The Monthly Multiple — April
Prognosticating future macroeconomic trends is more likely to make you look dumb than make you a fortune. Most “serious” economists predicted a recession by the end of 2023. Most serious economists (the ones still willing to venture a guess) have declared victory for the “soft landing.” When the sun sets of 2024, the soft landing crowd may not look too smart either. Only time will tell.
Still, there are a number of sectoral trends that even the most mealy-mouthed market pundit wouldn’t doubt:
Some interrelated things:
AI is a thing. You may think that a vast reimagining of the economy is still a ways off. You may think that tighter capital markets will stymie growth of the industry. You may even think that AI will hasten the demise of our species. Those questions aside, AI will keep charging ahead. This means more processing power will be needed (potentially at an exponential rate).
What corners of the CRE market benefit? Data centers, and tech hubs big and small.
Ecommerce: still a thing like Zoom meetings, buying stuff online feels like the way it’s always been. What’s amazing is that online shopping accounts for only about 25% of total shopping. Despite a torrid pace of growth since the onset of the COVID-19 pandemic, ecommerce still has plenty of room to run.
What corners of the CRE market benefit? Industrial, especially warehouse space that can accommodate high-volume shipping and benefits from access to dense population areas.
Ecommerce growth is only one reason EquityMultiple is currently bullish on the industrial sector.
YAHOO! FINANCE
Press release: Our current perspective →
INDUSTRIAL INSIGHTS
Vantage Point: Of the core-four CRE property types, industrial properties are of particular importance to the recovering (and evolving) US economy. →
There aren’t enough houses and no one can buy them. With mortgage rates creeping up over 7% again, and confusion about the upshot of the recent NAR class action suit, prospective homeowners are back to playing the waiting game. “The costs of buying a home are also outpacing the increases in rent, making it relatively cheaper to rent.” Meanwhile, cities across the country are trying to figure out how to build more market rate or affordable housing, and it’s tough sledding.
What corners of the CRE market benefit? Multifamily, but especially non-luxury and value-add multifamily in locations that are not overly burdened with zoning and building regulations, such as a handful of Florida and Texas markets.
Is It Time to Buy the Bottom?
Buy the bottom; buy the dip; buy when there’s blood in the streets, even if it’s your own; be greedy when others are fearful. Easier said than done, right? If it were so simple, we’d all be Warren Buffett, and hence there would be no Warren Buffett. Doesn’t mean we shouldn’t try.
Is right now the “bottom” in real estate markets? As always, we won’t know til the dust has settled. But there are signs. Institutional players are on the move. In total, CRE values have fallen 21% since the first interest rate hikes two years ago. This could be the moment, or at least the period, when the best bets are made.
Rates will come down… at some point, to some extent. This may mean tentativeness on the part of investors and would-be buyers — from that same WSJ article, “many investors still aren’t ready to jump back into the market again.” This tentativeness, almost by definition, means opportunity for those who are ready to jump back in.
Blackstone may be moving aggressively, but not all institutional asset managers are. Pension funds have stepped back, and generally many bigger investors are tethered to return hurdles that keep them on the sidelines, especially with uncertain capital markets. This may particularly point to opportunities in CRE middle markets.
The supply pipeline is thinning out. This holds true across a number of sectors but is especially intriguing for multifamily. Per Mill Creek Residential, purpose-built rental apartment starts (new supply) should slow from nearly 500,000 units started in 2022 to an average of 220,000 in 2025 and ’26. That’s an over 50% drop at a time when job growth and new housing starts are still robust. Paired with the general lack of housing affordability and inventory in the U.S., this starts to look like the moment to strike for multifamily investors.
But where, and which types of CRE are the right bets now? Again, this only becomes fully clear in retrospect, and the right current bet for you will depend on your risk tolerance. That said, we do know that a “higher for longer” interest rate environment, combined with record CRE loan maturities coming due, favors real estate private credit. EquityMultiple’s Ascent Income Fund makes this opportunity real for individual investors.
In this context, it’s worth recalling that the U.S. is a big, dynamic country with lots of individual real estate markets. When it comes to private-market real estate investing, that’s part of the fun and part of the opportunity. Just look at this range of headlines on CRE markets, just from one publication on the same day. (“Move Theaters Saved by Weird Real Estate” may be the best example of how varied, and pleasantly unexpected, real estate investment opportunities in the U.S. can be.)
Ultimately, you give yourself the best shot of “buying the bottom” with a range of bets across the capital stack, across markets, and across property types.
If you ever want to talk it through, don’t hesitate to reach out to ir@equitymultiple.com
