Operating Fundamentals Improve in the Central Valley Even as Multifamily Deliveries Trend Higher

The apartment markets across the Central Valley posted improved performance during the second quarter, despite a more active period of inventory growth. More units were delivered in the second quarter than in any period since the second quarter of 2021. This trend of rising deliveries will prove to be short-lived, as the number of units under construction has declined considerably, and minimal levels of permitting activity will restrict inventory growth at least through 2025. Vacancies and rents have posted consistently healthy performance in recent quarters. Rent growth year to date is nearly identical to the pace of expansion that was recorded in the first half of last year, but the outlook calls for a stronger second half of 2024. Improving operations in Fresno and San Joaquin Counties should drive regional performance and carry over to surrounding areas.
Multifamily investment activity maintained a gradual pace during the second quarter, with a few properties selling across the Central Valley region. While overall transaction levels have been limited, there has been an increase in the number of sales in excess of $15 million in recent quarters. While a few larger transactions have closed year to date, activity remains concentrated in 1970s- and 1980s-vintage Class B and Class C assets. Prices to this point in 2024 have been only slightly lower than levels that were recorded last year, even as cap rates have gradually pushed higher. During the second quarter, prices rose, reaching approximately $150,000 per unit, while cap rates have generally ranged between 5 percent and 6.25 percent.
Looking ahead
The second half of 2024 is expected to be a fairly steady one in the Central Valley. Deliveries have been elevated to this point in the year, but the construction pipeline has thinned considerably, and the pace of new inventory growth is expected to slow to below-trend levels over the next several quarters. With supply-side pressures likely to ease, the vacancy rate is expected to remain stable across the region. The close alignment between supply and demand should allow for continued rent growth. In prior quarters, rents gained momentum in some of the region’s counties with smaller populations, including Merced, Madera, and Kings Counties. In recent months, rent growth gained momentum in the more populous Fresno and San Joaquin Counties, and a continuation of this trend would support overall rental performance across the region.
Sales velocity in the Central Valley region has maintained a steady pace over the past several quarters, but there are a few trends emerging that could signal a greater amount of activity in the coming periods. Historically, transactions in the Central Valley have been most active between $5 million and $15 million, with most deals averaging between 50 and 100 units. In recent quarters, there has been an increase in larger properties trading, with a handful of deals in the $30 million range closing. These types of transactions were more prevalent at the height of the market in 2021 and the first half of 2022. This resumed of trading in larger assets could buoy market sentiment, and any declines in interest rates and borrowing costs should make it easier for a greater number of acquisitions to pencil.
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