Year end
How's everyone feeling about market overall going into 2025?
I feel like it can only get better from here!
Or i might be wrong
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So many variables here. The Fed needs to kind of tell the market that rates will be stable going forward. Everyone is not sure what to do because the Fed hasn't provided any sense of stability. If the Fed said, the rates will be at this level going forward and we will not change, then the market will act accordingly.
Next issue is Trump. Everything Trump is for Tariffs/Tax cuts etc is inflationary, hence the market is pricing it in and treasuries act accordingly. Even mass deportations are inflationary. The idea of kicking out cheap labor that pick our food is going to cause grocery prices to jump massively. If inflation shoots, RE will be safe haven.
There are so many layers to this onion. Too much capital chasing few deals. Too much uncertainty. Replacement costs too high therefore muted construction. Its a really tough environment and people are just throwing money in CRE regardless of negative leverage or valuations because they dont know what to do.
I dont think 2025 will be any better because we have an unknown on what the Republicans will do. It could go either way.
I'm done trying to project what the next 6-12 months look like. Every broker has been saying the next six months will be better....for the last 18 months. No one knows. If a deal works with today's numbers and today's debt, probably a good deal. But am I going to buy something that looks meh today on the expectation things will get better? No way.
I have this sense alot of firms will close up shop this cycle. Its very difficult to make deals happen. The ones that will remain will be the big boys or family offices that don't care about returns.
I'm curious if anyone has done any research on deportations on the demand side of the equation for inflation. They're definitely inflationary on wages, but you also have less demand for services from those people as well since they're consumers
I would say the drop in demand from reduced immigration pales in comparison to the increase in labor wages from said reduced immigration. Demand is broad based, and in many cases global. Wages for the labor pool that immigrants largely play in is much much much smaller.
Also - as someone in real estate, I cannot make an argument for why you shouldn't be pretty dang pro-immigration. Robust immigration helps construction costs, immigrants rent apartments, buy stuff from retailers, etc. For us, there are very few downsides. I understand that is not the case for others in our country, but selfishly, hard for me to make an argument why it doesn't benefit me.
I don't know of any studies reflecting that specifically, but in general people's marginal propensity to spend is higher the lower you go down on the income scale. On the other hand immigrants are notorious for being high savers and remit most of that back home, so I think the effect on demand won't be that big.
I may be naive here because I try not to get too caught up in politics and don't read too much into it, but hasn't Trump acknowledged many times the need we have for immigrants and labor while also saying there will be a systemic approach to deportation basically going for the worst of the immigrants (the gang members that definitely aren't picking fruit, national security threats, etc)? Presidents tend to run off dramatic claims that are adjusted to be more reasonable once they're in office. It would be one thing if he never acknowledged our need for them, but I tend to believe he's not just going to go deporting mass swaths of immigrants that are actually out working and contributing to our society.
I think this is what will likely happen. Yes Trump is likely to be more realistic when he gets in office, but his appointed Border Czar has literally said "Im telling the millions of illegals you better start packing now". His DHS pick Noem is also a hardliner, one thing is certain, the immigration situation will be tightening significantly.
In his speeches he's said "they can come back, but they've got to do it the right way" whether you believe the cost of that is justified or if they could work out a system while they're here, I don't know.
I think most of what will actually happen is ending benefits for those who come here illegally and some requirements for employment verification and there will be a lot of self deportation. Not sure if this will help/hurt the overall situation, but that's what I saw when anti immigration governments were in place in AZ back in the early 2010s.
So your prediction is "anything and everything can happen?"
Really going out on a limb there.
OPs post certainly took a stand on where we're headed.
Survive until 2025 now survive until 2026*
No no no it's been since June Exist to 26
Get to heaven in 27*
The problem is people didnt finish the rest of the phrase. Its survive until 2025 and then die in 2026. Geez people missing the important details here.
Optimistic overall about next 10-15 years, but I fear we may get some more pain in immediate future.
Extend and Pretend round 2: Electric Boogaloo
I work in multifamily development in the Southeast. Here is how I see the market today.
Most SE markets are experiencing peak deliveries from the 2021-22 starts either right now or will in the first half of 2025. There is a high amount of excess supply in these markets. Overall market vacancy is somewhere between 10%-13% with stabilized vacancy in the 8% to 10% range. Market rents are on average down 1% to 2% from the beginning of the year.
The good news is that unit demand is fantastic. Absorption YTD is either in-line with or just below 2021 which was a banner year. Yes, there are a ton of units being delivered, however, they are being backfilled at a much quicker pace than I thought. Before, I thought most markets would have 2-4 years of excess supply delivered from the 21-22 starts. Now I think that is more like 1.5-2 years in most markets. I think you will see vacancies return to their typical 7%-8% level (5%-7% stabilized) in early 2026 across most markets. Previously I thought it would have been 2027+. There are obviously exceptions (Nashville and Austin come to mind). Obviously if there is a recession, this won't happen, but I'm assuming a (relatively) soft landing as my base case.
Why is demand so high? I think it's a few things. Job growth and population growth are still decent. However, most of it is being driven by the relative affordability of renting vs buying. Housing costs are outrageous because of a mix of prices and rates while multifamily owners are offering substantial concessions to keep their units filled. A much higher than typical % of all net household formations are going to renters rather than homeowners. Since
In development the main challenge is that most deals have a really mediocre untrended yield still. While we have seen construction costs come in as much as 5% to 7%, there still needs to be more cost reduction to make deals work. I would guess another 3%-5% combined with a little NOI growth does the trick.
During the peak, deals were being greenlit at a +/- 5.25% untrended YoC (on honest UW, don't lie to yourself). Spot UW NOI growth is probably negative since Q4 2021, but let's just say it is flat. Construction costs down 6% and land costs down 15%. Soft costs are flat. Total costs down a little over 6%. Guess what, that YoC is still only 5.60%. Need to get untrended yields to a 6%. As mentioned above, another 3%-5% needs to come out. I think that happens by the second of 2025.
Capital markets remain disrupted. People talk all about how cap rates are sub-5 but that is on almost no volume. Once people start to sell their merchant builds in 2025-26, you will start to see some price discovery. I think caps land in the low to mid 5s.
Good luck getting Land Costs to come down 15%. Yes MF properties were leasing up this summer but traffic is down and even a 2-month concession doesn't move the needle. Rents are soft and getting softer. I hope we are back to 2021 Rents by 2027 at this point.
It will be 2028 before we see top-of-the-market rent growth.
The good news is the 2030s are setting up for a stable bull run.
Anything starting construction now will do well but no data (except lack of starts) can support that.
Land has almost certainly already come down 15%. I know of 4 sites in my market that are now tied up at least that amount below what they were UC for in 2022.
Interesting take. We're on the hotel side and are still seeing 10% YOY bumps in construction. Most of that is labor related. Materials has stabilized. So I'm actually surprised your saying construction costs are coming down. Even talking to other multifamily merchant developers they said they're expecting YOY increases in construction costs no matter what.
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