2025/2026 Market
How is everyone feeling about the last four months and 2026? What asset classes have you spent the most time on and what do people think will be opportunities/problems going forward?
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Dogshit unless we see some rate drops. And even then just kind of mediocre.
After August's inflation report, I second this
completely dog and getting worse tbh. Have been keeping track the past two years and don't see it improving in the short term (next 2/3 years). Don't see how anyone could look at the macroeconomic climate and the actions of the administration and have confidence in job hiring picking back up when every single economic indicator points toward the opposite. might do an mba instead feels like a much better chance of getting into a good school
Office credit has been active. Spreads are coming in though from 12 months ago.
Office acquisitions is interesting; core plus risk now achieves value add (or better) returns. We are in Dallas. Haven’t acquired a building but opportunities are there. Great basis plays are there.
Multifamily is tough; sub 5 caps aren’t too exciting, but you can buy core product at a 30%+ discount to replacement cost. Problem is achieving a 12-14% LIRR when rent growth is anemic. Family offices buying on basis alone are competitive.
SFR/BTR is exciting. Yields are better than multifamily, and I have higher conviction in the product long term due to demand drivers. Buying and developing this.
Despite what we are seeing, volume is down. Nothing is moving quickly.
Entitling next cycle mixed use now, and working on low cost land control positions.
Assuming SFR/BTR is development? What are you seeing in hard cost for these product types?
Senior Living will be a very interesting asset class in the next few years. First, there is a huge shortage of units for the aging population which will likely drive up occupancy across the board. Second, the operational side of SL is really hard to get right and truly skilled operators are few and far between.
For what it’s worth, I’ve been hearing this every single year of my career. I don’t disagree with the logic, but I still haven’t seen a rush toward the sector.
Interesting. I am new to the sector (less than a year) so I might have a slightly ignorant bias still. What are your thoughts on Senior Living?
My two cents - I think the demographics are there, but senior living is by far the most operationally intensive asset class in real estate. Most real estate investors/developers are not set up to do well in this space. The groups that do a nice job are operators who fell back into real estate and not the other way around. This is really a healthcare play more than a real estate play. So unless you are developing the building and executing a long-term lease with an operator, I think there is a lot of surface area to get your ass handed to you. And the reason I know that is that when I was an LP, we got our ass absolutely handed to us in the senior space by backing great developers with great real estate who had no idea how to operate. Even the great operators struggle because it is so damn difficult to get right.
Yes, senior living is back in vogue - and was totally in the dog house as recently as a few years ago. I suspect landlords are seeing more power to push rents.
But the demand was over-stated for many years and far too much was built (and very little has been built for the past few years - which may support the current thesis).
The issues are:
(A) the average move-in age is 80+ and not the 65 threshold. Peak of baby boomers hitting 65 occurred in 2022 so we're a ways off from massive numbers turning 80.
(B) it's insanely expensive. And they have add-on's for every little services. Live-in nurses / home-care are less expensive.
(C) As others mentioned, the operator is critical. These things are basically glorified, full-service hotels.
(D) staffing is a challenge. This low-wage labor can get better pay elsewhere, so turnover is high.
Distressed/NPLs
I'm pretty sure we are in a recession right now. Everyone I talk to only talks about how bad the economy is and that their business or employer is slowing down and laying off. Even on the blue collar front, my electrician told me that the number of jobs he has is down significantly
I fight with my construction team every weak who still denies the possibility of construction costs softening at all, despite every piece of data pointing to the fact that it should. Starts off a cliff, architecture spending index off a cliff, jobs down etc. These greedy fucking subs have squeezed every cent out of us for the last 5 years and now were coming back to squeeze them - nature is healing
I'm jealous... all the GCs around me are either actually getting work or are too arrogant to realize the cliff, and are still pricing way too high.
I’m starting to see rates drop and prices adjust a little… but I don’t know the next time I’m going to be able to underwrite a positive leverage deal.
The way we’re justifying getting deals done right now is, we’re looking at it like buying a trophy asset at ~150-200 basis points over the 10 year treasury + rent increases + depreciation benefits + likely an appreciating asset over the next 10+ years. If rates drop, then we take out financing later or depending on liquidity or tax needs, we’ll accept a negative leverage mortgage with a step down pre-pay to refinance later.
Are we underwriting a 25% IRR? Absolutely not but family offices gotta park cash somewhere.
Buying trophy at a 5.5/6 cap? Sign me up lol.
They’re hard to find but I found a few. That was when the 10 year treasury was around ~4.5%. Probably harder to get it done right now.
Assuming we are not entering into a recession (which I think there is a very good chance we are), the next 18-24 months are going to be a good opportunity to sell but probably a bad opportunity (generally) to buy. You have funds that raised record amounts of capital in 2021, 2022, and to a lesser extent 2023 that are going to come up on the end of their investment window here soon. Those same funds are not raising anywhere close to the same amount of capital for their next vehicle, if they are able to raise anything at all. So they are highly highly motivated to spend what is in their pocket. My sense is that you will have a very distorted capital markets environment as those funds push their remaining money out the door. But on the back end of that, there is very little capital being raised, both in 2024 and 2025. Liquidity is going to be a premium starting in 2028 until we see fundraising numbers rebound.
eb?
Not me but he's one of the best follows on Twitter and I back his opinion wholeheartedly
who?
He's wrong about a lot of stuff and is kind of a doomer. It is bullshit that PERE fund raising has fallen off a cliff. It's substantially better this year than last. Dollars raised reflects that.
I’ve mentioned before - CRE has fundamentally changed. Deals don’t make sense on paper and that will likely continue for a few years.
For multifamily we need some outsized years of rent growth to make things work in the short term. Otherwise it’s a large reset in terminal values and is more of a 5-10 year type of timeline for things to improve.
For rent growth to realistically happen wages need to grow and for wages to grow interest rates need to drop significantly. For interest rates to drop inflation needs to tamp down and stay low. Not to get to politics but inflation measures are complete bullshit, and DTJ (not really a fan personally so I hate to say this) is right that the fed is likely wrong on the state of inflation and job growth.
Anecdotally everyone I talk to outside of real estate is also feeling squeezed. Everyone fears losing their job, and folks are getting squeezed hard and OTE is on average not in the cards for most. I have no idea how wages can grow enough for folks to actually be able to afford more rent.
I have a hard time believing rent growth/real estate long term myself even though my job demands it to be true. I’d love someone to prove me wrong
Good post. You touched briefly on inflation measures. Curious if you think:
Good question - I’m unsure but generally I’m very skeptical.
Tarrifs should be a one time cost increase unless new tariffs are levied. It should generally be mark to market like interest rate increase or decreases.
That said it’s my opinion margins had grown so large for most industries in the covid years that many are just absorbing the increase to retain what little businesses they have. Things I see impacted with “tarrif increase” are typically bogus and just an opportunist way for folks to add margin.
This is my experience from breaking ground on a ground up this year. Virtually no impacts to our project from budgets last year through gmp and now from 3 months into construction.
CRE would have benefited from a forced recession by the Fed back in 2023. Highly restrictive rates to flush liquidity out of the system and force speculative buyers to sell at a large discount, effectively resetting values. Instead we've gotten this death by 1,000 cuts and the kick the can strategy which has stalled the entire industry for the last 3 years as everyone waits and waits and waits.
Institutional equity is still not biting except on the largest deals with the largest players. There is still a lot of caution out there given the negative headlines we're seeing about job losses, loan defaults, credit balances, tariff/inflation risks. However, wages are outpacing inflation, but consumer confidence is trending downwards.
I don't think anyone knows what to make of the next 6-12 months. The one huge thing multifamily has going for it is that demand has remained strong and new supply is falling off a cliff. We do really need some strong organic rent growth to justify upward movement in NOI.
Today is similar to the late 70s.
Volcker basically did what you are saying with his rate increases, which bankrupted many. I think Powell has been shooting for the “soft land” recession which has not allowed the market to cleanse the bad deals that we started/done during the COVID years.
We are in uncharted waters though - there just is not a comparable economic event to Covid lockdowns and the flood of money that followed, which I can think of in history.
Couple that with outdated metrics (do people really believe we had less than 2% inflation from 2008 - 2018/2020?) and I don’t think Powell or anyone else has any clue how to chart rates and the economy going forward. To quote Star Wars Mace Windu “should we tell the senate our ability to use the force [interpret economic data] is diminished?
I wonder how much of this job market is tied to traditional fiscal/monetary policy vs. AI making people more efficient at their jobs and/or automating them completely. Anecdotally, I have a friend in a STEM field bragging about how he figured out how to automate ~75% of his job with with AI and ~3 months later he was laid off. I’m guessing management also picked up on the same idea he had.
Interesting thought - My take is AI has been around for a long time and is only somewhat related to why people are being laid off, to potentially just being a red herring, meaning many industries, specifically tech ballooned with employees to deploy investment dollars for R&D features etc. coincidentally, when musk bought twitter and laid everyone off people thought twitter would not be able to continue operating, but turns out you need a lot less people to keep the lights on at a company then to actively grown and add features and revenue streams. I think what we are seeing is actually a trickle down impact of companies getting wise and/or being forced to deal with works not providing value. Watch the day in the life video for twitter - you’ll throw up a bit in your mouth knowing they probably got paid a few hundred grand in rsus. Go on the over employed sub Reddit and you’ll see a whole new world and suddenly you’ll understand why jobs are disappearing.
Ether way true deployment of equity requires people, AI and help keep the lights on in the back office, but true improvement and investment plans need to be done by people, ie someone needs to run the tools. I’m sure folks were saying the same thing when email and excel came out. I’m sure many people lost jobs or jobs not longer existed after these tools.
You think AI could develop a building? Maybe someday but not any time soon.
The capital “haves” are going to outpace the have nots by a greater margin. Older people tend to have assets.
I think high end senior living development, particularly with a significant independent living component in high end markets with limited new supply will do well (seen this since 2022). The most successful of these have scale that is hard to replicate (200 units plus), but I think smaller IL/AL/MC’s, IL/AL, and AL/MCs can also do well in the right areas. I’m an operator that works with developers.
I think the market is favoring a rental model vs entrance fee model, especially in some markets where the median or average household net worth is over $3MM. No need sell investments or house, just distribute modest 4% annually along with social security. This thesis is one of the more reasonable ones out there.
Regarding the silver tsunami of demographics, as I also get older, I think we are getting closer and closer to the sweet spot of the wave along with record high net worths. Like @CRE mentioned, I’ve been hearing about the demographics for my entire career, but I’ve never seen household net worths this high. IL is the way to get them in “younger” and their goal is to live a long time, which is ours too. I first started in senior living in 2009. Home care and other options are growing, but the best life experience in my opinion is in a social setting where your friends and family come over to your luxury senior living often and eat and drink with you (work out at your gym, swim in your pool, drink and play on your golf simulator) and then take occasional international trips. This creates a network effect. Guest meals are a big part of our dining program. Interesting nuances like Sunday brunch is popular. Chicago people like to eat breakfast everyday. LA people wake up late and skip breakfast. During the labor turbulence of 2022-2023, I pushed down the labor bell curve Sunday - Saturday, as low hanging expense savings and to reduce 3rd party agency labor.
Any new development in coastal markets requires at least $10,000 base rents. That’s said, developing high end senior living has difficulties comp’ing out with the existing market, which is also why picking the right operator is so important for execution but also to attract financing with their track record. There are few operators who are mainly 3rd party management who do the high end, most others are part of vertical operations. One reason for this is the life cycle of a management company usually starts with Class B and C assets, and by the time they get to manage Class A, they’ve branched off into multiple business lines including acquisitions and development and 3rd party management is ancillary focus. It is really rare to find a true 3rd party Class A operator.
Property is still one of the safest assets. Next year, the focus will be on prime locations, though rising costs may be a challenge.
we've already entered a period of extended stagflation. A number of "sure thing" NNN deals will fail. Class C properties will be hit the hardest. Stockpile cash. We'll be back to 2010-13 market conditions soon.
Nothing breaks, nothing booms. Lenders stay tight, pricing mostly flat, workouts grind. Office outside the top decile bleeds quietly, industrial cools to normal, necessity retail keeps carrying water. You make money by buying right, structuring tighter, and refusing to kid yourself on exit caps.
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