Construction is ongoing at The Monarch @ Chinatown in Downtown Fresno. The $24.6 million project will have 56 units — available at affordable rates when it is completed. Photo by Edward Smith

published on December 2, 2021 - 12:09 PM
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Experts largely see Fresno County reaping the benefits of what the deadly virus changed culturally. Remote work, a dire need for housing and the demand for warehouse space have sent millions of dollars to area. But rising entitlement costs and dwindling development space have tempered the potential for growth.

Industrial real estate has been the largest benefactor of stay-at-home orders with warehouses hiring thousands of people in Fresno and Visalia. But in both cities, available shovel-ready land has largely been exhausted.

“Fresno County has been the center for people from all over the state and all over the country looking at expanding or for a new place to move,” said Lee Ann Eager, CEO of the Fresno County Economic Development Corporation.

Industrial brokers often tell Eager Fresno has become a hot market. But with vacancy rates at .02%, there isn’t much available. New construction sites have nearly been exhausted.

Earlier this year the EDC spoke with a company that wanted to bring a 1 million square-foot warehouse to the area and 2,500 jobs. Eager had to say no because she estimated the process would take three years whereas they wanted to be up and running in 18 months.

A land-use study by Fresno County officials for 3,000 acres in Southeast Fresno will hopefully go before the board in January 2022 for approval to begin an environmental impact review so the county can begin installing infrastructure on the land, speeding up development times for businesses looking to locate here. Among five sections of land, Eager estimates there are about 20 landowners each the County would have to negotiate with to secure land. Unlike high-speed rail, Eager said the County will not use eminent domain.

Additionally, they have been begun talking with the San Joaquin Valley Air Pollution Control District to explore pollution impacts to the area. Industrial development has been a hot button issue after community members worked for years to get regional specific plans approved with the City of Fresno. An Amazon sorting facility set to open in the beginning of the year at North Pointe Business Park was only approved after it reached an agreement with community organizations to upgrade streets and outfit homes to better withstand sound and pollution impacts from trucks.

Community members in Southwest Fresno have often expressed their desire for more retail businesses rather than industrial development at community meetings and Planning Commission meetings. Eager said retailers have their own metrics about population densities as well as area median incomes before locating. Nonetheless, initial plans for the 3,000 acres would put retail zoning around the perimeter to create a buffer zone for communities such as Malaga.

It’s not just been industrial development that has been hot in Fresno.

Eager has been working with partners in Los Angeles and the Bay Area, courting service-type businesses to expand to Fresno County. Unlike industrial land, there is office space available. The most recent industry report from Newmark Pearson Commercial in Q4 2020 has office vacancies at 10.4% with a 12-month forecast for that number to rise.

New construction for office space is beset by lenders waiting to see what the future of the service industry has in store. The same can be said for most retail, said Alan Rurik and Tom Walker, partners with Capitalize, a commercial lending broker in Fresno.

Companies such as Adobe, Amazon and Apple have all made announcements that workers would continue to work from home. This has spurred lenders to scrutinize when providing loans for new construction, said Rurik.

“It’s not an immediate ‘no’ if you bring in a retail center, but it’s kind of getting back to blocking and tackling, It’s like — what’s the tenant mix, what’s the location?” Walker said. “If you can’t check the boxes, you don’t have the minimum requirements then you’re probably going to have a really difficult time getting a loan in today’s environment.”

For retail and office centers, lenders want to see mixes of tenants and staggered leases so renewals aren’t all happening at the same time. They’re also more scrutinizing of who is asking for the loans, said Rurik. They want developers with proven track records.

Despite scrutiny for retail and office space, Rurik describes the demand for new construction as “very active, if not voracious.”

Taking the lead has been multi-family construction. Rurik said everyday people are coming into the office looking to finance a multi-family development, whether they are people familiar to the market or new faces trying to get on board with what has become one of the most booming industries currently.

Despite the clamor for housing in California, the cost of green laws and entitlements has made the cost of development much more expensive, said Walker.

On a construction deal, if the price of a project goes up, that developer has to come up with more cash to cover the increased terms for equity.

What’s more is new construction has been relegated to either high end or affordable, according to Robin Kane, senior vice president with the Mogharebi Group. Apartment developers have said the only way they can make up for rising entitlement costs is with luxury apartments in the range of $1,800 to $2,200 in rent.

For this, apartment complexes are all competing for the same tenants, said Kane.

“The problem lies in the middle market,” Kane said. “We are severely underserved, there’s no really simple answers without subsidies or without chasing the high end.” Subsidies exist to fund affordable housing, but those units are limited to people earning between 30% and 40% area median income.

Tenants in the middle are competing for limited supply. Investors have been buying up single-family homes, which has introduced some rentals for those kinds of tenants, but that has come at the cost of first-time homebuyers, said Kane.

New state legislation has opened up the creation of what’s often referred to as mother-in-law units for by-right zoning. Kane called this an easy win and expects in certain areas in Fresno, such as Old Fig Garden with long lots, development should be feasible.

“Instead of looking for a big solution from a big developer, that takes too much time and too much political will,” Kane said. But adding one-to-two units in single-family lots, when multiplied by a thousand, could provide one solution for a state desperate for housing, he added.

Rising inflation could be the big issue in 2022. Fresno Chamber of Commerce President Scott Miller said that, combined with supply chain issues, represents the most pressing issue for small business.

For big capital, this has turned investors to hard assets.

The Visintainer Group’s Q3 2021 report on commercial activity noted that the 115 transactions in the time period is the highest its been going back as far as 2006.

For this, there’s very little to buy, said Rurik. Investors looking to take advantage of 1031 Exchanges in the Central Valley have been forced to take their money as far as the East Coast to find investments eligible for the tax break, said Walker. Rurik added that some are just biting the bullet and paying capital gains while they’re low.

Low interest rates have been the driving factor for continued development even in the face of disrupted supply chains and inflation. But with supply and entitlement costs rising, if the cost of capital goes up, “that’s going to cool development,” Rurik said.

But if inflation persists, investors may continue to find safe havens in hard assets, said Kane.

“I’m only hoping lenders continue to be disciplined and not fund bad deals,” Kane said. “2009 was the crash of the single-family market, we don’t want 2022-2023 to be the crash of the commercial market.”

 


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