Central Valley Multi-Family Real Estate Market Analysis

Over the past three years, there has been a significant shift in the multi-family real estate market within the Central Valley as well as nationally. The pandemic spurred fundamental changes for the industry as demand for housing surged in the following years to the great benefit of owners and developers eager to meet that demand. As of late, inflation, much higher interest rates, and a record number of delivered units have given tenants stronger leverage in the rental market.

New Development Trends

The rate of new construction has fluctuated drastically in the Central Valley since the start of the pandemic. In 2020, the multi-family market saw low vacancy and rents skyrocketing at never-before-seen rates, sparking large amounts of new development projects. Today, we are expecting 1,585 units to be completed in the Central Valley over the next 3 years. However, interest rate increases, along with softening market fundamentals, rising vacancy rates and more stagnant rent growth, have reversed that construction trend. While current projects are still being completed, there are significantly less new developments coming into the pipeline. In 2023, only one new multi-family project broke ground throughout the Central Valley. This trend is also a nationwide phenomenon. According to the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, the country’s new multi-family construction starts fell by 33.7% over the past year.

Rent Growth Fluctuations

The Central Valley has also seen major swings in rent growth in the recent past. Between 2020 and 2022, rent growth exceeded 12% annually in certain areas. In contrast, going into 2024, projected rent growth is expected to be much more modest. It ranges from 1.1% YoY in Modesto to 3.4% YoY in Madera. National rent growth projections are also down as Freddie Mac projects a moderate 2.5% national increase in rent for the coming year, largely due to over a million units set to come online nationwide.

Rise in Landlord Concessions

The market is witnessing a rise in landlord concessions. To remain competitive against similar properties, owners are increasingly utilizing rent concessions to attract tenants. Common strategies include offering the first month free or providing a discount equivalent to one month’s rent, distributed across the year. These tactics reflect the intensifying competition within the rental market.

Impacts on Property Owners and Tenants

Reflecting on these changes, owners of multi-family properties have experienced both great prosperity and challenges. Property owners enjoyed significant growth in NOI and returns following the pandemic, with strong rent growth and low vacancy, along with robust development. Now, as the market evolves, tenants are emerging with greater influence, as evidenced by moderate rent increases and more rental choices. These developments signify a new chapter in the multi-family sector, balancing the interests of both owners and tenants and paving the way for future growth.

*Data courtesy Visintainer Group and CoStar Analytics, U.S. Department of Housing and Urban Development

As originally reported by The Business Journal , Fresno-based commercial real estate brokerage Visintainer Group announced it has completed the largest retail center transaction by a Central Valley firm this year. 

About the Transaction

The Visintainer team represented the Los Angeles buyer of the Riverpoint Marketplace in Sacramento, a 113,967-square-foot shopping center that sold for $36 million.

CoStar reported that the sale is the largest transaction by a Central Valley firm for a retail center in 2023, according to the Visintainer Group.

Visintainer Group is a real estate brokerage and advisory firm specializing in commercial investment property sales.

The property is part of West Sacramento’s Riverpoint Shopping Center, encompassing over 1 million square feet with anchors including Walmart, Home Depot and the region’s only IKEA location.

Brett Visintainer, principal of Visintainer Group, represented the buyer. JDM Funding Corporation of Los Angeles provided the financing.

Eric Kathrein and Warren McClean with JLL Capital Markets represented the seller, Excel Riverpoint, L.P.

Click to view available properties at Riverpoint Marketplace.

Last year, Visintainer Group represented a buyer in a $36 million retail transaction in Rancho Cordova, California.

Impact of the Slowdown on Commercial Real Estate

As originally covered in The Business Journal

The world of commercial real estate has been a rollercoaster of trends and shifts, with 2023 proving to be no exception. After a robust 2022 marked by strong investment sales, the current year has brought about a significant deceleration. Investors find themselves grappling with heightened uncertainty in the economic landscape, rising interest rates and tighter debt markets. These factors have led to a decline in sales, leasing, and financing, impacting prominent brokerages’ profitability by staggering margins of 50% to 100%.

A notable barometer of the commercial real estate market’s health is the RCA Commercial Property Price Index, which reveals a dip of 8% in the value of commercial real estate over the past year. The situation is even more pronounced in the multi-family sector, where values have shrunk by 10%. This decline shows the market’s current fragility, prompting investors to ponder a central question: How much longer will this trend continue?
 

Central Valley Multi-Family Market Analysis

In contrast to the strong apartment investment sales in 2022, 2023 activity in Q1 and Q2 has cooled down considerably. A significant change in the investment landscape has manifested through an increase in capitalization rates (cap rates), which now average 5.61%. This marks the fourth consecutive quarter of cap rate escalation. Alongside this, there has been a remarkable 62% year-over-year decrease in sales volume, plummeting from $353,960,818 in 2022 to $133,484,774 in 2023. The number of transactions has also decreased, with just 25 transactions recorded in the first two quarters of 2023 compared to 61 in the previous year. Multi-family was the darling of the dance after COVID but the music seems to be fading. The significant decline in sales raises questions about the impact of the new normal and higher interest rates on the once-thriving multi-family market.

 Central Valley Retail Market Trends

Similar to the multi-family sector, the retail market has witnessed a substantial reduction in sales volume, affecting both single and multi-tenant properties. Multi-tenant properties, in particular, have experienced a significant drop of 66% in sales volume year-over-year, while single tenant properties have seen a 43% reduction over the same period. The average cap rate for multi-tenant properties, 6.86%, is the highest average cap rate since the early stages of COVID recovery in Q1 2021. Further, transactions have decreased by a staggering 58% year-over-year. The data illustrates that sellers can expect a reduced buyer pool, prompting pricing adjustments aligned with the debt market, given buyers’ inability to match the previous year’s prices; consequently, the coming months are likely to reveal a notable shift in pricing expectations.

Potential Effects of the Exchange Extension on Market Activity

The recent extension granted by the Internal Revenue Service (IRS) for 1031 exchanges in regions affected by severe storms might hold promise for increased market activity. The extension is until October 16th for the 45-day identification period and 180-day closing term for 1031 exchanges. Investors who were awaiting this extension could potentially unleash pent-up demand, leading to an upswing in transactions. This scenario has historical precedent, as a similar IRS extension during the summer of COVID prompted a surge in activity as the deadline approached.

Charting the Future Course for Investors

The combination of rising interest rates and divergent seller-buyer perspectives on property values has left investors hesitant to commit to new investments. This will likely curtail sales activity as the year progresses, extending into 2024. Apart from the anticipated effects of year-end exchanges, investors are adopting a patient stance, observing how the economy and interest rates unfold before committing to major investment decisions. 

Consulting with an Investment Advisor for Strategic Decisions

Market volatility can create complexities in commercial real estate investing. Consult with an experienced advisor who understands your financial goals and can provide market expertise, with an understanding of elements that impact value.

Brett Visintainer, CCIM is a Commercial Investment Advisor and the Principal of Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $715 million in transactions across the United States. Brett specializes in commercial property acquisitions and dispositions and 1031 exchanges for owners in the Central Valley, Sacramento, and Central Coast markets. He can be reached at 559.890.0320 or [email protected].