Colorado-Real-Estate-Journal_429145
Page 12 — Multifamily Properties Quarterly — November 2024 www.crej.com INVESTORS T he Federal Reserve’s 50 basis point rate cut on Sept. 18 marked the end of a 30-month tightening cycle and the start of a new chapter for investors. After an extended period of rising interest rates, the Fed has pivoted, set- ting the stage for the next phase in the market. While the precise pace of future rate cuts and the movement of the longer end of the yield curve remain unclear, the trend toward lower interest rates on the short end of the curve seems certain (See Chatham Financial chart). For many investors, this shift is a welcome relief. As confidence grows that property val- ues have already hit bottom, buyers are reentering the market, eager to capitalize on forth- coming lower bor- rowing costs. The “Great Tightening” may be over, but the next challenge is navigating the opportunities that come with this new phase. n The impact on real estate pricing. With the Federal Reserve's rate cut, a critical shift is happening – inves- tors are beginning to reassess what they’re willing to pay for properties. Lower interest rates enable buyers to pay more for assets and achieve the desired return profile. This is par- ticularly true when it comes to the reemergence of positive financial leverage. In this environment, posi- tive financial leverage will become a pivotal driver of increased transac- tion volume in 2025. Property prices, which had soft- ened during the last two years, are now poised for a rebound. As capi- tal becomes cheaper, we will see a renewed ability for investors to make the numbers work, reigniting the market. (See Bloomberg chart.) n Capital waiting on the sidelines. The U.S. has more available capital than at almost any time in his- tory, and this liquidity will play a significant role in shaping the next few years. Money market fund bal- ances are soaring to unprecedented levels, stock markets continue to bounce around record highs and U.S. Treasurys have accumulated to unmatched levels. Even gold, tradi- tionally a safe haven in uncertain times, is near historic highs. (See Pimco chart.) While much of this capital has been parked in safe, short-term instruments, the dynamics are shifting. As the fed funds rate falls and money market yields shrink closer to 3%, we’ll see trillions of dollars moving out of low-yield accounts into investments that offer greater returns. Real estate is well-positioned to capture a part of this influx of capital, especially as investors look for opportunities that align with their appetite for risk and return. n “Stay alive until 2025” becomes “Stay alive until 3.5.” There’s a phrase circulating among investors: “Stay alive until 2025.” But I’d argue this phrase should be updated to “Stay alive until 3.5,” a reference to the anticipated drop in money mar- ket yields to the mid-3% range by sometime in 2025. When this hap- pens, the flow of capital will change dramatically, as investors who are currently content with the safety of low-risk investments will once again chase higher returns. This influx of capital into real estate will coincide with a gradual absorption of new multifamily sup- ply. It’s important to note that while we’ll continue absorbing new devel- opment throughout 2025, it will likely take a couple years of rent growth before we see a major shift in development activity, resulting in low new supply in 2026-2027. n Looking ahead: The election and market stability. By 2025, the election will be behind us, and assuming a divided government, we will likely avoid any major legislative changes that could disrupt the market. This will remove a significant layer of uncertainty and allow both investors and developers to take risks again with a clearer sense of the political landscape. With the combination of lower interest rates and a stable political environment, I believe we’ll witness a strong resurgence in the real estate market. n Riding the next wave. The Sep- tember rate cut is a clear signal that we’re entering a new phase in the market, and it’s a shift that inves- tors should be prepared for. As rates continue to fall in 2025 and capital becomes cheaper, we’ll see a surge in real estate transactions, driven by improved financial leverage and the availability of capital. We may still have some turbu- lence ahead, particularly as we absorb new supply and navigate the political landscape. But the current is turning, and for those who are ready, the next wave of opportunity is here. Now is the time to position for growth as the market begins to move in a new direction. s kevin.brinkman@brinkmanre.com What September Fed rate cut means for investors Kevin Brinkman Founder and CEO, Brinkman Real Estate Source: Chatham Financial; https://www.chathamfinancial.com/technology/us-forward-curves Source: Bloomberg; https://www.bloomberg.com/news/articles/2024-09-24/commercial-real-estate-activity-picks-up-with-buyers-lenders-returning Source: Pimco; https://www.pimco.com.sg/en-sg/insights/economic-and-market-commentary/pimco-perspectives/the-cost-of-cash-a-6-trillion-question/
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