📉 Q4 Market Update: CRE Prices Slump

Hello, Best Ever Community!

In today’s newsletter, CRE prices take a dip, opportunity knocks in Texas, and one multifamily investor reveals how he increased his property’s value by $4.5 million in two years.  

Plus, if you haven’t already, we invite you to sign up for the Best Ever Book Club, led by Joe Fairless. We’re currently reading Living With No Excuses by Noah Galloway. 

Read on!

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TOP HEADLINES

🔮 The (Future) State of Multifamily: Freddie Mac’s 2024 Multifamily Outlook forecasts an uptick in average rent and as much as $380 million in deal volume, an overall positive outlook despite short-term headwinds.

💸 Priced Out: U.S. home prices rose for a record ninth straight month in October. Values climbed annually in 19 of 20 major cities in October as a severe inventory shortage spurred competition among homebuyers.

📉 Office Rents (Still) Declining: A CBRE report that analyzed more than 3,400 lease comparables across 12 U.S. office markets from 2019 to Q3 2023 showed that rents in Class A+/A dropped by 1.2% since 2022 while Class B/C fell by 3.9%.

💵 Multifamily Debt Tops $2.5 Trillion: Despite a pullback in borrowing, multifamily mortgage debt rose 1.3% ($26.8 billion) to $2.05 trillion from the second quarter to the third quarter of 2023.

🔥 Hottest of the Hot: Manchester-Nashua, NH, topped Realtor.com’s list of hottest housing markets in November, the fifth time the market claimed the top spot in 2023 (22nd overall). It has placed in the top three every month since February 2021.

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CRE PRICES DIP IN Q4, BUT THERE’S HOPE FOR 2024

Presented by:

In the words of analysts at MSCI Real Assets, “the commercial property markets are not roaring into the fourth quarter.” That’s the big takeaway from the company’s recent U.S. Capital Trends report.

🤔 Mixed Bag: Both October and November witnessed substantial YoY declines in commercial real estate transactions. November's deal volume dropped by 60%, bringing the YTD total to $323.8 billion, a 55% decrease from the previous year. On a positive note, The RCA CPPI National All-Property Index dropped 8.0% from a year ago, representing a narrowing of the annual declines seen at midyear. Compared to October, prices were flat, an improvement on the month-over-month drops of nearly 2% at the start of 2023.

📉 Major Decline: Every major asset class saw a decrease in deal volumes. Multifamily and industrial properties, which previously exhibited resilience, reported dramatic declines of 68% and 64%, respectively, compared to November 2022. The office sector, still recovering from pandemic impacts, experienced a 54% decrease in transaction volume, with Central Business District (CBD) office spaces facing a steep 76% yearly drop in sales.

🛍 Retail Resilience: Unlike other sectors, the retail sector demonstrated relative resilience, albeit in the context of the overall decline. Despite being the best performer in terms of annual sales growth, retail still faced a 32% decrease in transaction volume compared to the previous year.

📆 Year-end Recovery Unlikely: A significant rebound in December sales would be required to end the year on a positive note, with an almost improbable target of $110 billion in sales, a feat only previously achieved in December 2021 during the peak of pandemic-era transactions. This scenario seems highly unlikely.

➥ THE TAKEAWAY

☀️ Hope on the Horizon: The current state of the commercial property market is partly attributed to the inherent timeline of real estate deals, which tend to have a long gestation period. Deals closing now were likely negotiated months earlier under different economic conditions, including concerns about mortgage rates. There's growing optimism due to changes in the Federal Reserve’s monetary policy, but it's expected that the positive impact of these changes will only be visible in commercial transaction data by 2024 or later.

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FROM BV CAPITAL

Texas has become a top destination for real estate investors thanks to its thriving economy and attractive multifamily fundamentals. Major metros like Austin and Dallas-Fort Worth are magnets for corporate relocations and domestic migration, key factors behind the state’s surging job growth and housing demand. 

📈 Surging Population, Increased Demand: Since 2000, more than 9 million people have relocated to Texas, and between 2021 and 2022 alone, more than 650,000 people moved to the Lone Star State, according to Census Bureau data. Only Florida welcomed more residents during that time.

💼 Record Job Growth: Between September 2022 and October 2023, Texas’s employment grew by 435,800 positions as its annual growth rate of 3.2% outpaced the nation by 1.1 percentage points. During that time, Texas recorded historic milestones in job count, boasting 14 million total jobs.

🚪 Opportunity Is Knocking: According to GlobeSt.com, new multifamily construction starts have dropped across Texas from 2022 at a sizable margin. Houston multifamily starts have fallen by 79%, Austin by 74%, and Dallas-Fort Worth by 64%. With fewer units coming online and the migration to Texas showing no signs of slowing, this will create a future supply and demand imbalance that, to investors, can mean only one thing.

Opportunity.

👉 Read the full article here. 

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$4.5M MULTIFAMILY VALUE-ADD RESULTS

David Lilley added $4.5 million in value to this multifamily property in two years. Here's how he did it. 👇

🏢 Property Details: 136-unit, Class C multifamily property purchased in Dallas in 2021. 87.5% occupancy at time of purchase.

💸 Finances: Purchase price was $12,560,000 with $2,252,087 in capital raised. Bridge financing, three-year term with two one-year extensions at 4.35%, 0.75% rate cap for two years.

💼 Business Plan: Value-add improvements — new roof, exterior paint, and landscaping. Renovated 76 classic units. Replaced property management with Reap Management.

🍾 Results: Sold in June 2023 for $17 million. 1.86x equity multiple, 37.24% IRR. 94.85% occupancy at time of sale.

If you have a deal you'd like us to feature, share it with us!

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—Joe Fairless