Three years since the end of the hiking cycle and a few cuts in to no avail. Would love to hear everyone’s thoughts on where we go from here, but particularly interested in a sitrep from leasing/IS brokers.
There’s been good bid sheets on the assets we’ve taken to market this year & leasing activity is at least normal but the market still feels weak. Thoughts on when RE is back to healthy again?
Real estate is played out. Too many syndicators still looking for deals. People are pricing it like it's as efficient/liquid as the stock market. I don't think RE will really recover for ~5 years.
And before I get someone taking a general statement and applying it to a specific situation. I think you can still make money, but it'll be even more deal specifics dependent than it was before.
I’m primarily a distressed buyer (lots of notes) and I’m just not seeing rent growth in a lot of these markets. I think some groups are getting too aggressive now to get deals, however that means i can take another shot at the deal in 2-3 years.
I think recovery is coming but recovery is not a 2021 or 2022 those years were CRAZY.
Inclined to agree on the rent growth point. Anemic across the board but would think (hope) that this leasing activity and maybe the Q1 transaction increase sets the stage for growth 1H27 - definitely not 2021/2022
Odds of rate hike now are now 55% this year. Market is not moving in the right direction, and assets are still not priced in alignment with where debt rates are. Seems like this stand still market can linger for a while longer. Acquisition activity still hasn’t picked up, albeit there was a slight pick up end of last year given treasuries we 50bps lower or so.
Could be 5+ years in sunbelt markets before typical deals make sense again. Brokers push back their rent growth projections every year.
Same stuff different day.
I work in multifamily development in the southeast. Unfortunately in the major SE markets (Atlanta, Charlotte, RDU, Nashville, Tampa, and Orlando), there is still too much of a supply hangover which will weigh on rents over the next 18-24 months. My strong suspicion is that 2026 will be another lost year. While I expect that 2027 will be better than 2026, I doubt it will be a strong year overall - just OK. Major markets are setting up for a rebound in 2028 IMO.
Absorption has slowed a bit due to lower population growth resulting from lower domestic and international migration and lower job growth. But it's still being supported by strong rent vs buy and rent vs income dynamics. Either way, I don't think it's as bad as some of the bears are saying, but definitely weaker than 2024-25 levels which were pulled forward to a certain extent by enormous lease up concessions.
People love pointing to falling construction starts and lower completions, which do help, but we just built 2x to 3x more supply from 2023-25 than necessary. It takes a long time (years) to chew through that supply. Even if we totally shut down all development for a year in some of these markets, I think we would be totally fine given the existing vacancy on the ground.
Some of the minor markets (Charleston, Wilmington, and to a lesser extent Jacksonville and Greenville) appear to be rebounding quicker than the larger markets. And that's because they just didn't get as much supply compared to the major markets from 23-25 and their peak deliveries were earlier than the majors. They all have meaningfully lower construction pipelines and starts which should help them through the recovery.
Some people say development makes sense, some people say acquisitions make sense. In today's market, I actually think neither make sense. There was a deal that just traded in one of the major SE markets for a 4.4% cap on 2025 NOI. And that NOI is down about 10% from peak NOI in 2022. So even if you get the thing back to peak NOI, you're looking at a 4.8% cap. How does that make sense when debt is in the mid to upper 5s and you still have to pay AM and CapEx on top of that? Cap rates need to go higher if the market wants to clear. The only thing that has kept a lot of inventory from hitting the market are the debt funds which appear to be making some pretty cheap and dumb loans from a risk/reward standpoint.
Some people in the industry (looking at you MAA) say that acquisitions are unattractive but development is. At the same time, they will agree that you can buy new construction assets at or below replacement cost. Surely that means development yields are below cap rates (that are in my opinion far too low), right? As long as you can buy assets at or below replacement cost, I think capital flows into development should be challenging although LPs will never amaze me in their ability to light money on fire.
So yeah maybe its "Great in 28"?
Too many groups assuming these markets are going to V shape back to their glory days and completely ignoring how much inventory has outpaced growth.
I too get the blank stare when I ask developers how they make sense of developing when you can buy 2024 product for 20% less than they can build for. Have heard some wild mental gymnastics but the reality is some of them are still finding capital, meaning that the supply isn't going to go to 0 like many people are assuming. Should probably make for a slower recovery.
However, there is something to be said for where these rents are now. In some markets like Austin, rents are actually lower now than they were in 2019 before this inflation craze began. You'd have to think that they can bounce hard off these levels once the market does firm up.
Another crazy one I see is groups underwriting a 4.5 - 4.75% exit cap rate because "that's where they're trading today so there's no compression!". Also ignoring the fact that groups are buying 4.5%'s today because they think they're going to be a 5.5%+ in 12-18 months once concessions burn off while these other guys are assuming concessions go to 0 by 2027 and next buyers still fork over a 4.5% cap rate for it.
Yup. Thats the problem, first survive until 2024, then 2025, then 2026, nows it definitely rebound in 2028. People just need to understand the glory days are gone and frankly speaking it might be a good thing. Too cheap of credit was causing bubble spikes, fraudulent syndicators entering the market, and deals not penciling. The market needs to get back to pre-covid and this is happening as we speak. Less construction needs to happen, there has to be less buyers as well. This is a tightening of liquidity which is what was supposed to be the main point here. Im still seeing plenty of developments in the southeast and still new permits being approved. We are nowhere near zero supply increases.
The idea of "neither [acq. or dev.] making sense" is kind of what I'm getting at; there still seems to be sizeable amounts of capital just waiting to bid everything down to neutral or negative leverage. At what point are those capital sources exhausted and cap rates expand to a healthy spread to leverage, etc again? What are those sources?
It's not going back to the way it was before. This is the new normal. Everything is more complicated, debt is more expensive, and every deal requires some blocking and tackling.
As it pertains to multi (though these effect every asset class, in and outside of RE):
1. Higher for longer was just mean reversion. Debt is still historically cheap, but expensive relative to whatever the history books will call the ~2012-2022 super cycle (probably stupidity).
2. Demographics have crested their last years as a tailwind, and will now push harder as each year passes in the opposite direction. This is math, not conjecture.
3. The “prohibitive costs of homeownership” story, largely due to the above two, will slowly unravel. Boomers retire, downsize within a decade of retirement, and eventually exit the SFH market entirely. This adds further supply pressure to an already anemic current and future demand story. As homes become more affordable, the proportion of the population that rents shrinks.
4. Rent growth exceeded inflation by a wide margin in ‘21-‘22, pulling that potential from the years following. The ability to push rents for the majority (certainly not all markets) has been met with an inability of renters to pay. Most operators have made up for some of this with expansion in other income (bulk internet, valet trash, etc), but it’s nowhere near enough. Again, some markets have bucked the trend due to job growth (SF, recently), population growth (select hyper growth SE cities), or relatively slim supply growth (midwest, some NE pockets), but by and large this has been true.
Markets/regions that were net beneficiaries of the great Covid migration will be able to extend the run for maybe another decade or two. However, as many have already pointed out massive supply waves have hit most of those markets hardest, and buyers familiar with the above trends are willing to pay top dollar to try to escape them.
All of this to say, I’m sticking around but the golden years are behind us (in both volume and returns). As always we will breath in and out in smaller cycles and in different regions, but the pie has permanently shrunk and markets are very efficient at eating that shrinking pie.
Damn bro how am I supposed to charge hella acq fees with these doomer takes
Mention AI and that your team only hires absolute rockets as property managers in your pitch decks.
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