6 Real Estate Insights from Q3 2024 and What They Mean for You

As we move through Q3 2024, the real estate market is showing signs of significant change.

Cap rate spreads are beginning to reveal potential opportunities compared to other investment options. In the multifamily sector, future supply growth appears limited, yet some high-growth markets are experiencing rent declines due to oversupply. At the same time, industrial markets are seeing a normalization that could impact investment strategies moving forward.

We dive into each of these shifting dynamics below, providing a closer look at what they might mean for investors and asset managers in the months ahead.

1. Cap Rate Spreads Widen as Bond Yields Move Lower

As bond yields dipped this quarter, the spread between cap rates and bond yields has widened. This provides a more favorable environment for real estate investments compared to fixed income investments.

What this means for you:

Widening cap rate spreads suggest that real estate may offer better risk-adjusted returns relative to certain bond investments. Investors should increasingly consider real estate opportunities, including in select office and retail sectors, where cap rates remain high.

We believe high quality (e.g. Class A) and appropriately amenitized offices may provide compelling future returns, as companies continue to push employees back to the office, taking a cue from Amazon’s recently announced return to office policy.

2. Oversupply of Multifamily Housing Slows New Construction

Multifamily buildings under construction

Multifamily construction has significantly slowed as developers react to oversupply in the market. While demand for multifamily remains steady, the excess inventory continues to weigh on rent growth and absorption in key markets.

What this means for you:

Investors should exercise caution in oversupplied multifamily markets. For investors considering deploying capital into multifamily, there may be bargains in acquiring assets to relieve existing asset owners’ stressed balance sheets.

For existing owners, focus on enhancing property value through amenities. We believe targeting areas with limited new construction can provide a competitive advantage.

3. Demand for Multifamily Housing Remains High, But Oversupply Looms

Multifamily Snapshot

The demand for multifamily units remains robust, particularly in growing regions. However, oversupply continues to pose challenges, particularly in urban markets where rent growth has stalled.

What this means for you:

Investors should monitor regions like the Midwest, where rent growth remains strong, while the Southeast struggles due to oversupply.

Identifying markets with resilient demand and constrained supply will be key to optimizing investments.

4. Rent Growth Trends Diverge by Region

Rent Growth by City

Rent growth is showing significant regional divergence. While the Midwest is experiencing stronger growth, the Southeast is facing lagging performance due to an influx of new inventory.

What this means for you:

As all real estate is local, investors should focus on market-specific analysis, particularly in regions where rent growth is projected to continue.

Understanding local dynamics will be essential for making sound investment decisions.

5. Industrial Real Estate Adjusts After Post-Pandemic Surge

Industrial Snapshot

The industrial real estate sector saw sharp growth during the pandemic, yet it is now reverting to more normalized levels. Fundamentals remain strong with positive net absorptions, primarily driven by logistics and warehousing needs.

What this means for you:

The industrial sector continues to offer long-term value.

Investors should look at logistics hubs and areas with strong infrastructure to capitalize on sustained demand in the sector. We expect these trends to continue as the eCommerce sector’s market share grows, as evidenced by companies competing on reduced delivery times and supply chains moving towards  increased on- and near-shoring.

6. Multifamily Sector Continues to Lead in Net Absorptions

Net Absorptions

While many real estate sectors face challenges, multifamily remains a leader in net absorption rates. Despite the oversupply, the demand for multifamily housing continues to drive positive absorption in many regions. As housing affordability remains an issue for many, it forces greater demand for rental units.

What this means for you:

Multifamily still presents strong investment opportunities, particularly in regions with robust population growth. The key is to focus on recent and expected supply growth. 

Investors should focus on markets with resilient demand to offset the risks posed by oversupply.

This commentary is brought to you by our advisors at Aprio. Contact our team today.

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Investment advisory services are offered by Aprio Wealth Management, LLC, a Securities and Exchange Commission Registered Investment Advisor. Opinions expressed are as of the publication date and subject to change without notice.  Aprio Wealth Management, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. This commentary is for informational purposes only and has not been tailored to suit any individual. References to specific securities or investment options should not be considered an offer to purchase or sell that specific investment.

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