The past few years of the real estate market have been like a roller coaster ride. Since Covid, we have seen supply, demand, interest rates and prices shift radically. Times like these would typically call for caution among investors, but opportunities may exist for those who can navigate these complex market conditions effectively.
For investors who want exposure to real estate, the next few years could offer deals we have not seen since the post-2008 crisis. As the principal of a real estate family office and co-founder of a privately held real estate investment firm that owns and operates multifamily properties, I see how family offices are primed to take advantage of these once-in-a-decade conditions due to their nimble decision-making process, large capital resources and long-term investment horizons.
The Current Landscape
Post-Covid, as interest rates were at all-time lows, investors and developers alike benefited from the favorable borrowing climate and raced to buy up assets and initiate new construction projects. Fast forward to today, the Fed has raised interest rates dramatically while labor, construction and insurance costs are at historical highs. Thus, investors face a vastly different investment climate and the challenge of navigating through this period.
With over $900 billion in commercial real estate loans maturing in a higher interest rate environment, thinly capitalized investors are facing unique distress. Many investors will be forced to sell assets into a market that is shifting in favor of buyers. Investors today are demanding higher yields given the uncertain interest rate environment and new supply that is creating downward pressure on rental income in oversupplied areas.
The combination of these factors creates a new wave of opportunities for investors to acquire assets at outsized return levels. New construction starts have slowed significantly as project development economics are rarely viable. Starting in 2025, this halt will cause a dip in supply, and as demand continues to grow, this will translate into a new period of under-supply. This opportunistic period will likely only remain open for the next 24 months as supply, interest rates and operating costs will eventually trend back to normal.
How To Identify The Right Opportunities
I recommend following a few fundamental principles as you review the changing landscape. The old real estate adage that nothing matters more than location holds more than ever. For example, it is important to review underlying data for each area including income-to-rent ratios, population and job growth, and supply/demand deliveries. Finding and structuring the right opportunity is especially important, especially when evaluating risks and arriving at a cost basis. One way to mitigate basis risk is to buy assets that offer a discount relative to replacement cost. This can be accomplished by acquiring existing assets instead of newly developed assets.
Finding the right investment manager is essential and can make all the difference in the performance of a real estate investment. A good manager will identify and provide access to the especially lucrative deals that never actually make it to the open market. Investors should ensure managers invest significant equity into their own strategy, as that is the best indicator of their conviction in the deal and ensures alignment of interests for all parties.
In addition, managers who integrate their acquisition and asset management teams ensure consistency and realism in their underwriting and business plan assumptions and execution. Integrating these functions is the best way to ensure that business plan expectations are realistic and achievable.
In the current real estate market, staying close to the information flow and being prepared to react quickly when opportunities arise is important. Structure deals conservatively with moderate leverage, follow the data, and if working with a manager, look for aligned interests, access to unique deal flow and a strong, integrated asset management team. A strategic investment approach that encompasses these factors is key to successfully navigating an evolving real estate market that is once again starting to brim with potential.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
