The Covered California office in North Fresno has been mostly vacant since its opening in 2020, the most drastic local example of the impacts of remote work. Photo contributed

The office sector in major cities has driven the negative portrayal of commercial real estate. As the lockdown forced many companies to work from home, many never returned to their buildings, leaving a ghost town of cubicles and printers.

The office crash has had the opposite effect on the Fresno market. With a smaller commercial office market than the Bay Area or Southern California, Fresno’s inventory tends to fill quickly.

“There are people out there looking to buy stuff, but the inventory is short in terms of what’s available,” said Michael Schuh, senior vice president at the Colliers International brokerage in Fresno.

The Fresno office market held an 8.3% vacancy rate for the second quarter, the lowest of major cities in California. The Bay Area and Southern California office markets saw the highest vacancies — San Francisco at 19.7% and Los Angeles with 15%. San Jose and Sacramento follow just behind.

Remote workplaces, higher interest rates and construction costs have taken their toll on commercial real estate. In Fresno, while new office construction has been limited, rents haven’t increased by much.

Working from home has also created other effects — creating shorter leases and offices downsizing. In Fresno and the Central Valley, tenants are also signing shorter leases, according to the Colliers brokers. Many more companies will seek to spend less on office space in the coming years.

The need for less workspace because of hybrid work schedules drives the need for smaller offices. Some national tenants are now looking to downsize when leases come up. Some plan a nearly 50% reduction in size.

While Fresno’s office market hasn’t seen the most drastic impacts of working from home, there is one glaring example locally.

The Covered California building near Fresno Street and Nees Avenue has been empty since 2020, when it opened. The 65,574 square-foot Zinkin Development building is leased through 2029 by the health insurance exchange but is largely unused since the transition to remote work during the lockdown.

That’s uncommon in the Fresno area, however.

“More the tech companies that it’s happening to, because it’s easier for them to work remotely. We’re not huge here for that,” said Colliers Senior Vice President Beau Plumlee.

One exceptional player in the office market has the been the health care sector. Medical offices are being built out near Clovis Community Hospital. It’s difficult to find vacant space.

While shopping centers continue to see new businesses in suburban communities, they struggle as inflation forces landlords to raise rent prices. Commerce Department data shows that Americans’ spending has increased for four consecutive months and appears to be outpacing inflation, raising retail sales to an adjusted 0.7% in July compared with the prior month.

In a blog last month for The Business Journal, Brett Visintainer, president of the Visintainer Group investment advisory firm in Fresno, touched on the investment trends in commercial real estate.

He said multi-tenant retail properties 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,” said Visintainer. “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 years’ prices; consequently, the coming months are likely to reveal a notable shift in pricing expectations.”

Rising interest rates and divergent seller-buyer perspectives on property values have made investors hesitant to commit to new investments, Visintainer said.

Apart from the anticipated effects of year-end 1031 tax exchanges, investors are adopting a wait-and-see approach, observing how the economy and interest rates unfold before committing to significant investment decisions, he said.

Investment in the multi-family market has cooled down from the first half of 2022. Sales volume is down by 62%, which just 25 transactions recorded in the first half of the year compared to 61 the previous year.

“Multi-family was the darling of the dance after COVID but the music seems to be fading,” Visintainer said. “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.”