Photo by Edward Smith Harry Dhillon, partner with BDM Builders, speaks at a July news conference about his group’s 151-unit apartment project/retail at Jensen and Maple avenues called Jensen Landing.

The Nov. 25 print edition of The Business Journal included economic forecasts for each of the four counties we cover. We will be sharing them throughout the week.

Covid-19 created a once-in-a-lifetime economic event. And while the growth caused by excess capital and low interest rates may not have been equal across all industries, for real estate, the feverish pace created by billions of dollars of investment is only now starting to break.

Experts in most industries agree that the end of the thrill ride has come. Now they wait to see if it all falls off a cliff or returns to normal.

When measured by real estate sales, the two years coming off Covid had some of the biggest quarters the Central Valley has ever seen. Hesitancy following Covid shutdowns didn’t last long.

For stand-alone retail properties — banks, fast food and others — quarters two and three of 2020 were dismal, said Brett Visintainer, principal with the Visintainer Group. But by the fourth quarter, sentiment had turned around.

The $382 million in Central Valley single-tenant sales for those three months was more than either 2018 or 2019, according to data from the Fresno-based real estate company.

In three quarters of 2022 alone, the $850 million in multi-tenant retail transactions put sales for the year at the second highest of all time, following only 2015’s $1.1 billion, said Visintainer. Data from the Visintainer Group spans Bakersfield to Sacramento, with Fresno making up anywhere from 10% to 15% of the number.

The rush of investment into real estate was caused by two things, said Visintainer — available capital and low interest rates.

Money came out of the stock market and flooded into real estate, elevating property values and compressing returns, he said.

Investors and banks alike have already re-strategized in response to rapid interest rate hikes. For business owners, the increased cost of money will probably translate to higher rents.

On the lending side, banks feel many investment properties have been overinflated and the value might not be there in the future. For a buyer, that means coming up with more cash to cover the difference between what the seller and the bank say a property is worth.

Visintainer is suggesting to many of his clients to accept lower offers if the deal is all-cash, rather than taking the risk of a buyer not qualifying for lending terms at the end of escrow.

For buyers, higher interest rates on inflated properties may mean carrying negative leverage for a while. The way to make up for higher costs to borrow will translate to increased rents or more money down.

A lot of buyers are going to come out of the market and for sellers, that will mean having to accept a new reality.

Visintainer said activity will still be strong in the first half of 2023, with a slowdown happening in the second half of the year.

“Once the capital dries up is when we’re really going to run into issues. We’re starting to see that,” Visintainer said.

Small business owners have been operating with a lot of question marks, said Scott Miller, president and CEO of the Fresno Chamber of Commerce.

Business owners have been battening down the hatches as inflation drives up costs, and at the same time, made consumers more cautious than they would have been last year, Miller said.

In the world of housing, the pendulum is beginning to swing back in favor of the tenant, said Robin Kane, senior vice president with the Mogharebi Group, a Costa Mesa-based real estate group with an office in Fresno.

Vacancy rates are still in the 2%-3% range, much lower than they should be, Kane said. But while that would normally mean landlords can dictate terms, increased cost of living has disincentivized moving. Many renters are opting to stay where they are instead of moving upward. Some are even doubling up to cut costs.

The cost to do business in the apartment world has increased nearly two-thirds, said Kane.

But smart landlords will think twice about raising rents to the maximum if it means losing a quality tenant.

Agriculture is facing its own issues. Inflation has bore down on farmers in the way of increased fertilizer, material, energy and labor costs, said David Magaña, senior analyst covering fresh fruit, vegetables and tree nuts for Rabobank’s RaboResearch team. The problem is for many crops, it’s been difficult to pass on costs to consumers.

For almonds and walnuts, yields have dropped and cost to produce has increased, but at the same time, prices are down year-over-year.

In most parts of the world, California fruits and nuts are luxury goods, and a consumer’s appetite for higher prices varies, said Magaña. Add a stronger dollar into the mix and ag exports are having to compete against other countries. Regulations from the Sustainable Groundwater Management Act have been begun taking effect and pumping is getting expensive. In some cases, permanent plantings are being taken out.

Pistachio prices have remained stable for the most part. Crops from Iran were down for a second season, but that could change depending on the weather.

Overtime rules and increasing minimum wage are continuing to be a challenge. New innovations are coming out, however, Magaña said. In Florida, a strawberry harvester is being tested. Strawberries are fragile and often hidden by leaves. Successful testing would push the viability of automation forward.

But even if automation becomes a possible solution, these are capital intensive investments. Higher interest rates mean higher borrowing costs. Efforts from the Federal Reserve can change consumer-driven inflation, said Magaña, but the only way to address supply-side inflation is to innovate and invest, which is expensive in the world of high interest rates.

There are not many positive stories for ag, said Magaña, but he is still bullish about a growing global middle class with an appetite for California fruits, veggies and nuts.

There are a lot of unknowns in the world of tourism, said Lisa Oliveira, president of Visit Fresno County. Gas will affect traveler’s desires to go places, but for Fresno County, where prices may be lower than in other parts of the state, that may be a positive.

There are three new hotels opening, two in Fresno and one in Clovis, and the tourism board has been creative in getting people to come to the area.

Hotels have been leaning on higher daily rates that travelers have been willing to pay, Oliveira said. Corporate travel as well as construction and medical tourism have been keeping hotels busy. They are running around 60% occupancy.

Miller said if the Federal Reserve can get inflation under control, he would be optimistic, but the question is how quickly it will happen and whether it will be an overcorrection.

“Whether it’s a return to normal or something that goes past a return to normal, the results aren’t in yet,” Miller said.