Commercial real estate dislocation can generate deals once every decade

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Matias Recchia is co-founder and CEO of keywaythe commercial real estate technology platform designed for small and medium-sized businesses.

The ever-changing real estate market landscape has undergone significant shifts in recent months, with higher borrowing costs and wide bid-ask spreads leading to a temporary pause in the bustling commercial real estate investment activity. However, despite the macroeconomic backdrop, savvy institutional investors with stable capital can close deals once every decade, especially in small-scale commercial real estate

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The multi-family option

As an example, let’s look at the demand for multifamily housing in Dallas, Texas. For the past two years, multi-family sales in Dallas have led the country $44 billion in total sales, indicating the fast-growing demand for multi-family homes to cater to the region’s hardy residents job growth.

The strength of the housing market, which remains relatively resilient, has benefited from continued demand headwinds and limited supply, which continued to drive steady year-on-year price increases. While typical US home values ​​fell slightly from December to January (floating at $329,542), US home prices are still 6.2% higher than a year ago.

Housing availability and affordability remain a problem. At the 2023 International Builders’ Show, housing economists blamed it high construction costs, a sluggish economy and rising mortgage rates for causing recent declines in new home sales and construction. According to the National Association of Home Builders, more than 18 million households were priced out of the market in 2022 as interest rates rose steadily from 3% to 7%.

This dynamic is compounded by existing homeowners who took out their mortgages two to three years ago when rates were low. During 2020 and 2021, $5.5 trillion (registration required) in mortgages were refinanced. I see that homeowners who have borrowed at these relatively lower rates are not inclined to sell now because refinancing would equate to a significantly more expensive new loan.

I believe this macroeconomic dynamic lays a strong foundation for the multi-family sector, where those who continue to be priced out of their own homes, coupled with a burgeoning population of young adults forming households, are fueling demand for rental housing.

Small-scale commercial real estate: Impending debt maturities

Small-scale commercial real estate, particularly in multi-family homes, offers an attractive investment opportunity that I’ve found largely ignored by institutional investors. How do investors access this subsector?

First, with asset information difficult to access, technology is essential to aggregate data and centralize information to make better investment decisions. From sourcing and underwriting to transactions and management, technology can streamline the investment process. For example, my company, Keyway, uses AI and machine learning to make deals faster, smoother, and more efficient for commercial real estate stakeholders. It is my belief that technology-leading real estate investors will have a competitive advantage in building and scaling commercial real estate portfolios.

Second, there are also concerns about looming debt terms and the prospect of tighter lending across the commercial real estate spectrum. Many owners of small-scale commercial real estate will need to refinance debt in the coming year, which could lead to financial pressure on their balance sheets and possible asset sales. However, I believe that this event-driven disruption may create a buying opportunity for investors with stable capital, as these property owners may be forced to sell their assets at a discount.

Hood rates increased in the second half of 2022 and further increases are expected in 2023. I think investment activity is likely to be more modest in the first half of the year before accelerating in the second half. This presents an attractive opportunity to pick up these properties at reduced prices and a position for long-term profit.

Will there be a “blood in the water” scenario similar to the Great Recession? I do not think so. However, the rate caps expiring will be an incentive to sell for some owners, and a lack of demand will lead to great deals across multiple industries.

How to choose the right deal

Investing in real estate means making predictions about what will happen with cap rates, demand and other factors. Smart investing also means making concrete decisions based on imperfect information. In this case, the future of interest rates remains a big unknown. Whether the Fed decides to continue cutting rates or hold on and hope for a labor market slowdown, it is clear that conviction-driven investors will continue to generate returns in markets with strong fundamentals.

This is an area where job and population growth is an important metric to watch, especially in emerging markets like the Sun Belt. While interest rates may make some deals look less favorable, there are still opportunities for investors despite the high cost of financing.

If investors focus on core fundamentals and find profitable acquisitions in asset classes such as small multi-family homes in regions supported by job and population growth, opportunities are obvious despite the current macroeconomic headwinds.


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