Investor Expectations Year-End 2024
Explore the latest survey insights on investor expectations for the second half of 2024. Discover how real estate values and rents are stabilizing despite market volatility, regional differences in performance, and forecasts for CRE values and transaction volumes. Understand the impact of potential Fed rate cuts, market trends, and asset class performance predictions, as investors navigate a cautious yet optimistic landscape. To view investor expectations for H1 2024, click here.
Mixed Investor Expectations in H1 2024 Highlight Trends of Stability and Decline
When asked about the first half the year and if the value or rents of their assets are higher, lower, or the same, most responses indicated that real estate values and rents have remained the same. 55.34% of investors voted that the value of their real estate on average is the same, while 45.63% voted that rents at their properties on average remained the same. This stability suggests that, for many investors and property owners, there has been little to no fluctuation in property values, despite broader market volatility.
However, a segment of the market is experiencing depreciation, with 29.61% of responses reporting values as “lower’ and 1.94% as “much lower.” Conversely, rents have been reported as “higher” (29.61%) or “much higher” (2.43%), indicating significant variation in real estate performance. This disparity could be attributed to factors such as increased Class A construction across the Sunbelt region in 2024. While these deliveries have pushed up average rent, it’s important to note that vacancies have also increased across the board. As one survey respondent mentioned, “tenants are stronger because the supply of space exceeds the demand.”
The differing responses also highlight the influence of local market conditions, property types, and economic factors on real estate performance. This variation underscores the uncertainty and volatility in the market, suggesting that while some areas are thriving, others are facing challenges, reflecting broader economic issues and uneven market dynamics.
Market Sentiment on Investment Performance Was Positive For the First Half of the Year
According to survey data, 49% of investors rated their CRE investments as “average” for the first half of the year. Of the remaining respondents, 33% said “good” and 12% said “poor.” Despite the presence of lower ratings, most investors viewed their property performance as either “average” or “good,” reflecting a generally stable market environment for the first six months of the year.
No Change in Direction for Volume or Values is Expected in H2 2024
The prevailing expectation is that CRE values and transaction volume will remain steady though 2024, with survey respondents selecting “flat” at 48% and 46%, respectively. Investors are forecasting a modest interest rate cut of 25 basis points by the end of the year. However, significant changes in CRE transaction volumes may not be evident until 2025, due to the typical market lag in response to interest rate shifts.
The market is showing signs of both optimism and caution, with 27% and 32% of respondents anticipating growth in values and transaction volume, respectively, in H2 2024. However, uncertainty around how an interest rate cut will impact the market remains. One investor noted that “if there are any changes in leadership, a decrease in rates, and regulatory easing, a substantial increase in transaction volume, demand, and prices could follow.” For now, the market is expected to remain relatively flat, with private investors likely staying on the sidelines, while institutional investors might look to capitalize on perceived bargains.
Market Outlook Hinges on Fed’s Decision
The sentiment among investors is that the CRE market is closely tied to the Federal Reserve’s actions in the second half of 2024. Survey responses reveal that, while most investors do not foresee a recession in the immediate future (69% of respondents said “no” recession in H2 2024), many are adopting a cautious, wait-and-see approach until the market shows clearer signs of stability.
An MAI appraiser with 32 years of experience noted that interest rates may become less significant if banks increase loan-to-value ratios and debt coverage ratios. Current metrics show declines in rent (excluding industrial), rising vacancies, and escalating expenses. The appraiser pointed out that although cap rates remain stable, average sale prices have dropped significantly, indicating that the market activity may be limited to well-priced properties.
Other responses suggest that while CRE is less impacted by inflation compared to stocks and bonds, there are growing concerns about the retail sector, particularly regarding rent payments for restaurants. The Fed’s current policies, combined with political uncertainties, have created a precarious economic environment. There is concern that Federal Reserve Chair Powell’s efforts to tackle inflation could potentially
trigger a recession, with one survey responder saying it will “lead to a severe CRE crisis in major cities like New York, Chicago, and San Francisco by early 2025.” Many believe that the market’s future will depend on whether Powell can achieve a soft landing or if worsening economic conditions, exacerbated by political developments, will drive further market deterioration.
Predictions for Asset Class Performance
Multifamily properties are projected to be the top performers in the second half of 2024, with investors identifying them as the best performing asset class. With industrial properties ranked second, retail ranked third. When asked about the worst performing assets, most investors selected office as the worst with retail second.
Investors provided additional insights into their property preferences. One investor noted they are “targeting multifamily properties with deferred maintenance, poor management, and opportunities for upgrades.” Another investor, who chose “other” as the best-performing asset
class, is interested in “construction opportunities or existing self-storage facilities with potential for expansion and under-market rates.” Some are shifting from multifamily investments to residential rentals due to concerns about potential government rent control regulations, particularly in California. Additionally, one investor highlighted a trend where “churches are being sold at below-market prices, offering opportunities for conversion into multifamily housing with minimal renovation.”
Conversely, some investors expressed concerns that the multifamily sector may face another challenging 9-12 months, with current pricing not yet making it a compelling investment. They highlighted significant risks and a lack of substantial risk premium in returns on new deals. For retail, many investors observed a transformation, noting that “the retail sector is being reshaped by increased fragmentation, reduced in-person shopping, and the shift to remote work, significantly impacting urban retail outlets.” Innovative uses for vacant spaces and a move toward experiential retail may offer some solutions, but high prices and low cap rates for major retailers may not be sustainable as the market weakens.
Most Investors Plan to Maintain Investment Level While 34% Plan to Increase It
Most investors plan to remain on the sidelines throughout 2024, largely due to challenges in finding suitable properties that will pencil. While some are considering increasing their investments, many believe that the best time to buy will be in the second half of 2025, with Q3 2025 citied by one respondent as the ideal period.
One investor remarked, “we are in a holding pattern. Rates are likely to stay the same in 2024, with Fed cuts expected to start in early 2025, and multifamily rents are anticipated to flatten.”
In the meantime, the strategy for many is to hold and manage existing portfolios, as a minor interest cut or a stable rate is not expected to significantly affect the market. Another respondent noted that “sellers are likely to hold off or finance transactions themselves, as deals with 6+ cap rates are not appealing.”
Investors are hoping for improved market conditions in 2025 and are closely watching the Fed’s actions. They expect that properties will become more economically viable and that the current uncertainties will resolve by the second half of 2025.
The Biggest Risks Remain Operational
Survey responses indicate that the primary concern for CRE in the second half of 2024 is the anticipated economic downturn, which is expected to lead to operational challenges such as increasing vacancies and decreasing rents. This concern surpasses those related to market saturation, political changes, and interest rate fluctuations.
Additional concerns include the impact of rising operating costs on net operating income (NOI) and issues related to CRE refinancing. Loan maturity is highlighted as a significant risk, with many loans coming due, potentially triggering a market downturn as investors adjust to lower prices for financially distressed assets. This adjustment could extend the period of downward price expectations and create further strain on loans maturing in the future. Furthermore, economic downturns, exacerbated by regulatory burdens and policy issues, contribute to concerns about the viability of property investments. Banks are reported to be reluctant to lend, even to borrowers with excellent credit and low loan-to-value ratios, due to liquidity challenges rather than collateral issues. One respondent noted that “expenses are rising faster than rents, adding to the financial strain”.
