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].