What Effect Will Interest Rates Have on Real Estate Returns?

Speaking of interest rate changes, you know, a few months ago, kind of the markets and were predicting that there'd be maybe three interest rate cuts on the short term interest rates that the fed controls in 2024. More recently, they're talking about maybe not being able to cut rates at all in 2024. Do you expect that to have a negative effect on real estate returns in 2024?

Yeah, I do on the common equity side. I don't on the credit side. And that's why investors have choices and we really see the opportunity on credit side. And it's hard not to root for a great economy. I can't find myself doing that. I mean, if the Fed can magically engineer a soft landing, that would be absolutely incredible. We would love that. But I don't know if that will happen. I feel like the Fed always does something until we figure out where the risk out there, then something breaks and then we go into recession. But I do believe that the Fed is going to do their job. They're going to get inflation down. We're going to start to see this rates come down by the end of the year. And one of the big components I mentioned this earlier in inflation are housing costs. And part of the housing costs are rent. And you're seeing single family homes at least stabilize in some areas, but rents actually coming down significantly depending on the market you're in itself. But that takes a while to run through the inflation numbers. But we're going to start to see that and even the Fed is waiting to see that take place this year. So I think rates will be lower by year end and it should help alleviate some of the interest rate costs and cap rate expansion that we've seen the last couple of years, whether or not there's a complete turnaround for real estate. The only thing I look at to get a great indicator of that is I watch a lot of the public REITs. Public REITs tend to be great leaders of what's going to happen in the future. So we look at these public REITs in the multifamily space that overlap our areas and so far they're just sort of sitting on their 52 week lows right now or very near them. So that could change quickly though.

Yeah, yeah, I've definitely noticed, you know, as I look at the quarterly reports from my various investments, you know, multifamily investments are often seen rents going down a little bit lately. Values of those properties, the ones that at least mark them to market periodically, you know, slight decreases quarter over quarter and So I think you're right. I think we're seeing at least a little bit of a recession for multifamily investors. And hopefully that means we're talking about buying opportunities now and in the near future. But it certainly affects investor returns for those who already own.

Yeah, I think it will. I think that as you know, again, nobody has a crystal ball. But if I'm looking out six months, and the thing I mentioned earlier was negative carry, I do see a world where the carry at least goes neutral, which would benefit investors greatly or even slightly positive, where you can borrow for less than the cap rates. And I think there's a real chance here, and I've said this to a lot of investors in the past, that you really haven't had any multifamily properties sold for two years and there's a lot of investors out there who want to sell. And I think that what could conceivably happen, and this has happened, in other words, periods like this, this happened in kind of 08, 9, 10, 11. Those periods, is that you have this overhang of pent up sales that are going to happen in the face of improving fundamentals. And so by the end of 2024, if we get lower rates, you're actually going to see higher supply and potentially even lower prices because of the amount of sales, which could create a great buying opportunity. Because when you look at the arc of any cycle, if you have an overhang of people who are selling into improving fundamentals, that creates a great, great environment. And we haven't bought in four years. Jim, you know, any more stabilized deals? We've done a lot of ground up development, but that could be our cue to sort of jump in.

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