Almost a year since the Federal Reserve started pumping the breaks through aggressive rate increases, the Central Valley commercial real estate market has moved away from the seller-dominated phenomenon of the post-pandemic world.

An example of the power shift came with the sale of a Visalia shopping center in 2022. The owners of a 102,000-square foot retail space at the corner of Mooney Boulevard and Caldwell Avenue thought the market had peaked and it was time to sell, said Brett Visintainer, principal with The Visintainer Group in Fresno. Visintainer represented the seller along with Michael Arfsten of Retail California.

The owners wanted to get one final space occupied before listing the center. Unable to do so, they decided to go ahead and put it on the market in April 2022.

Prime national retailers called the shopping center home, including Petco, Smart & Final and DD’s Discounts, as well as some medical tenants. The shopping center should have sold quickly and at a premium. A sale didn’t close until December for $4 million less than the original listing price.

Visintainer said the center is a prime example of how the winds have changed. Had it been listed in January, he said it would have sold at the expected price. But beset by a bombardment of rising interest rates, offers from buyers fell apart.

A couple of buyers were interested at the $21 million listing price, but in April, the yield on the 10-year Treasury note spiked. Commercial real estate loans largely follow that rate.

“Those offers disappeared once the debt market changed,” Visintainer said. “The clients did not expect things to happen as quickly as they did.”

They repriced the center to $17 million, which drew interest. With uncertainty in the market, however, offers didn’t go the distance.

“Partnerships fell apart, people decided not to invest, we had every reasoning under the sun as to why people were backing from a deal this size,” Visintainer said. “It all stemmed from the uncertainty of the debt market.”

The center sold in December for $17 million.

Mindi Weber, commercial banking leader with Wells Fargo, said the tide has shifted away from a seller’s market. Based on the conversations she’s having with borrowers, she’s getting the sense a balance has returned.
“It’s never good to be one way or another,” Weber said. “You should never have the sellers running the show. You should never have the buyers running the show.”
While volume remains strong, Weber said the number of transactions is not like it was a year ago.

The cost of capital has gone up and now they are having conversations with customers about how to secure the best deals. Potential buyers are nervous about where the market might go.

Wells Fargo’s economic outlook report for January stated it do not expect the Federal Reserve to change its monetary policy through 2023. Inflation in the Consumer Price Index remains above its target 2%. The most recent jobs report showed higher-than-expected employment, prompting Federal Reserve Chairman Jerome Powell to say that “we have a significant road ahead to get inflation down to 2%.”

In the world of office space, the Fresno-Clovis area has experienced a slowdown in activity, though there is still a lot of leasing for smaller spaces, according to Brandon Lamonica, vice president with Fortune Associates in Fresno.

Compared to other parts of the state, the Central Valley is more inoculated against big swings in the market, Lamonica said, though he is seeing increases in vacancies from larger sized companies.

Businesses who used to need more space are opting to keep remote or adopt a flex schedule. This includes insurance companies, real estate companies — especially on the mortgage side — as well as “back-end” medical such as billing companies.

Remote work has been successful and until efficiency begins to drop off, Lamonica doesn’t predict that will change much.

“Only time will tell there,” Lamonica said.

Where office is still strong is in short-term leases. Not wanting to commit long-term in an uncertain market, smaller office users are opting for short leases of 1-3 years. For a property owner, that means higher rental rates, but tenants are willing to pay.

Medical space is still driving demand for office and a lack of new construction has kept property prices elevated.

Those looking to own their own buildings are having trouble finding them and the ones that come on the market do not stay there long.

Nationally, analysts with Wells Fargo predict that rising financing costs and heightened economic uncertainty will produce weakness for the next few years.

Commercial real estate investment will still be strong, said Visintainer, but sellers will have to come to the realization that the market has changed significantly from where it was even just a year ago.

If brokers and sellers are trying to be aggressive with pricing and returns, you’re going to have properties that sit, he said.

“As long as sellers are used to the changing market and the price is right, the product is still going to sell,” Visintainer said.