Some positive signs ahead for the challenging real estate capital markets, says The Real Estate Capital Institute®.

 

John Oharenko

Chicago, IL – Last year proved challenging for the real estate capital markets, notes The Real Estate Capital Institute® (RECI).

 

"Sticking to the basics seems to be a theme for 2024," suggests John Oharenko, RECI Director.

 

 "As interest rates stabilize, investors will continue to focus on improving existing portfolio performance while waiting for more market clarity on seeking new investment opportunities."

 

Inflation peaked at generational highs.  In response, the Fed's numerous rate hikes tamed inflation to about three percent but did not reach its two-percent target. 

 

Such actions led to benchmark 10-year treasuries climbing about 100 basis points and landing at about the same price point as the start of the year. 

 

On the other hand, the five-year treasuries stopped inverting.  And the Fed announced that possible rate cuts are on the horizon in the new year, setting the stage for the following trends:

 

Soft Landing:  A strong labor market accompanied by robust consumer spending helps to assure that the economy will show stability, even in the face of cooling inflation.  As a result, real estate capital markets should continue to attract capital at more favorable rates and terms.

Uneven Property Sector Recovery: High interest rates punished the real estate industry in 2023.   As rates calm down, some property sectors are expected to fare better.   Multifamily dominates as America faces a housing shortage, keeping home prices at historical highs with more people forced to remain renters instead of owners. 

 

Current national vacancy rates hover in the five-percent-or-less range, demonstrating the strength of the apartment markets. 

 

As for retail properties, physical presence still matters.  Although online shopping wreaked havoc on the industry for many years, the bottom line translates to about 15% market share.  While older malls and marginally located projects suffer, neighborhood centers in infill locations help boost sector performance.

 

After a long streak of record growth, industrials show slower post-pandemic demand.  However, a resurgence in domestic manufacturing vs. off-shoring should help this sector's resiliency. 

 

Lastly, office properties remain clouded by uncertainty and face structural demand changes, with national vacancy rates hovering near 20%. 

 

Rising Operating Expenses:  While lower mortgage rates should help the industry, rising property taxes and insurance costs haunt investors.  Depending upon various markets in the country, some of these expenses have more than doubled, canceling any gains in debt service savings. 

Now more than ever, owners will be forced to seek optimal solutions for controlling expenses, mainly relying on property technology ("prop-tech").

 

 The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields. 

 

^Contact:

John Oharenko

 Executive Director director@reci.com / www.reci.com

^The   Real Estate Capital Institute^®

Chicago, IL USA 60622