I just finished listening to the Walker Webcast quarterly discussion with Peter Linneman. Both Joe and I like this podcast, especially the quarterly real estate discussion with Peter. I find it’s one of the more comprehensive and insightful ongoing discussions of the economy and commercial real estate.
For the most part, I agree with what Peter said this month. My main disagreement is that interest rates are too high, and the Fed is wrong about not reducing them sooner. Listening to Peter’s argument I hear so much about how good the economy is in every way, he thinks unemployment is still a little high (over 6% by his estimate). Given these facts wonder why the fed would lower rates at all. Moving too early might create the need for more aggressive pain in the future and with limited pain now they should be patient. Keep the powder dry for when it’s necessary, so to speak. When they do move, I think the drop will be small (50-75 bps/ 2-3 moves), maybe bringing down the 10-year to the mid 3’s. This would put multifamily rates in the fives, based on my experience a pretty normal rate.
During this discussion, Willy wondered if our current data is squeezed because of the high level of income inequality and the statistical averages being impacted. Peter disagreed, but I think there is something to this. The dramatic income inequality we see today is a driver of many things and I would love to see some more analysis and data on this issue.
As for multi family values I still see them as slightly elevated but getting closer to “fair value”. Last year it seemed prices were about 20% higher than our underwriting. Based on what we have been looking at this year they are still high, but only 10% or so over “fair value”. Value adjustment because of macro issues usually take a long time so as a buyer we just need to be patient.
During Q1 2024 we looked at 61 transactions, 8 of those we fully underwrote. We made an offer on 2 and put nothing under contract. On the positive side we are seeing better real estate come to the market. Real estate in better locations and in better condition. Not all of these transactions are going under contract, proving there is still a disconnect between buyers and sellers, but at least this real estate is something to get excited about.
We are also seeing press reports of large deals getting done at reasonable prices. So far, I have not seen that flow down to the under $25 million properties, but I expect that will happen sometime this year or next. We just have to be ready and in the right place at the right time.
I started this post mentioning the Walker Webcast. Look at the article, below, which outlines some of the podcasts we are listening to on a regular basis. If you have others, you think we should follow, please let us know.