The past year was challenging for many in the real estate market. I recently sat in on a discussion from the heads of the #1 real estate brokerage in North America to discuss how we can use last year’s lessons to get the upper-hand in 2024.
First, market ups and downs are built in. When times are tough, it feels like forever…
When really it’s 2-3 years. Real estate is not a ‘get rich quick’ sector. Big-picture thinking and patience is key (… so is protecting what you have when times are tough)
Reviewing some statistics from 2023:
- Sales were down 43% from the peak in 2021.
- Many got taken by surprise by the rapid FED rate hikes, which were the fastest in history.
That is very important for us to let sink in. The results of this rapid rate increase was immense. For example, margins on deals got smaller, it was harder to find good deals, and some investors saw their cash flow dry up. The term ‘capital call’ — meaning when you have to add more money to a deal that is in trouble — became commonplace.
In 2023, for both commercial and residential real estate, it became a dance between conflicting seller and buyer expectations. Sellers continued to expect 2021 prices, while buyers were unwilling or unable to pay that amount. This stalled the market.
What happens next? Well, some sellers can’t afford to keep their properties because of the operating costs — and this is what we’re looking at for 2024 – distressed properties coming to market at discounted prices.
If you’re looking to get into real estate investing, this is an opportune time and it may not last. News outlets are already speculating that rates will decline this year.
Another main talking point was the lack of new inventory in some markets because of high construction costs. In certain areas, new assets won’t become available until 2025ish. Which pushes up demand due to lack of supply. Which, I might add, was already limited as there continues to be a massive affordable housing shortage in America.
The high cost of construction means less new units are available, translating into higher rental rates. In the multifamily real estate space, this means values increase because value in this sector is based on the Net Operating Income (NOI) not comparable property sales.
Now that we’re in 2024, the big talk is Feds reducing interest rates. This should boost activity in the market again. A very interesting insight from Jason Hartman, CEO of Empowered Investor – he stated that ultra-low mortgages of the past have created a ‘lock-in’ effect. Meaning, a mortgage has become an asset because if someone sells the property, they lose their low rate. So, many won’t sell.
According to Jason, 140 million single-family homes have cheap mortgages. Since the cost of money skyrocketed, only 4 million transactions have occurred meaning 136 million houses are not affected by the higher rates. In layman terms, people aren’t letting go of their great rates. Transaction volume is low, values are going up, and there are more people renting than buying.
For investors in real estate, it’s great (philosophically, not so much when you look at housing affordability).
Jason gave a simple calculation: 1 million new tenants are created for every 1% decline in homeownership ability. So while multifamily transactions are down 70-80% in some areas this year, it’s a small blip in a massive macro trend of a growing renter nation, which spells incredible returns for real estate investors.
For 2024, there are two words being used to summarize the real estate sector: cautious optimism.
Despite last year’s challenges, the multifamily market in particular is poised for huge opportunities. If you’ve been sitting on the sidelines thinking about investing, this year is the time to jump in and take advantage of deals that ‘had’ to hit the market (meaning not by choice and at a great price). As they say, “short term pain, long term gain.”
- The real estate market faced challenges in 2023, with sales down 43% from the 2021 peak and rapid FED rate hikes.
- Margins shrank, good deals were harder to find, and some passive investors experienced cash flow pauses.
- Market activity, especially in multifamily, was down 70-80%, leading to a dance between seller and buyer expectations.
- Distressed properties may become available in the new year, presenting opportunities for investors.
- Limited new units coming online may drive rental rates higher, increasing the value of commercial real estate.
- Federal interest rate reductions in 2024 could boost market activity.
- Many homeowners with ultra-low mortgages are unlikely to sell, leading to low transaction volumes and increasing real estate values.
- Cautious optimism is advised; 2024 presents a good time for investors to take advantage of real estate deals.