Just as the future of CRE remains unpredictable, the investors are now worried as to what type of income producing real estate will actually grow in the coming year. But out of all the major focus remains on the rental property.
Given how it has been a bit stable during the last few years, it is expected to perform well in the coming year as well. But there are certain things that one needs to take into account when considering investing in real estate property.
To begin with, the rising interest rate and the home prices indeed have put a break on the two-year run of high rent increases and low mortgage rates.
As recession seems to become a reality in 2024, landlords and smaller investors who can capitalize and adapt to changing multi-family real estate dynamics will most likely stay out of the deep end of the downturn. After all, everyone wishes to avoid facing losses.
The economic landscape
There has been a lot of buzz going on about the economic condition in the coming year. No doubt, having a clear insight about the same is quite crucial for putting your money in the right place.
To begin with, CBRE expects there will be a moderate recession starting in late 2023 in the US, and it will extend into early 2024, which clearly aligns with the recent market trends.
Further, the rising interest rates, along with 4,50,000 new multi-family units, will likely reduce rental demand in the short term while also pushing vacancies closer to 6% by the year’s end.
After being at a great height at 9.1% in 2022, inflation rates have gone below 4% for the last three months. In fact it is projected by CBRE that it will end at 3.7% by 2023. Despite this progress, there have been a lot of changes.
For instance, housing inflation has accounted for about 70% of the core CPI increase in 2023. This clearly suggests that housing pricing will continue to increase in 2024 as well. However, there will be a slower annual rate of 3.4% when compared to the increase seen in the year 2022.
When it comes to the interest rate fluctuation Fed has clearly paused the rate at a high of 5.25% to 5.5% in September. In fact, there is a plan for another hike during this year and fewer cuts in the coming year.
The condition will make the mortgage unaffordable while the sellers will be forced to give up a 3% rate. This means the existing inventory for investment properties will remain low.
Although the industry is getting back to its usual self, there are still changes that need to be brought in.
It is only after careful consideration and analysis that one will be able to understand if the rental market will be good in the coming years.
As an investor, it is advised to stay confident and research the markets well before taking any step.
Multi-family real estate dynamics
Multifamily is a favorite for CRE investors. However, the dynamics have changed during the last few years. Multifamily rent growth has slowed down to a record level of 15.2% in 2022 to a pre-pandemic average of 2.6% in 2023 Q2.
There has been a lot of research that clearly shows negative rent growth of -2% in 2024, followed by a better recovery in 2025.
While multi-family investing has always been a healthy long-term outlook, declining rents are putting a lot of pressure on the net operating income and the valuations.
Thus, making it challenging for the investors to take any step right now.
It is quite clear that the multifamily cap rates are near their peak at 5.3%, but Fannie Mae anticipates there will be an increase between 5.5% and 6.2% in 2024.
The increases are still outpaced by the borrowing costs, which now comfortably sit above 7% for a 30-year mortgage. However, the highest straight is over 20 years.
This imbalance indeed has created a negative leverage which clearly varies based on the deal.
The market condition as of now clearly indicates signs of distress in the latter half of 2023, as there will be high borrowing costs, and the rent growth will be quite slow, which will continue to squeeze the profit margin.
The investors will thus need to assess the impact, rate hikes will have on depth serviceability and cash flow. There will be a lot of factors, like population job growth trends, that need to be considered for determining how severely a particular market will be affected.
While there is no way to understand or know what will happen in the coming year, investors can only use trial and error methods and deep research to know how to use their money in the best way and get better results from it.
Opportunities in real estate for 2024 and beyond
Given the current environment of the CRE industry, landlords and investors need to consider a few points before they choose to put their money in the real estate industry.
- Preferred Equity
Preferred equity, in the case of multi-family real estate property, can be quite beneficial in reducing the overall capital cost for financing real estate while also maintaining consistent returns from it.
This investment will offer you a great opportunity and priority position over the common equity investors for getting better profits from the property or, in case of repayment if there is any underperformance. Thus, this will reduce the exposure of risk in multifamily investing.
- The build-to-rent boom
It is quite crucial to know that BTR housing demand has increased as more young families, empty nesters, and remote workers watch the benefit of home ownership, but they won’t or can’t buy a property.
Now it is quite clear that a high occupancy rate and steady rent growth will continue increasing the investment and construction in the BTR industry. But you must know BTR also has exit optionality of selling or renting to individual homebuyers.
The real estate marketing dynamics will keep on changing even in the coming year. Just make sure you identify the opportunities at hand and avail it as soon as possible. It is the only way you will be able to survive and make a profit from the industry.
What to Expect?
When you understand the market condition right, it will never be difficult for you to put your money in the right place. Overall, it is quite clear to see that there will be a positive outlook for multi-family in 2024.
Multifamily fundamentals look strong as affordability, and inventory issues will continue to bring in more demand in the industry. Besides, there will be a lot of opportunities available for dealing with properties just as distress starts to set in.
Further bank repossessions auctions are up 34% from the last year. Not to mention, emerging neighborhoods will also have distressed properties that will be priced below the market value.
It is quite clear that 2024 will bring in a lot of economic challenges for the investors, but in the case of multi-family property, they are expected to remain resilient as a long-term class asset.
The rent price is indeed will bounce back just as the demand returns and the interest rate will come to a better stability.
In the meantime, you must keep an eye on the underpriced properties and keep monitoring your debt cost.
Remember, the focus must always remain on increasing the net operating income. This is the key to last longer in the CRE industry and gets better returns from it.
Still, it is advised as a newbie in the industry, you stay careful and do your research well before making any decisions. Timely research of all the available areas or demographics is quite crucial. Make sure you do it yourself and even consider taking help from someone expert in the industry to get the best assistance.
They will be there to help you understand the marketing dynamics that you might not be able to know. They will bring you deeper knowledge and insights. Stay calm and take on the job of investment.
No doubt things will get back to normal in the coming few years. But until that time, you need to be very careful with the investments or the money you are putting into the industry. It is the only way you can safeguard yourself and protect your investment options.
Investment in the real estate industry or the rental sector in the coming year, no doubt, is going to be very challenging. However, if you are looking for an easy financing option, then you can definitely get in touch with Private Capital Investors.
They have got expert professionals who will be there to help you get the financing as soon as possible. They will understand your requirements and then provide you with multiple choices to choose the best financing option as per your budget and needs.
Also, they will guide you in understanding the market condition. With this, your investment journey will be easy.