Nathan Rothschild, a 19th century British financier and member of the Rothschild banking family, is credited with saying that “the time to buy is when there is blood in the streets.” This is contrarian investing at its heart.
Many CRE investors are asking us, “Is now a good time to buy?” They appear to be gun shy of coming out of cash due to perceived asset overvaluation.
Obviously, this is most conspicuous in the big post-election run up in stock prices. We predicted animal spirits would surge following a Trump victory, and that is exactly what happened.
Was this rational? Of course not. However, following the Biden 4-year regulatory assault on business it was to be expected.
This has not been the case with commercial real estate. We may now be emerging from the second largest drawdown of CRE valuations on record. As such, a compelling entry point may now be presenting itself. There isn’t just blood in the street but pools of it.
We hope to see the economy in 2025 and beyond look a lot like it did in the decade after the Great Financial Crisis: low growth, low inflation, and low interest rates.
This, combined with some short-term pressure on NOI, and the aforementioned decline in commercial real estate prices, may come together to provide an interesting opportunity for commercial real estate investors over the next 12 to 24 months.
The massive transaction volume from 2021 to 2023 created a great deal of short term debt to go with it. Much of the debt originated between 2019 and 2022 will be coming due in the next 12 to 24 months. More fool they for thinking interest rates would remain low indefinitely.
While we believe many lenders may continue to “extend and pretend,” this dynamic could pressure less-capitalized owners, creating opportunities for strong, smart buyers to acquire these assets at knock down prices.
CRE assets with strong fundamentals but inefficiently or insufficiently structured capital stacks could come to market at attractive valuations.
2024 ended with many borrowers receiving short term extensions, increasing’ the nearly $1 trillion in maturities expected in 2025. This potentially bodes well for savvy investors.
The questions then are what property types and where? Expanding on our core of storage, senior living, and student housing, now may be a good time to refocus on multifamily.
Housing affordability, or better unaffordability, may drive residential rental demand for the foreseeable future.
Despite an increase in mortgage rates, the Case-Shiller Home Price Index is at an all-time high. This is driven by continued demographic demand for housing, coupled with an extremely low supply of existing homes for sale. With many homeowners sitting on 3% mortgages, selling is not an attractive option.
In fact, renting is more affordable than owning in all 50 major metro markets, with the typical mortgage payment exceeding rents by nearly 40%. This is before factoring in taxes, insurance and maintenance.
A renter immediately receives a new or like new product with no additional cash flow needed for the aforementioned downstream costs or down payment.
The build-to-rent subsection may prove particularly attractive to those who cannot afford to buy but need a more family friendly living environment. This could drive more people into suburban and exurban environments.
Despite the current administration’s best efforts, it is estimated that 75% of population growth the next decade will come from immigration. This may put much of the rental pressure on boarder markets like Florida, Texas and Arizona.
This may be exacerbated by net migration between states with progressively governed cities like Chicago, New York, San Francisco, Portland, and Seattle continuing to lose population to places like Charlotte, Nashville, Phoenix, etc.
It is our belief people will continue leaving both the east and west coasts and Chicago for better governed locales.
As we have been saying ad nauseum, you should consider going south, going red, and going now. DSTs may be the tool to help.
