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].