6 Real Estate Insights from Q2 2024 and What They Mean for You

Cap rate compression, shifting construction patterns, and mixed market signals are defining the real estate investment landscape in Q2 2024.

Cap rate spreads are narrowing even as cap rates rise, resulting in real estate becoming less attractive compared to investment grade bonds for investors. Further, 2024 is seeing easier financing amid overleveraging concerns. While multifamily construction has slowed post-2023 peak, the asset class faces oversupply and rent pressure in many once hot geographies, and yet markets are correcting as single-family permits rise, while multifamily falls. Despite challenges, multifamily, in the most recent quarter, showed resilience in occupancy, NOI, and absorption. Lastly, architectural inquiries are up, but developers hesitate on new contracts, awaiting market stability.

Here are the top six takeaways from last quarter:

1. Spreads narrow despite rising cap rates, as bond yields move higher

Cap Rate Spreads

While cap rates mostly rose over the past quarter, apart from Office, investment grade bond yields rose more, causing spreads to narrow. With the highest cap rates and largest spreads, Office and Shopping Center appear to be the most attractive asset classes. Office’s challenges are well-known in the age of remote work, and after more than a decade of limited supply growth, Shopping Center valuations appear resilient and are potentially poised to grow.

What this means for you: Narrowing cap rate spreads indicate decreasing risk perceptions, reducing the appeal of real estate compared to investment grade bonds. If the Federal Reserve (the Fed) lowers interest rates, bond yields would likely follow, potentially resulting in commercial real estate spreads becoming more appealing. Investors should focus on properties with stable income streams or value-add potential, ensuring thorough due diligence and conservative valuations to mitigate risks in a volatile market.

2. Easing lending standards signal shift in 2024 commercial real estate financing

Lending Standards

In 2024, commercial real estate lending standards significantly improved as lenders became more comfortable with the current market, influenced by the Fed signaling the end of its interest rate hikes. Although standards remain tight relative to historical norms, this directional shift suggests that the most stringent lending conditions may now be easing for commercial real estate borrowers.

What this means for you: Looser (though by no means loose) lending standards will make financing relatively more accessible for borrowers. However, this could potentially ignite animal spirits should standards loosen quickly, thus inflating property prices and causing overleveraging. Real estate lending cycles are notoriously cyclical. Prioritize downside modeling in due diligence, conservative valuations, and maintaining adequate reserves to mitigate risks and ensure long-term investment stability.

3. Multifamily construction boom peaks as construction now declines due to oversupply

Multifamily Construction

The multifamily sector saw a construction boom in response to high post-pandemic occupancy and rent growth in 2021-2022, resulting in a record high of over 1 million multifamily buildings constructed in 2023. Since then, construction has quickly declined as the sector has become oversupplied.

What this means for you: The surge in multifamily construction, resulting in record-high completions, indicates a near-term potential oversupply, leading to increased competition for tenants and pressure on rents. We see this occurring in popular destinations, such as Austin, TX. Investors should assess local market saturation and prioritize opportunities where there has been limited supply growth to mitigate risks and optimize returns. While oversupply may pose challenges in the coming years, for those with longer-term perspectives, markets with expected population growth could offer compelling opportunities beyond this period due to constrained new supply after 2024. It’s imperative to manage balance sheets and loan-to-value ratios accordingly.

4. Housing permits reflect a shift as multifamily declines and single-family rises

Single-Family and Multifamily Permitting

Housing permits for both single-family and multifamily houses declined in 2024. However, over the past year, multifamily permits declined 23% while single-family homes rose over 11% as the supply/demand dynamics shifted in favor of single-family homes.

What this means for you: The shift towards single-family housing suggests potential decreased multifamily rental tenant demand in markets with significant single-family permitting growth. This could lead to lower effective rents and challenge profitability. To combat this, multifamily investors should scenario-plan for these impacts and consider investing in enhanced amenities to retain current tenants and attract new ones, thereby maintaining occupancy rates and competitive positioning.

5. The multifamily sector faces challenges but shows resilience in early 2024

Multifamily Snapshot

In 2023, the multifamily sector saw declining occupancy, NOI, and net absorptions as oversupply hindered demand. The oversupply brought increased competition for the sector, causing rent growth to stall and come down off previous highs. While one quarter does not make a trend, multifamily showed signs of resiliency, with an uptick in occupancy, NOI, and net absorptions.

What this means for you: The oversupplied multifamily sector has made its impact on profitability as rents stagnate and NOI growth, occupancy, and net absorptions declined last year. Investors should prioritize diversification, extensive market research, and selecting properties with stable cash flows and resilient demand to mitigate risks in this competitive landscape — especially in markets where supply grew most significantly between 2019 and 2023.

6. The impact of surging apartment construction on occupancy and rents

Architecture Billings Index (ABI) – National 3-Month Avg.

With a reading above 50 indicating growth and below 50 a decline, inquiries for architects have risen while contracts remain stagnant and billings decline.

What this means for you: Rising architectural inquiries indicate developers’ readiness to start construction, but the lack of new contracts shows they are currently hesitant, and securing financing may still be a challenge. This suggests that construction activity may remain subdued until supply conditions stabilize. However, given the high demand for housing, we can expect contracts and billings to rebound once supply concerns are resolved.

Disclosures

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.

This commentary contains certain forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.  No graph, chart, or formula in this presentation can be used in and of itself to determine which securities to buy or sell, when to buy or sell securities, whether to invest using this investment strategy, or whether to engage Aprio Wealth Management, LLC’s investment advisory services.

Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. Any securities mentioned in this commentary are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information. Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Securities are offered through Purshe Kaplan Sterling Investments (PKS), member FINRA/SIPC. Headquartered at 80 State Street, Albany, NY 12207. PKS and Aprio Wealth Management, LLC are not affiliated companies.  Certain investor qualifications may apply. Definitions for Qualified Purchaser, Qualified Client and Accredited Investor can be found from multiple sources online or in the SEC’s glossary found here https://www.sec.gov/education/glossary/jargon-z#Q.