What’s News:
Here are five market trends that are shaping your real estate investments:
WHAT RATE CUT?
At the end of 2023 we spoke about how inflation was likely not transitory. We hypothesized that hidden inflation from fees and merchant charges were driving up the felt costs of goods and services while the sticker prices remained low. Price changes can take time to take their full effect and the most recent CPI report shows how stubborn and persistent inflation can be. Interest rate futures, which analysts use as a forecast of anticipated interest rates, showed a marked change from the end of 2023. Back then, traders expected more cuts than the Fed had hinted at. News outlets are now questioning whether a rate cut will happen at all. But should we take it a step further and ask: what happens if rates need to be increased instead?
CAN WE CALL THE BOTTOM
GreenStreet Advisors, a well respected CRE analysis and data firm, produces a monthly index of commercial property prices, the CPPI. The March 2024 report showed the first notes of a bottoming where the broad CPPI remained unchanged from the prior month. This follows a period of declines across sectors and geographies. There are still some property types and regions that did decline (unsurprisingly office), but the overall trend seems to be a bottoming in the CRE market. This should signal more stability and hopefully the start of a recovery in the CRE market.
BLACKSTONE’S BIG BET
And in tandem with the GreenStreet release, Blackstone announced last week that they would be acquiring Apartment Income REIT, known as AIR Communities. AIR owns several upscale multifamily properties in coastal markets. The acquisition comes three months after Blackstone commented on their earnings call that they saw the bottom of the CRE market. By putting their money where their mouth is, the CRE titan could be a harbinger of a CRE market recovery. Multifamily is often a solid performer in varied economic conditions, and if you are looking for diversified exposure to this asset class, you can check out the Foundations Portfolio: Multifamily that we just launched.
SAME BUT DIFFERENT
Two of the largest discount retailers in the US have had very different outcomes in the last year. The Wall Street Journal reports that Dollar General and Dollar Tree (owner of Family Dollar) have each had varied success in the current market climate despite having ostensibly the same business. The divergence comes down to where each has placed their stores. Consumers in both urban and rural markets look for bargains and discount retailers tend to perform well during economic downturns or inflationary periods. But despite apparent increased demand, the overhead for these two companies can be very different. Margins are already thin. So, competition and increased real estate costs in urban markets cuts especially deep for Dollar Tree who are closing several locations. On the flip side, Dollar General is expanding, adding several hundred new stores. As with any investment, the business plan matters, but the location and timing matter just as much.
DEMAND DRIVERS
In a similar vein, property types with declining demand have very different expected outcomes. With the US in a housing crisis, the idea of office to apartment conversions has had much discussion. Office occupancy has remained stubbornly low and property values have dropped significantly. But converting these properties to residential buildings is still out of reach. Comparatively, a recent article points to how movie theaters, which have also seen a decline in recent years, somehow have a saving grace. Their odd layouts have landlords left with no choice but to lower rents lest the tenants move out in a case of mutually assured destruction. Somehow, consumer demand for in person cinema has lasted just enough to keep the theaters afloat. The tenants and consumers have driven the change in both cases.
Want to discuss? Feel free to reach out to ir@equitymultiple.com or sign up at EquityMultiple.com
