💰 Is private equity killing CRE's hottest sector?

👋 Hello, Best Ever readers! The Fed ended 2024 with yet another rate cut of 25 bps yesterday while indicating fewer cuts ahead. We’ll see what 2025 brings!

In this week’s newsletter, private equity invades CRE’s hottest sector, depreciation eyes a comeback, and MOBs emerge as a frontrunner for 2025.

🎁 But first … a FREE gift! This holiday season, we’re offering FREE access to Ash Patel’s Invest Beyond Multifamily Underwriting Tool. Calculate key metrics, accurately project NOI, and make underwriting simple with the tool Ash and nearly 100 other investors rely on.

👉 Simply reply to this email with the word “Underwriting” and we’ll send you a free copy.

Let’s CRE!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

💵 Rent Report: The median U.S. asking rent fell 0.7% YOY in November to $1,595, the lowest since March 2022. Meanwhile, asking rents for newly constructed apartments rose 1.5% — the biggest YOY increase in 18 months — to a median of $1,802 in Q3.

💰 Buy, Buy, Buy: Global real estate markets are showing strong signs of recovery, with 66% of 534 tracked markets entering the "Buy" cycle — the highest level since 2016 — as expected rate cuts and strengthening market fundamentals drive renewed investor confidence.

💸 Depreciation Deal: Under existing law, bonus depreciation is being reduced by 20% each year until its complete elimination in 2027. Trump's proposed tax policy could reverse this, allowing 100% bonus depreciation to be reinstated through 2025 for property placed in service after Dec. 31, 2022.

📈 Loan Mods Rising: CRE bank loan modifications surged 65 bps in the first three quarters of 2024, with smaller banks showing a 217% increase, making lenders increasingly reluctant to continue extensions, particularly for underperforming assets.

🎙️ Retail Reshuffle: The retail landscape continues to shift as convenience stores expand, shopping centers pivot to entertainment and medical uses, large restaurants struggle, and fast-casual concepts face a shakeout. Commercial brokers Pete Montgomery and Josh Rothstein joined The Best Ever CRE Show this week to explain what’s happening.

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IS PRIVATE EQUITY KILLING CRE’S HOTTEST SECTOR?

Manufactured homes have been both a supplier of affordable housing and a cash cow for investors in recent years. Now, according to a recent report from Bisnow, residents and lawmakers are pushing for rent control as a wave of private equity has invaded the space, driving lot rents higher than ever.

Lot rents in manufactured housing communities jumped by 7.7% nationwide during the year leading up to Q2, marking the steepest annual rent increase recorded in the sector. It was also the third straight year in which rents grew 5% or more.

• The Problem: According to one report, private equity accounted for 23% of manufactured home purchases in 2020 and 2021, up from 13% from 2017-19.

• The Scope: An estimated 800,000 home sites — or one-fifth of manufactured housing communities — were purchased by investors between 2015 and 2023, and that number is expected to grow as the affordability crisis continues and institutional investors look to capitalize on the demand.

• The Fallout: One New Jersey community — made up mostly of seniors and fixed-income residents — reported a 40% lot rent increase over the last four years. But with the balance of power shifting from mom-and-pop owners to private equity, rent hikes haven’t equated to better living conditions for residents. Diminished amenities and poor maintenance now plague these communities while residents pay higher rents — in some cases, double what they were in recent years.

Sun Belt markets like Arizona have been hit particularly hard by rent hikes, but the issue is nationwide, and some states are moving to take action.

• New Jersey is considering legislation that would cap lot rent increases at 3% annually. 

• Pennsylvania proposed legislation in 2023 limiting increases to CPI growth rates. Though the effort stalled in 2023, it’s likely to resurface.

• Michigan and Iowa are currently pursuing similar efforts that could result in reform and possible rent caps.

WHAT IT ALL MEANS

Zoning reform could offer a market-based solution to rising rents, as industry experts argue that loosening density restrictions on manufactured housing would increase supply and naturally moderate rents that have surged under limited supply and institutional ownership. For investors, zoning reform presents both an opportunity and challenge — while it could open new development possibilities, increased supply might temper the rent growth that's attracted private equity to the sector.

_{🎟️ BEST EVER CONFERENCE}
2025 PROGRAM & SCHEDULE RELEASE

The program for Best Ever Conference IX is now live!

Some highlights include:

• Multifamily Market Outlook: Navigating 2025 with Jay Parsons

• Beyond Multifamily Panel: Diversifying into Niche Real Estate Opportunities with Ash Patel, Mike Mangione, Tyler Cauble, and Chris Hatch

• GP-LP Speed Networking: Fast-paced event for sponsors and accredited investors to share their opportunities and connect

• Capital Markets Panel with Ben Lapidus, Thomas Sherlock, and Charles McKinney

• Pitch Slam Competition: Watch 10 sponsors compete head-to-head for a $600,000 prize investment

• 'And much more!

🎉 To celebrate the release of our program, we're offering you 25% OFF your Conference ticket. Click the button below, and use the promo code program25 at checkout to get your discount.*

*Discount does not apply to already purchased tickets.

🚀 _{CRE TRENDS}
MOBS: THE BEST BET IN CRE FOR 2025?

Medical outpatient buildings (MOBs) could emerge as one of the hottest sectors in CRE in 2025, as CBRE projects that occupied MOB space will reach a record next year.

MOB investment activity showed strong recovery in Q2 2024, with volume reaching $2.5 billion (up 60% QOQ and 38% YOY), marking the first quarterly increase since mid-2022 and signaling potential continued growth as interest rates decrease.

Key factors driving the MOB sector’s momentum include:

• Aging Population: America's 65+ population will hit 70 million by 2030 (20% of total population), pushing healthcare spending up 31% to $2 trillion.

• Suburban Migration: New facilities averaging 26,500 square feet are moving away from hospitals and into residential areas, creating opportunities in suburban markets.

• Strong Fundamentals: Triple-net rents rose 14% YOY in Q2 2024 to $24.86/sf, with continued growth projected through 2026 and vacancy rates below 9.5%.

For investors seeking stability and growth, demographic trends, projections, and the growing need for essential services all point to MOBs as a high-upside sector in 2025 and beyond.

_{🏠 DEAL OF THE WEEK}
INDOOR MALL INVESTMENT SET TO PRODUCE 40% IRR AND 2.75X EQUITY MULTIPLE

Andy Weiner and the team at Rockstep Capital are aiming for a 40% IRR and 2.75X equity multiple return for investors on this 700,000 sq ft mall.

Here's how they’re doing it 👇

🏢 Property Details: This enclosed shopping mall was purchased in October 2021 and is located in Rapid City, SD. The entire property was 783,547 sq ft on 86 acres. There were 109 tenants in the mall and seven out parcels.

💸 Finances: The property was purchased for $12.1 million. The team raised $10.35 million in capital and secured a $9.95 million loan at a 4.25% fixed interest rate.

💼 Business Plan: The business plan was to sell the out parcels surrounding the mall (Olive Garden, Red Lobster, Texas Roadhouse, Motor Sports, Golden Ticket Cinemas, Hobby Lobby, 12-acre parcel in back) and the former Sears box store. Rockstep also budgeted to repair the roof and the parking lot, rebrand the property from Rushmore Mall to Uptown Rapid, and upgrade the food court.

They initially projected an 18% IRR net to investors with a 2.0x equity multiple over a 5-year hold.

💪 Biggest Challenge: A handful of national tenants on the mall's interior moved to a competing open-air center. The team has made a concerted effort to backfill those spaces with local and regional tenants and has had success with that effort.

🍾 Results: To date, Rockstep has sold all of the out parcels (except the 12-acre parcel) for just over $15 million. The roof, parking lot, lighting (interior and exterior), food court renovation, and fire panel system upgrades have been completed. As a phase two, they are in negotiations with a national home improvement store to acquire the 12-acre parcel and a national discount retailer to acquire the former Sears box for $5 million. Rockstep is working with city officials to provide incentives to complete the transaction with the national discount retailer, which would allow them to modernize the property and convert it into more of an open-air center.

They are finalizing a cash-out-refinance to return investor capital by February 2025. Upon completion of phase two (2028), they project the returns to exceed a 40% IRR and a 2.75x equity multiple.

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

_{🏠 EXPERT RESOURCES}
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