June 21, 2024

Rents inch higher with construction limited in the Central Valley multifamily market

Image of the market fundamentals in Central Valley in the first quarter 2024.

The apartment market in the Central Valley continued on its recent trajectory during the first quarter. Vacancy inched up, but the rate is only marginally higher than it was one year ago. Vacancy trends were mixed at the county level. In Fresno County, which has the largest population and inventory of rental units, vacancy rates have pushed up by more than 100 basis points in the past year. In other areas, however, including rapidly expanding San Joaquin County and Stanislaus County, vacancies have inched lower. Vacancies in San Joaquin County have declined even as new units have come online; the county has accounted for nearly 30% of the total new deliveries in the Central Valley during the past five years. While the overall vacancy rate has moved a bit higher, rents are rising in response to conditions that remain tight.

Multifamily investment activity was fairly steady in the first quarter, closely tracking levels that were achieved throughout much of 2023. Only a few properties changed hands, with transaction counts in recent quarters about 50% lower than during the recent peak years of 2020 and 2021. Still, enough properties are selling to support price discovery in the region’s investment market. Cap rates have risen about 50 basis points from 2023 levels and are generally ranging between 5% and 6% on average. Recent transaction activity has been occurring throughout the region, including in some of the larger population centers such as Fresno and Bakersfield, as well as in cities with smaller inventories of rental housing led by Merced. While a handful of Class A properties traded each year from 2020-2022, recent activity has consisted almost exclusively of Class B and Class C assets.

Looking ahead

Apartment properties in the Central Valley are expected to post relative outperformance through the remainder of 2024. The region will benefit from a continued slowing of new deliveries, at the same time as the nation posts a record high of new construction. This cooling pace of inventory growth will allow the local vacancy rate to level off in the coming quarters, and employment growth and renter demand should remain strong enough to leave room for modest rent increases. The greatest operational gains will likely be recorded in the fastest-growing markets in the Central Valley, while larger and more established cities such as Fresno and Bakersfield will likely post mostly stable operational performance.

Investment activity should gain momentum in the second half of 2024, as more properties become available for acquisition and interest rates potentially decline slightly by the end of the year. Healthy operational performance should support the investment market, with investors wary of the competitive impact of new supply in other markets. Another factor that should support the investment market in the Central Valley is cap rates, which have likely risen to a high enough level where deals can get done. A few properties have traded with cap rates of 6% or higher, and these levels should be sufficient to support deal flow in the coming quarters.