It seems like almost every day, a new article predicts doom and gloom for commercial real estate. If you open any News app on your phone and search for commercial real estate, that is pretty much the message you will get.
Is there any tangible basis for this negative view? The simple answer is maybe, but it’s not that straightforward.
There are lots of different types of real estate, from residential to retail, storage, office, hospitality, light commercial (manufacturing etc), multi-family, and the list goes on. There are also classes such as A, B, and C. You can classify it further as value-add, an existing building that is cash-flowing or new development. Finally, real estate can vary significantly based on location and market area. Even down to the city block!
Think of commercial real estate as a vast, intricate tapestry. Each thread, whether it’s a type of property or a geographical location, has its unique patterns and trends. For instance, while the pandemic might have hit urban office spaces really hard due to the rise in remote work, it has simultaneously boosted the demand for larger residential spaces and warehouses thanks to the e-commerce boom and rental demand. Retail spaces, once seen as dwindling due to the surge in online shopping, are now reinventing themselves into experiential hubs, drawing consumers back in. Hence, it’s clear that while some segments face challenges, others are rapidly adapting and thriving.
So, casting a ‘one size fits all’ spell over commercial real estate is a little short-sighted.
Clearly, certain types of real estate, such as office, have been hit hard, and it would be glib to suggest that interest rates have not affected all of the industry. But if you look into the past, you see that often during downtimes, opportunities can present themselves.
What does history tell us?
In the dynamic realm of real estate, multi-family properties have historically stood out. As urban landscapes evolve and societal preferences shift, the allure of multi-family investments has become increasingly evident. These properties, encompassing everything from small duplexes to expansive apartment complexes, can offer investors a unique confluence of consistent rental income potential and opportunities for capital appreciation.
The recent past has underscored the multi-family sector’s adaptability. While the 2007-2008 financial crisis presented challenges for the broader real estate market, multi-family units showcased a relative resilience, attracting attention from discerning investors. Fast forward to the unprecedented times marked by the COVID-19 pandemic, and the sector again highlighted its flexibility. Despite initial uncertainties, multi-family properties demonstrated an ability to navigate challenges, with many regions witnessing a resurgence in demand, especially in suburban areas.
The 2007-2009 Economic Downturn
Multi-family properties demonstrated relative resilience during the financial turbulence. While there was an undeniable dip in property values, the decline was less pronounced compared to single-family units. A surge in the rental market, propelled by challenges in homeownership, cushioned the multi-family sector.
The Revival Era (2010-2014)
The post-crisis years marked a rejuvenation period for the multi-family market. The shift in housing preferences, especially among the younger generation favoring metropolitan living and rentals, coupled with tighter mortgage regulations, paved the way for a rebound. Data from Freddie Mac during this timeframe reflected an uptick in rent prices and a decrease in vacant units, signaling a robust rental landscape.
The Golden Years of Stability (2015-2019)
The multi-family sector entered a phase of consistent growth. Urban and suburban areas both witnessed sustained rental demand. National rent metrics, as highlighted by Freddie Mac, showcased an annual growth ranging between 3% and 5%, underlining the sector’s stability. This steady rental increment, juxtaposed with low vacancy levels, underscored the multi-family properties’ value appreciation.
Navigating the Pandemic (2020-2022)
The onset of COVID-19 presented a set of novel challenges. The initial months were marked by apprehension, with metropolitan regions experiencing a transient dip in demand, influenced by the rise of remote work and the quest for spacious living. However, as the world adjusted to the new normal, the multi-family sector showcased its adaptability. Suburban properties, in particular, became hotspots of demand and value growth. Freddie Mac’s analyses during these uncertain times consistently emphasized the multi-family market’s enduring nature.
The period spanning 2007 to 2012 was characterized by muted or, in certain regions, negative appreciation, a repercussion of the financial crisis. However, from 2013 to 2022, the multifamily domain displayed a commendable growth trajectory. A rough estimate, when considering property appreciation combined with rental growth, positions the yearly appreciation rate between 5% and 8%. Yet, regional variations and specific property attributes could influence these figures. For an in-depth and up-to-date analysis, Freddie Mac’s Multi-family Research Center remains a primary resource, offering extensive reports on market patterns and forecasts.
Buy In The Dips – An Opportunity Waiting?
It’s a commonly suggested strategy in the world of investing to ‘buy in the dips, sell in the highs.’ It is a version of buying low and selling high, which we have all heard. However, the key is to make sure there is a strong indication that the item you are buying has fundamental, solid reasons why it might increase in value again at some point in the future. If you do not have that, then you are essentially gambling.
Based on the data presented above, we feel that there is a great opportunity on the horizon. Take a look at the chart below from Green Street.
What this shows is that over an extended period, all commercial real estate pricing increased. While that isn’t particularly surprising, it is a good illustration of the potential of real estate over time. While it’s not possible to look into a crystal ball and know exactly what is going to happen, you can learn from the past and make educated, calculated assumptions based on what you see in front of you.
At CalTier we are excited about the future opportunities that can be presented when assets are distressed. This can present a significant long-term upside if you are in a position to capitalize on opportunities. That’s what we are working on, and we are excited about the next few years and how we can go after some significant assets.
In conclusion, we are excited about the potential medium and long-term opportunities this real estate market will present.
You can start today and, in some cases, even roll over monies from your 401k.
Who is Freddie Mac?
Freddie Mac, or the Federal Home Loan Mortgage Corporation, was established by Congress in 1970 to ensure a reliable and affordable flow of mortgage funds throughout the United States. Unlike traditional lenders, Freddie Mac operates in the secondary mortgage market. It collaborates with approved lenders, purchasing mortgages that meet its stringent criteria. This partnership enables lenders to extend loans to qualified borrowers while maintaining capital flow into the housing market. Freddie Mac then bundles these mortgages into securities sold to global investors. Freddie Mac facilitates liquidity in the housing market, benefiting lenders, borrowers, and investors, thus supporting the broader U.S. housing finance system.
https://mf.freddiemac.com/research
https://insights.greenstreet.com/hubfs/GSCPPI20231005.pdf
