April 2024: Fed Rate Hikes and Market Shifts

Last month we wrote about how Jerome Powell and the Fed had decision paralysis and couldn't make up their minds about whether it felt inflation had slowed enough to cut rates, or if it was persisting strongly enough to keep rates high. Well, if it was hard enough to decide between the two, try adding in a third option.

While dismissing them as unlikely, Jerome Powell put future rate HIKES on the table at his conference following this month's Fed meeting, something that wasn't even an afterthought just last month.

So, is this a ploy to get the market to cool off? Or is it a way to prep the market for even more hikes? Only time will tell.

CLOSING SOON - RESIDENCES AT ST. GEORGE

We are set to close Residences at St. George, our 248-unit value-add multifamily project in Savannah, GA on Friday. We are very excited about this project for many reasons, but the big highlights are summarized below:

• Assumption loan with 2.95% fixed rate debt through 2032.
• Proven value-add upside with 44% of units in classic condition.
• Excellent basis of only $157k / unit, lower than numerous recent trades that required new financing.

If you would like to learn more about this opportunity, you can click the link here, or email us at investors@mathcap.com.

‍MARKET UPDATE

What drove a previously unthought-of option into consideration? We got March PCE reports this week that showed overall PCE was up 0.8% M/m, and core PCE on a 3-month annualized basis is now 4.4%. Core inflation also ran hot, at 3.8% Y/y in March. Fed watchers agree this nearly eliminates any chance of a rate cut before July and makes previous Wall Street estimates of 3 cuts in 2024 unlikely.

March nonfarm payrolls outperformed, 303k versus 200k expectations, supporting higher for longer interest rates (even though jobs don't cause inflation, the Phillips Curve is wrong, etc.), but with half of US residents reporting that they struggle to pay for housing, is a higher jobs number driven by Americans seeking extra part-time income to just retain their existing lifestyle really a bullish sign?

PORTFOLIO RECAP

At Cooper Bend, we completed the 5 renovations that were underway in March and put all 5 out to market for lease. We're seeing a $133 / month increases on newly renovated units.

At Summers Run, we've now completed 24 renovations, and have 4 more in progress. We are achieving $185 / month renovation uplift over our last 5 leases, exceeding pro forma expectations by over 16%.

The rest of our portfolio is stabilized, so we're not actively renovating units at those properties.

WHAT WE ARE LOOKING FOR

Our focus continues to be on distressed assets or loan assumptions. Traditional acquisition financing for value-add deals is still challenging, so we'll continue to look for opportunistic buying opportunities to pay market rates for assumption loans, or target assets that were purchased at peak pricing where sellers are ready to exit at a loss, or where seller business plan is driving a sale.

MARKET INSIGHTS

A sign of hope to come, Blackstone announced this month a $10B all-cash acquisition of Apartment Income REIT Corp (AIR Communities), a portfolio of 27k units across 76 properties, primarily in coastal US markets. Markets are likely to see this as a signal that Blackstone believes the market has bottomed.

Speaking of bottomed, we're hoping that we've reached the bottom, as multifamily deal volume is down 25% Y/y, CRE lending volume is down 47% so far this year, and apartment starts are down 43% Y/y.

We've started to see some more signs we may be turning around, despite the Fed holding rates at the highest levels since 2001.

- Rents were up $8 in March, the largest monthly gain in 20 months

- Construction cost rise is decelerating, now below 6% Y/y

- Q1 apartment demand jumped, from 49k units of absorption in Q4 to 104k

- CBRE reported improved cap rates and IRR targets for the first time in 9 quarters

- RealPage adjusted its 2024 forecasts for apartment rent growth after a strong Q1

- NC pension funds announced $527MM in new commitments to PE Real Estate

As we start to recognize signs of a turnaround, institutional investors are increasingly considering private placement investment in search of higher yields and diversification. Barings sees the sector continuing to grow as more accredited investors look for exposure.

As always, thanks for reading, and we hope you enjoyed this update.

Thank you,

Will Matheson