💸 Appreciation has slowed. Why rate cuts won't help.

👋 Hello, Best Ever readers!

In this week’s newsletter, appreciation slows, property values stall, multifamily vacancy peaks, and lending surges.

Today’s edition is brought to you by the all-new Best Ever Community, an exclusive, private network for serious investors only. The community launches soon, and only a select group will be the first to gain access.

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Off we go!

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CRE HEADLINES

🌊 Lending Surge: CBRE's Lending Momentum Index showed increased lending activity in Q3, rising 13% from Q2 and 15% YOY. The Q3 2024 index value of 214 approached the pre-pandemic five-year average of 229.

‼️ Double Trouble: The number of borrowers defaulting for a second time on property loans nearly doubled over the past year. These CRE loan "re-defaults" surged 90% YOY as of September, with $1B added in the last quarter alone. Total at-risk loans reached $5.5B.

🤖 Tech Boost: Tech companies leased 9.9 million sq ft of U.S. office space in Q3, the highest since Q4 2021 and up from eight million in Q2, largely driven by the AI boom and high job growth in the tech industry.

🤔 Unsure Insurers: While most asset classes see risk-adjusted property insurance rate increases ranging from flat to +10%, multifamily faces steeper hikes in 2024 with primary liability increasing 10-20% and umbrella coverage rising 10-15%.

📦 Big Box, Big Problems: Large warehouse and distribution centers — defined as modern buildings of 200,000+ sq ft with ceiling heights of 28+ feet — near major ports and industrial hubs are facing challenges due to oversupply and increasing vacancy rates, indicating a market reset after a post-pandemic development boom.

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APPRECIATION HAS SLOWED. WHY RATE CUTS WON’T HELP.

CRE property values have been on an upward swing since December 2023, showing 3% appreciation over the previous three months alone. Now, they appear to have stalled, as Green Street's Commercial Property Price Index remained flat in October. According to the report:

• Property values remain 19% below their 2022 peak, with the core sector (apartment, industrial, office, retail) down 21%. Office properties have been hit hardest, declining 37%, while self-storage is down 21%.
  

• None of the property sectors Green Street includes in its index saw a change in values in October.

The Fed announced last week a rate cut of 25 basis points after an earlier 50-basis-point reduction in September, but that has yet to impact medium-term interest rates. Bond yields also remain high. It’s these two key factors that are slowing appreciation and leveling property values, as expensive borrowing costs push cap rates higher and reduce cash flow while elevated bond yields provide a more competitive investment option.

📣 “Property appreciation was set to accelerate, but then medium-term interest rates turned higher,” said Peter Rothemund, Co-Head of Strategic Research at Green Street. “If bond yields stay at current levels, I wouldn’t expect real estate prices to increase much.”

WHAT IT ALL MEANS

Rate cuts sound great. The truth is, however, that while the Fed controls short-term rates through its federal funds rate decisions, the medium-term rates typically found in CRE respond to broader market forces like inflation expectations, economic forecasts, and Treasury bond demand. And until these factors conspire to drive CRE borrowing costs down, appreciation, property values, and CRE at large could remain in a holding pattern, regardless of what the Fed does moving forward.

🎤 _{BEST EVER CONFERENCE}
FREE LIVE EVENT

Join us and some very special guests on Thursday, November 21 for a FREE live event — From Market Bottom to Boom: What to Expect from CRE in 2025.

Join Gerrit Van Maanen, John Chang, Neal Bawa, and Hunter Thompson for this roundtable discussion as they help experienced investors navigate the new era in store for commercial real estate in 2025.

👉 Register here to join us at 8 p.m. EST on November 21.

In this 45-minute event, our panelists will discuss:

✅ Market trends and predictions: Discover what to look out for and how to prepare for the next 12 months in CRE.

✅ Real-life case studies: Gain insights from real-life scenarios, problems, and successes our panelists are experiencing today.

✅ Action items: Walk away with clarity on your 2025 goals and a clear understanding of how best to achieve them.

Can’t make it on November 21? Register anyways, and we’ll send you the replay.

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MULTIFAMILY VACANCY APPEARS TO HAVE PEAKED

The national multifamily vacancy rate appears to have peaked at 7.9% in Q3 2024, the first time in three years it has not increased quarter-over-quarter. This suggests stabilization after rising 310 basis points from 2021's record low of 4.8%, though still above the pre-pandemic average of 6.4%.

Regional variations are significant, particularly in the Sun Belt. Austin leads with a 15.1% vacancy rate, followed by eight other Sun Belt markets ranging from 13.8% to 11.6%. Coastal and upper Midwest markets, however, show lower rates. Chicago and Milwaukee are among the bottom while Orange County (4.5%) and New York City (2.8%) are lowest.

_{🏠 DEAL OF THE WEEK}
FLEX SPACE GETS MORE THAN 20% COC RETURN ANNUALLY

Drew Joyner and the team at Equity Ventures are seeing an annual cash-on-cash return of more than 20% on this flex space. Here's how they’re doing it 👇

🏢 Property Details: This 32,000 sqft, nine-unit flex space asset is located in Memphis, TN, and was purchased in June 2021.

💸 Finances: The property was purchased for $1,790,000. The team raised $461,000 in capital and secured a $1,455,000 loan with a 4% interest rate and 25-year amortization.

💼 Business Plan: From day one, the property has been fully occupied with some tenant turnover occurring naturally. Rents have been raised more closely to market rates over the past three years.

The team borrowed an additional $150,000 to replace the asphalt, upgrade all exterior lighting, replace multiple rooftop HVAC units, improve landscaping, and break out some common utilities for individual spaces.

Tenants include a photographer, a medical device supplier, an occupational childcare therapy provider, a roofer, and a church.

🍾 Results: The property is currently valued at $2,200,000 at a 9% cap rate. It’s cash flowing at 20.65% annually, and the team plans to hold it long-term for cash flow.

💪 Biggest Challenge: The biggest hurdle Drew and the team encountered was taking ownership of a mom-and-pop investment property and getting the tenants to understand what their leases required, such as HVAC maintenance. This became easier over time as they saw the investment in the property and the upgrades to the common areas.

If you have a deal you'd like to feature here, respond directly to this email with “deal breakdown.”

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FREE DOCUMENT DOWNLOAD

Should You Sell Your Apartment Deal Early?

One of your ongoing asset management duties is to frequently analyze the market to estimate the current as-is value of your property based on the market cap rate and your current NOI. The purpose of this document is to review other factors besides the potential sales price to help you determine if it makes sense to sell your apartment deal before your initially projected sales date.