Hearing mixed opinions on when ground up development deals start making sense again. The motto for a while has been “survive till 25”. But tbh I don’t see things getting better that soon. Even if the fed cuts rates within ‘24, seems unlikely to be a big cut. Do you guys think any fed rate cuts will really move the needle on a) the interest expense line item of project budgets and/or b) exit valuations…both of which need to improve in order for a) yields to improve enough to attract equity investment (for most dev deals today) and b) overall deal returns to work for most shops.
Thoughts on whether a rate cut or two is really going to make deals work again in 2025?
It will make a difference, but it is unlikely we go back to pre 2022 rates anytime soon. So expect a decent improvement but nothing crazy
Depends on where and what product type. I know suburban multi guys in the southeast who haven’t even slowed down.
That said, I would not expect a return to 2021 underwriting any time soon, if ever. Gotta find new ways to pencil whip deals.
Going to be a couple years imo. I think it will take a combination of rates moderating, rents increasing, and costs moderating or staying static. None of those things happen quickly. Will be slower in markets currently seeing negative rent growth.
I wouldn't expect the Fed cutting to impact cap rates much.
It won't impact cap rates but it will make stagnant caps more attractive relatively. The 10yr has already dropped to 3.8%ish, that's suddenly making a 5-cap look better.
My point was more about the yield curves. 10yr Treasuries aren't expected to move much over the next 4-5 years. Now, that could/very well will end up being way off, but the market is not expecting Fed rate cuts to move treasury yields. If the world goes to hell in a handbasket, then we will see a big movement in Treasuries.
"survive to '25"
"save your sticks for '26"
"heaven in '27"
"great in '28"
I think we're going to be kicking the can a while. Be sure to keep these phrases handy.
What if the light at the end of the tunnel is a train?
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