rates and taking a more conservative approach
• As the cost of funds rises, asking prices are increasingly more difficult for investors to reach
• Looming fears of a potential recession in 2024

The Impact of the Fed

The Federal Reserve increased its benchmark rate 0.25% in March, another 0.50% in May, and another 0.75% in June, with even more rate hikes projected over the course of 2022. New market data is suggesting that inflation is coming in hotter and proving more stubborn than policymakers had hoped. Lenders throughout the country have quickly adjusted to these rate hikes and have dramatically increased interest rates from 3.3% in late 2021 to over 5.45% currently.

Market value has started to moderate slightly because of these rate adjustments, however, there is still an extreme amount of capital looking to be deployed that will help maintain robust buyer activity and demand through the end of the year. Multifamily fundamentals are still strong, with favorable migration trends, high household formation, and solid wage growth contributing to continued demand.

Central Valley a Hot Spot for Investments

The Central Valley has enjoyed surging demand as investors look for markets experiencing high year over year rent growth. Among tertiary markets across the county, the Central Valley ranks seventh highest for year over year rent growth at 16.5% and average market rent now stands at $1,490 per month. Since the start of 2020, Fresno rent growth has increased 23.7% while Visalia saw the largest increase in the Central Valley over that same period of 39.3%. Average rents now exceed their pre-pandemic level. Moving forward it is expected that the economy and the multifamily industry will continue this growth pattern, but at a more moderate pace.

Many owners have already taken advantage of investor demand, but as more owners convert into sellers, bidder pools will reduce due to the increase in available properties for sale. Sellers will experience downward pressure in values as interest rate volatility will impact pricing moving through the end of 2022, we have already seen a 13% reduction in value since January 2022.

Amid all the noise, the key to success will still be thoughtful market insight and investment strategy.

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 $570 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].

When investing in commercial real estate, it’s important to understand each investment type and average return on investment (ROI) before deploying your capital. Whether you’re purchasing retail, office, industrial, or multi-family, determining which investment class best represents you, will establish your risk tolerance and help find the right investment that aligns with your goals. We have found that astute investors typically spend a great amount of time planning with a trusted real estate advisor to educate themselves on current market conditions and expected risk/returns before making their initial investment.

When measuring investments and their offered return, we look at the following characteristics: location, CAP rate (CAP rate = net income ÷ purchase price), income growth over a hold period, strength of tenant(s), length of lease term, and management intensity. Understanding these different attributes will help investors determine the amount of risk each investment offers and provide them with the ability to identify which properties are overvalued, undervalued, or in line with market pricing.

Below are examples of five investment classes which are commonly used by investors and real estate professionals to classify commercial real estate investments:

Risk-Free (Non-Real Estate) 

Risk-free investments are non-real estate investments, such as Bonds, CDs (Certified Deposits), Money Market Accounts, Savings Accounts, Treasuries, and Notes. These are considered risk free investments because of their fixed returns and high liquidity. Due to their safe nature, these investments run the lowest on the return spectrum compared to all other commercial investments. Understanding risk-free investments in commercial real estate is important because it provides a baseline for all other investment classes below and can shape the market.

Core

Core investments are arguably the most sought-after properties in commercial real estate and can be single tenant or multi-tenant. These investments can be single or multi-tenant properties and often contain long-term leases backed by strong corporate tenants, such as Starbucks, In-N-Out, and Walgreens, to name a few. If single tenant, the average remaining lease term is around 10 years while multi-tenant is a blend of 5-10 years remaining. There is little to no management on these properties and the strategy for most investors when purchasing is a long-term hold plan. From a risk perspective, these investments offer the lowest amount of risk as well as return.

Core Plus

Core plus investments can be either single or multi-tenant and offer investors an increase in return and risk compared to core investments. These properties can include as few as one tenant to greater than twenty. With an increased number of tenants and higher returns, owners can be faced with shorter leases, which give a higher chance of vacancy and constant lease negotiations/renewals over an ownership period. These properties usually consist of smaller tenants rather than national tenants. The increased day-to-day involvement from the owner and higher risk of vacancies are why returns on these investments are higher than core assets.

Value Add

Value add investments are some of the highest risk properties in the market. These investments are the properties low risk investors tend to avoid and usually contain some sort of issue that needs to be solved. Whether it be a high amount of vacancy, deferred maintenance, short leases, or larger vacancies not in demand (think vacant K-Marts and Drug Stores), these investments are attractive to investors because they see an opportunity to add value and increase the return. Value-add buyers are considered full time investors and are very hands-on in the day-to-day of these properties.

Opportunistic 

Opportunistic investments, often done by the most sophisticated investors, offer the highest risk and, if done successfully, can award owners with very high returns. Examples of opportunistic properties are empty buildings or shopping centers, raw land to be developed, and teardowns with replacement at the highest and best use. Investors will view these investments with a long-term plan, unless doing a flip or something short term with high risk on the front end. Much can go wrong, and risk is very high due to a variety of assumptions and unknowns. Owners can be faced with the risk of a complete loss of initial investment.

What’s Your Risk Profile?

Understanding your risk profile and which investment class you fit into is the first step towards making the right acquisition for your current needs and goals. If you’re looking for a long-term investment that generates steady cash flow, then a core or core plus asset might be the right fit for you. If you’re one who thinks taking great risk is worth the reward, then value-add and opportunistic properties might be a better fit.

Consult with an Investment Professional  

At the Visintainer Group, we carefully analyze each client’s situation, risk tolerance, and objectives to develop a custom strategy tailored for their needs. Whether it’s purchasing your first commercial investment or adding to your portfolio, our proven track record and market knowledge ensures that clients are investing in the property that best aligns with their objectives, not ours.

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 $550 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

We are currently experiencing the highest inflationary period in the last 40 years and multi-family investment owners are facing declining cash flow. A common conversation I am having with multi-family owners across the Central Valley is – what can be done to maintain the investment value of my property?

Each property has a unique story and characteristics that are important to consider when assessing (and adding!) value to a multi-family property. Some require thousands of dollars in upgrades and amenities, while others are as simple as routine maintenance. Determining what strategies and solutions work best requires an understanding of the current market through accurate market data, an awareness of the marketing and sales process, and a firm grasp of all potential options and benefits available.

Let’s narrow down key initiatives every investor should consider that will maximize the value in the building.

1.     Raise the Rent

One way to add immediate value to a property is to raise the rent. Keep track of market averages for similar unit types and what amenities are provided. Understanding market trends and comparable buildings informs investors about how much of an increase the market will bear. Rental increases are vital to maintaining positive cash flow and hedging against inflation. However, California has rent restrictions so this shouldn’t be the only tactic to increase property value.

2.     Audit Operational Costs (Expenses)

Multi-Family investors are accounting for higher operational expenses due to inflation and its effect on rising costs of goods, labor, insurance, materials, and property taxes just to name a few. Many analysts have predicted that certain expenses will rise between 6%-21% over the next year. It is more important than ever to audit operational costs frequently to ensure future revenue remains positive. It is often possible to obtain a more competitive quote on property insurance by shopping around every couple of years. Buying material in bulk (carpet, tile, supplies,) can save thousands on Repair and Maintenance costs in addition to time and labor. Combing through expenses on a regular basis and checking market data will maintain prudent operational costs.

3.     Improve Curb Appeal

The exterior appearance of the property can help attract tenants or drive them away. The good news is these exterior improvements often don’t have outsized costs. One approach many investors take is to focus on improving landscaping and green spaces. If a property has lawn space, upgrade it. Fencing, lighting, grilling space, and durable furniture can give tenants desirable green space. Some investors offer space for tenants to join in a community garden, which is a great way to provide a community-building activity, along with a sense of ownership on tenants to maintain. For properties with limited green space, consider potted planters for an outsized positive impact.

Many owners, whether they are holding their property long term or exploring the possibility of listing the property for sale in the near future, solicit guidance on improvements to their property that will help marketability and add value to their investment. It is important to seek help from a qualified multi-family investment advisor who can help guide an owner through improvement strategies, asset management, property acquisitions and dispositions, investment goals, or simply keep you abreast of market trends.

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 $500 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].

FRESNO, CA – Visintainer Group, a commercial real estate brokerage and advisory firm, based in Fresno, CA, announced it recently eclipsed a $500 million sales volume milestone. The group, formed in 2018 and specializing in commercial, multi-family, and ag real estate solutions, has successfully helped clients acquire, dispose and exchange into more than 160 properties spanning across 15 states.

“This is an exciting milestone and proud moment for our team,” said Brett Visintainer, CCIM, Commercial Investment Advisor and the Principal of Visintainer Group. “We have been honored to work with Central Valley investors who have entrusted us with their real estate investment needs. We are grateful for the relationships we’ve forged and look forward to continuing to help our clients achieve their investment goals.”

“As a real estate attorney, I have worked with Visintainer Group on more than $200M in transactions and have observed them putting their clients’ best interests above their own in every situation,” Matthew R. Nutting, Senior Counsel for Coleman & Horowitt, LLP.

Visintainer Group focuses on the Central Valley market, but their reach is national. Through a broad network of brokers, owners, and developers, the Group has successfully brokered over $150 million in out of state, off market deals for their clients.

About Visintainer Group

Formed in 2018, the Visintainer Group is an elite investment advisory and brokerage firm focused on tailored real estate solutions for the acquisition and disposition of commercial properties. They are client-first commercial real estate firm. Using a proprietary database of available properties, buyers, sellers, and opportunities, they specialize in everything from commercial real estate transactions to multi-family properties, 1031 Exchange strategies, agricultural land, and full-stack investment services. The Group has executed over $500 million in transactions across the United States. For more information, visit www.visintainergroup.com.

The Business Journal

Investors are keeping a sharp eye on interest rates as they are a major factor to leverage returns. Rates have rapidly climbed over the last few months, and it is expected this trend will continue through 2022 and well into 2023. At the start of the year, interest rates for investment properties were between 3.5% and 4%. In four short months, we are seeing rates inching closer to 5%.

What does this mean for real estate?

Increasing interest rates make borrowing more expensive, therefore impacting investors’ desired return. Investors are forced to offset the higher cost of financing with a lower purchase price on real estate. As rates climb, cap rates usually follow, which puts downward pressure on pricing. Unlike the 10-year treasury and interest rates, cap rates do not see daily volatility. There is usually a lag between the time it takes the market to see cap rates increase from interest rate hikes alone.

The aggressive interest-rate increases are a direct move to combat inflation, the highest we’ve seen in four decades. The general rule of thumb is that higher interest rates are usually a response to higher inflation, which could have a positive impact on real estate income growth. Even though rates are trending upwards, which impacts what investors can pay, they will be focused on pushing rents to keep valuations high.

Economists expect rates to continue rising over the next 1-2 years, potentially reaching the 6% – 8% range. This could have a drastic impact on cap rates. Luckily, with low vacancy and little new construction in commercial real estate, it doesn’t create the same problem we saw during the Great Recession with over-supply. Investors will be more focused on increasing rents than being cap rate driven for values, which caused cap rate compression over the last few years.

An increase in values over the past twelve months have forced lenders to tighten their underwriting – the loan-to-values (LTV) we have seen in the past no longer worked! Currently we are seeing 55% – 65% LTV rather than the 65% – 75% during the last few years. Lenders are being more cautious with rising rates, cap rate compression, increased values, and the changing environment we face with headwinds in the debt markets.

Positive vs Negative Leverage

Sellers can anticipate investors showing more caution and patience if they need debt, until 2022 unfolds and the impact on values is revealed. It becomes difficult to use debt today if it creates negative leverage, meaning debt is at a cost that eats into cash flow, reducing the cash-on-cash return compared to an all cash return. Typically, debt is used to maximize the return which means investors need positive leverage. That doesn’t happen when you are buying at a 5% cap rate and borrowing at a 4.75% interest rate. To determine positive or negative leverage, you divide your annual loan payment by your loan amount to generate a loan constant. Based on the loan constant, you will know the minimum cap rate needed to generate positive leverage.

For example, if you bought a $5,000,000 property with 60% LTV, your loan would be $3,250,000. If you had a 30-year amortization with a 4% interest rate your annual debt service is $186,192 [$186,192 debt service/$3,250,000 loan amount = 5.73% loan constant]. This means you must buy a property at a higher cap rate than 5.73% to get positive leverage.

A 5.50% cap rate on $5,000,000 generates $275,000 of net income, less the $186,192 debt service, would leave you with $88,808 in cash flow. Take that $88,808 and divide it by your down payment of $1,750,000 and you have a 5.07% cash-on-cash return – which is less than the 5.50% cap rate, meaning that loan generated negative leverage.

On the other hand, a 6.00% cap rate on a $5,000,000 property would generate $300,000 of net income, less the $186,192 of debt service and you have $113,808 in cash flow. Divide that by the $1,750,000 down payment and you have a 6.50% cash-on-cash return – which is more than the 6.00% cap rate, meaning that loan generated positive leverage.

This concept is important to understand because it is what drives buyers to pay lower prices and have higher cap rates – making debt work to get positive leverage. Otherwise, bringing debt into a deal may not be advantageous to the borrower at current pricing and interest rates.

As we move forward in 2022, we may not see the movement in values right away, but sellers and buyers will soon enough find themselves at a crossroad of having to understand debt market pressure of increased interest rates and what buyers can (and will) actually pay. Sellers still find themselves in a great position to sell, as the amount of capital in the market is aggressively looking for real estate to hedge inflation. Today’s environment of changing rates and inflation causes uncertainty in stocks, cash, and other alternatives, whereas real estate is viewed as a much safer investment alternative.

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 $500 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].

The Business Journal

Real estate is an attractive, and often preferred, investment alternative in a volatile market. Any property, whether it’s commercial or residential, can be a good investment opportunity. Dollar for dollar, commercial properties typically offer more financial reward than residential properties, but inherently carry more risk.

When investing in commercial real estate, it’s important for you to determine your investment goals and risk tolerance before acquiring a property. Do you want to produce a steady stream of cash flow, capital diversification, long-term retirement plannings – or something else? Your aptitude of risk may shift based on your goal. At Visintainer Group, we work closely with our clients, so they understand the fundamental principles and risk of commercial real estate, enabling them to reach investment goals within their own comfort level.

Investors are faced with many options, but by using a financial objective as the foundation, the strategy can be easily determined. Below is an overview of single tenant and multi-tenant benefits and risks, so you can start thinking of what best aligns with your goals.

Single Tenant Investment

A single tenant property is exactly what it sounds like; it’s a property that is fully occupied by one tenant. Single tenant buildings are commonly occupied by national credit rated tenants with corporate-backed triple net leases, such as Starbucks, McDonald’s, Chick-Fil-A, Walgreens, AutoZone, Dutch Brother’s, and 7-Eleven, just to name a few. Owners of single tenant buildings are collecting monthly rent checks from these corporations. The single tenant market features various investment sectors that are essential including: Medical, QSR (Quick Serve Restaurants), Auto, Drug, Gas, Grocery, and more.

In today’s market, and depending on geographic location, a single tenant investment property with a solid national tenant can range in price from $1.5 million to upwards of $10 million dollars with a typical capitalization rate (CAP Rate) between 3.50%-5.50% (CAP rate = net income ÷ purchase price). For example, on a $1.5M deal, a 3.50% cap rate would generate $52,500 of net income. Generally, the lower your CAP Rate is on your investment, the less risk you have with tenant credit, remaining lease term, ownership involvement, and location.

Benefits:

• Long-term leases (typically 10–20-year term)
• Predictability with income and returns
• National credit tenants with corporate backed leases
• Minimal to no landlord responsibility
• Long-term passive income
• High liquidity

Risks:

• Often the lowest returns in the market (3.50%-5.50%)
• High price per square foot and sometimes irreplaceable rent rates
• Diminishing property value as lease term reduces
• All or nothing occupancy
• High costs to fill vacancy if tenant leaves

Multi-Tenant Investment

Multi-tenant investments differ in a myriad of ways from single tenant assets. They can offer investors attractive returns but come with greater risk and landlord involvement. A multi-tenant building can have as few as two tenants or greater than twenty. Multi-tenant properties allow, or may require, owners to have a greater amount of control over the day-to-day decisions of management, expenses, negotiations, and lease terms involved with the investment. Depending on variables such as location, tenants and lease terms, multi-tenant pricing can start as low as $1M. There is really no limit as to how much you can invest, depending on the property’s Net Operating Income (NOI).

Benefits:

• Offer higher returns than single tenant investments (5.00%-7.00% Cap Rate on average)
• Diversified tenant mix and income
• Versatile spaces that new tenants can fill or re-purpose
• Staggered lease expirations
• Greater control to increase rents and return on investment

Risks:

• High operational costs and fees (property management, repairs and maintenance, leasing commissions, tenant Improvements)
• Greater landlord involvement
• Shorter lease terms (usually 3–5-year terms and sometimes month-to-month)
• Higher risk of vacancy
• Ongoing lease negotiations and renewals
• Weaker tenant strength (franchisees, independent operators)
• May require additional capital investments (renovations, building replacements, property updating)
• Competitive leasing
• Complex accounting

What’s Best for You

In comparison, single tenant and multi-tenant investments offer a variety of pros and cons to an investor. Determining your goal and risk tolerance will allow you to decide which is the best fit for your current financial state and lifestyle. If you are seeking passive income for retirement and diversification, then investing in single tenant might be the best fit for you. If your risk tolerance is higher and your goal is to generate wealth, then multi-tenant might be a better option.

Consult with an Investment Professional  

When investing in commercial real estate, it’s crucial to have a solid acquisition strategy in place before deploying your capital. At the Visintainer Group, we carefully analyze each client’s situation, risk tolerance, and objectives to develop a custom strategy tailored for their needs. Whether it’s purchasing your first commercial investment or adding to your portfolio, our proven track record and market knowledge ensures that clients are investing in the property that best aligns with their objectives, not ours.

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 $500 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].

This article first ran in the Business Journal on March 14th, 2022: Article link.

Investors have been raising the topic of inflation more frequently over the last few months as the demand for multifamily assets is surging in the Central Valley. The U.S. inflation rate accelerated to 7.5% in January 2022, the highest since February 1982 and well above market forecasts of 7.3%. Soaring energy costs, labor shortages, and supply disruptions, coupled with strong demand, are behind much of the surge.

Unlike bonds and cash, which lose purchasing power when prices for goods and services are rising, commercial real estate is generally a secure hedge against inflation. It holds intrinsic value, is in limited supply, and is a yielding asset. At Visintainer Group, we view multifamily investments as one of the best inflation hedges within commercial real estate as the lease structures are far better positioned to benefit from an inflation increase than other asset types. Other commercial real estate assets might have lease durations of five, seven, or even ten years, but multifamily leases can reset at six, nine, or 12 months. When these leases reset, it gives investors an opportunity to adjust rents as prices increase.

It is essential to remember that multifamily real estate is a necessity-based asset. The primary purpose is to provide shelter. Moving is costly and time consuming and with dwindling alternatives in the home buying market, opting to rent is gaining popularity. Home prices have skyrocketed over the past 18 months due to the lowest inventory of for-sale housing in years, creating more pressure on pricing and making affordability an issue for many consumers. Since home ownership is becoming increasingly unaffordable, the demand for rental units in multifamily properties has increased.

Generational Changes In Home Buying

Multifamily as a substitute for single-family homes has been trending over time with profound shifts in demographics and consumer preferences. Baby boomers are downsizing, freeing up cash, and avoiding taking on new mortgage liabilities in the current chapter of their lives. Millennials are forming households far later in life and are still scarred from the financial crisis of 2008. Gen Z is just entering the workforce, with their savings rate at historical lows, creating a likely struggle to amass savings for a down payment for a home purchase. Inflation aside, these trends are a key driver for increased demand for multifamily real estate.

Operational Costs Are On The Rise

It’s important to remember that although it is true that the main benefit of multifamily real estate is its short lease durations enabling investors to reset rents, the costs to operate a commercial investment property is rising steadily and aggressively. California’s rent cap law, AB 1482, took effect on January 1, 2020 with two main functions – it restricts the allowable annual rent increase to 5% plus a local cost-of-living adjustment of no more than 5% (for a maximum increase of 10% per year) and it removes the right of landlords to evict tenants without just cause.

Multifamily operators are starting to account for higher operational expenses due to inflation and its effect on the rising costs of goods, labor wages, insurance, materials, and property taxes to name a few. The increase in certain expenses is expected to rise between 6%-21%. It is more important than ever to audit operational costs accurately and more frequently. In an environment where the costs of operation are steadily rising, coupled with a limit to the amount rents can be increased each year, the burden is on investors and managers to gauge costs accurately to protect yields as much as possible.

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 $450 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].

This article first ran in the Business Journal on February 21st, 2022: Article link.

If there was any concern about what the investment market would look like after COVID, the year-end numbers show us commercial real estate rebounded in a big way in 2021. Investors forged ahead, pouring money into commercial and multi-family properties. There was over $2.5 billion invested in the Central Valley in apartments over 10 units and commercial properties over $1 million (industrial, retail, office) — the most ever. Historic low interest rates, coupled with rising inflation, contributed to investors turning to real estate as the preferred investment alternative.

Investors bet big on apartments

Over the course of 2021, there were 82 transactions of apartment complexes over 10 units in the Central Valley, totaling $423 million. The top four deals accounted for 40% of the total sale volume — Parador Townhomes ($63 million) in Clovis, The Grove Merced ($38.2 million) in Merced, Park West Apartments ($23.5 million) in Fresno, and Axis at Compass Pointe ($23.5 million) in Merced. Cap rates for apartment complexes fell to 5.65% — the lowest since 2005. The demand for these properties has caused downward pressure on returns while appreciation is through the roof. The $96,875 average sale price per unit was $36,000 above the average over the last 15 years. While investors from outside the Central Valley are seeing skyrocketing prices on apartments in other parts of the state, and even nationwide, they have flocked to the Central Valley to find opportunities. This is evident as 80% of buyers of apartments in 2021 were from outside the Central Valley. With little product on the market and a major demand for multi-family properties, apartment sales have been one of the hottest real estate investments.

COVID drives huge year in CRE sales

Commercial investments (retail, office, and industrial) over $1 million also saw a big year in 2021 with a leading 355 transactions and $2.13 billion in sales volume, just shy of the 2018 volume peak of $2.16 billion. There were two large deals during the year that stood out. An Amazon facility in Stockton sold for $105 million and United Security Bank Building in Fresno sold for $96 million. The industrial market has seen a seismic shift in the way ecommerce drives our everyday life. This asset class was especially attractive to investors last year with 90 transactions, when comparatively, our market averaged 45 per year over the last 15 years. The office sector saw record highs in investment volume, $350 million, and 72 transactions, which was a bit surprising considering the office sector is experiencing its own shift regarding square footage requirements and an increase in remote working. Retail saw its second highest year ever with 193 transactions and $822 million in sales volume. Retail was crushed in 2020 with shutdowns and ever-changing restrictions due to COVID, but it bounced back with investors and lenders who in 2021 felt very comfortable diving into these properties.

Promising days ahead

As we head further into 2022, the trend of high sales volume and transactions are expected to continue. For apartments, investors are attracted to the necessity of the asset and the opportunity to increase rents, which will generate higher returns. Even with rent control statewide, as inflation increases, investors will be able to increase rents 5% plus CPI, with a maximum of 10%.

Commercial properties are also expected to continue to see a high volume of sales in 2022 with the major contributors to this prediction being rising inflation, the desire to invest in bricks and mortar, and low interest rates that give buyers the ability to lock in long term debt.

Industrial should continue to be the most sought-after sector in commercial, but also the most difficult properties for buyers to find as there is limited product in the market.

The retail sector has seen a lot of demand due to the long-term stability and passive income of single tenant properties with national tenants signing 10+ year leases. Since COVID, investor demand has continually increased for well positioned shopping centers with a good tenant mix. Overall, retail investment sales are expected to remain strong in 2022.

Office will be a sector that will offer investors the highest return due to the inherent risk associated with the evolving (and uncertain) post COVID office make-up.

Overall, look for investors to keep their foot on the gas pedal as they look for commercial real estate and apartment investments to be a primary place for their capital during the year after such a strong showing in 2021.

Visintainer Group tracks all sales in the Central Valley and generates quarterly reports. All information gathered is from CoStar and Visintainer Group tracking system. If you would like the full 2021 recap report for apartments or commercial, please email Brett Visintainer at [email protected].

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 $450 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].

This article first ran in the Business Journal on February 11th, 2022: Article link.

This past year the multi-tenant retail investment market not only recovered from COVID-19 but bounced back in a big way.

The average cap rate for multi-tenant retail transactions between $1M- $5M was a record low of 6.35%. Prior to 2021, the 10-year cap rate average in the Central Valley was 7.45%. To put in perspective, if a property has a net income of $200,000 at a 6.35% cap rate, the value would be $3,150,000 while the 10-year average of 7.45% would bring the value down to $2,685,000 – a 15% difference in value.

When the pandemic hit, it forced investors and lenders alike to re-evaluate the way they analyzed retail investments. In the early days of the pandemic, almost all multi-tenant retail investments were deemed as high risk. Single Tenant Net Leased investments (STNL) occupied by essential tenants (Drug, Fast Food, Grocery, Auto, Medical) with long leases in place is where the demand shifted. After a year of this trend and diminished returns on single tenant investments due to the high demand from buyers, investing in multi-tenant centers began to regain popularity amongst retail buyers. In a market where multifamily, industrial, and STNL investments are selling at record low cap rates, multi-tenant retail investments have become a reasonable alternative to investors searching for an attractive return.

This sharp decline in retail cap rates has increased property values and allowed owners to take advantage of their appreciation. Retail owners who purchased their property prior to 2014 could see their value appreciate by as much as 43% if they sold in today’s market conditions. Owners who have experienced steady rent growth during this hold period could see this appreciation rate increase even greater than the average of 43%.

The chart below shows the appreciation growth per year based on today’s cap rate compared to a previous year cap rate.

One way owners are increasing cashflow in the current market is by leveraging debt with historically low interest rates to purchase property of greater value than what they sold. In 2021, cap rates on shopping centers that sold between $5-10 million were 125 basis points higher than cap rates in the $1-5 million range. By leveraging into larger properties, investors can compete in smaller buyer pools and utilize their equity to increase their overall cash flow.

Repositioning assets locally and nationally is another reason owners are swapping properties in this market. Maintaining cashflow is just as important as increasing it. In some cases, owners have been able to utilize their appreciation and equity to reposition their investments in markets with strong population growth, low vacancy rates, and escalating rent – all with no additional out-of-pocket investment.

Holding a property is still a decision to consider, and something owners should evaluate annually. If selling does not make sense in this market, having a plan in place over a hold period will help ensure the best performance of your investment.

Even if you’re a long-term holder, reevaluating your property and comparing it to alternatives will help keep you in sync with a trending market and maximize your return on equity year over year.

The Visintainer Group tracks each retail transaction and where buyers are located on a quarterly basis. This provides timely insight into market trends within the region that owners and prospective investors rely on.

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 $450 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].

This article first ran in the business journal on january 21st, 2022: article link.

The Central Valley has been experiencing steady and accelerated appreciation growth in the multifamily investment sector due to the strong fundamentals in the market. The multifamily sector has seen significant interest from real estate investors across the country. As a result, Central Valley owners have benefited tremendously over the past 10 years, enjoying an appreciation growth of 252% in that period.

Since the market bottom in 2012, when the median price per unit in the Central Valley was $27,083, values have steadily grown year-over-year with a recent spike over the last 18 months reaching $95,224 per unit in 2021. Concurrently, the average cap rate has decreased 317 basis points from 8.9% in 2012 to 5.73% in 2021.

Despite the decreasing cap rates and increasing values, the Central Valley has become a desirable target market for wealthy individual investors, family offices, and institutional investors seeking higher returns outside of major markets. The current average cap rate for a multifamily property is 4.1% and 3.5% for Los Angeles and the Bay Area, respectively.

Furthermore, the Fresno metro area has consistently seen one of the lowest vacancy rates in the nation among cities with at least 1 million residents. Currently, the vacancy rate is 2% and remains near the all-time low of 1.6%, with no significant signs of an increase anytime soon. As a result, Fresno rent growth has spiked, up 11.1% on average from this time last year according to Costar. Average monthly rent for the area now stands at $1,245.

Demand from renters has only continued to increase, yet development activity for new units has failed to keep pace with market activity. Despite the low vacancy rates and increasing rents for the region, there are only a handful of multi-family projects under construction. With a limited supply of available units across all asset classes and no significant increase in new units under construction, significant upward pressure is being put on rental rates.

In any market, here are three questions to ask when faced with the decision to sell, buy, or hold:

How long will current market conditions last? Increased government regulation, rising interest rates, or an unforeseen downturn in the economy will have negative effects on real estate values. The Federal Reserve has announced, ahead of 2022, that there will be three rate increases in 2022.

Are you prepared to hold for the long term? Through data and investment industry trends, we can be confident what market conditions will be in the near- to intermediate-terms. However, long-term market conditions remain unknown. If selling is not an option, be prepared to hold for up to ten years to ride potential market downturn and recovery periods.

How will the decision impact cash flow? For owners who have held for the past 10 years, selling now provides them the ability to utilize accumulated equity and invest in larger properties that achieve a higher cash flow. The best part? No additional out-of-pocket investment.

The Visintainer Group tracks each multifamily transaction and where buyers are located on a quarterly basis. This provides timely insight into market trends within the region that owners and prospective investors rely on. 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.

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 $450 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].