A Typical Multifamily Trade in The Top US Market

A row of six townhouses selling for $1.6 million sounds like a typical day’s work — unlikely to rouse anyone beyond the brokerage’s office, if that. Sure, the pool and the trendy neighborhood are nice attributes, but why pause on such a routine deal? Because, in the case of 3231 N Van Ness Blvd. in Fresno, California, it exemplifies what's drawing private and entrepreneurial investors to the nation’s top multifamily market.

Fresno came in as LoopNet’s top U.S. market to buy residential rental properties below $20 million for two consecutive years. The main reason Fresno outscores all other cities is not because of its orange groves, arts scene or Central Valley climate, although those characteristics certainly help. It's because it’s more affordable than all of the major cities in California within driving distance. Compared to San Francisco, Los Angeles or San Diego where rents are twice as expensive, Fresno is far more within reach for homebuyers, renters and investors, too.

The well-documented exodus from California coastal cities that began around the onset of the pandemic has brought a lot of Californians to Fresno. And that influx has brought with it “a lot of rent growth,” according to William Austin, a Sacramento, California-based director of market analytics at CoStar, the publisher of LoopNet.

The increasing rents are promising for investors, he explained, but still not prohibitive to renters, of whom many are bringing their large Bay Area salaries to Fresno. Average monthly rent in the self-proclaimed “Best Little City in the U.S.A.” of around $1,325 at the time of publication is nearly $300 less than the national average of about $1,600, and far less than other markets throughout the state. Take nearby Sacramento, for example, which is also “affordable by California standards,” according to Austin: rent there still surpasses the national average by more than $100.

In remarkable contrast to most markets which are understandably slowing during this inflationary period, Fresno’s rent grew by nearly 9% over the past year, Austin continued. At less than 2%, Fresno also boasts the lowest vacancy among the top 10 markets.

The tight vacancies, high influx of demand and strong rent growth can all be attributed to a simple dynamic of supply and demand, Austin explained. While there’s been a boom in new construction among many of the most attractive secondary and tertiary markets throughout the U.S. in recent years as renters dispersed from gateway cities, “that hasn’t been the case for Fresno, which has had very little multifamily construction.”

Instead, home prices have shot up, as a lot of new residents had been favoring the also relatively affordable homebuying market for several years, explained Jeff Zimmerman of Realty Concepts, the listing agent for 3231 N Van Ness. That, in turn, has driven even more demand for apartment rentals in the city, all while supply lags.

Even without the favorable market dynamics, renters could do a lot a worse than 3231 N Van Ness, given its location among some of Fresno’s trendiest neighborhoods. Located in "biking distance" of Fresno High, Fig Garden Village, and Tower District, the property attracts a lot of tenants who take pride in where they live, but who aren't quite ready to own yet, Zimmerman said.

That’s partly how the seller kept vacancies around 2% in the three years since Zimmerman found the property for him. “Properties like this, which get incredible tenants, attract a lot of pride-of-ownership types of investors versus cash-flow investors.” Zimmerman knows, because he's one of those investors himself — owning and managing several multifamily properties in Fresno.

Disposing of the asset as part of a 1031 exchange, the owner is under contract for a $1.6 million sale. While it already achieves a higher rent than the city average, at around $1,600 for two bedrooms, a lot could still be done to increase the revenue, Zimmerman noted.

“It has great value-add potential,” Zimmerman said. The property has a pool, which is attractive in a climate like Fresno’s, and loft-style units, though one of the downsides is that there isn’t laundry equipment in the units. “With a little landscaping and updating of the interiors — there’s a closet in each unit that could easily be converted into a laundry room, for example — you could probably push rent to $2,000.”

Fresno also allows landlords to rent all units in a building out as short-term rentals. With an investment of around a tenth of the purchase price, or $100,000, investors could likely renovate the property to accommodate a full-time Airbnb destination. “That would really take it to the next level,” he said.

According to the pro forma included in the listing materials, using the property for short term rentals would land the deal at a cap rate of more than 9%.

But investors wanting to push rents in Fresno should be careful, Austin advised. If you want to make a value-add play in Fresno, he said, you have to be intentional about ensuring you can keep current tenants while attracting new ones who are drawn to Fresno mainly for its comparative affordability.

"Part of the reason why rents are low,” he said, "is because Fresno’s job base and income don’t necessarily support higher rents. And that could hinder growth going forward.”

In the same way it’s drawing new residents from places like the Bay Area looking for more breathing room in their budgets, Fresno is also drawing investors. Average sales slide in almost $100,000 per unit below the national average.

“The average Joe making a great salary probably still can’t afford an investment property in the Bay Area,” Zimmerman said. “And so they go look somewhere else. They can go nationwide but a lot of people want to stay in state, or at least within driving distance, so they can check on their investment. And with us being about three hours from the Bay, it allows for that money to come into Fresno very easily, so that's been our biggest draw.”

That makes it quite competitive. But as we see with 3231 Van Ness, a property in the nation’s top market that lingered on the market for 231 days this year, a typical deal in the top market is still pretty typical.

Lauren Shanesy contributed to the reporting of this article.