November 2024: Fed Cuts Again, CRE Confidence Climbs, and Multifamily Finds Its Footing
As 2024 winds down, the rate-cut cycle and renewed capital activity suggest a turning point. The multifamily sector is showing signs of strength—and the smart money is already moving in.
Isn't it a little late for the November update? Yes.
Admittedly, we've gotten into the habit of waiting on the monthly data (like jobs, inflation, etc.), which has caused delays. Moving forward, we anticipate sending these out at the end of the month.
With that said, as the year rolls to a close, the "Survive Till '25" mantra seems to be uttered less and less. Maybe it was a way for firms with floating rate exposure to push their mindset into the future and avoid locking in losses, and maybe it was the forever optimist's way of picking a date far enough in the future where they could predict change.
The upcoming wall of maturities for "Extend and Pretend" underwater sponsors has increased 25% over the last year, peaking at $5.4B in October 2025.
As it all shakes out, maybe the new kick the can moniker is "Survive Through '25"...
We'll see.
MARKET INSIGHTS
As widely expected, November kicked off with a 25bp Fed cut (and it followed with another 25 bps in December), and the 10Y fluctuated throughout November, but ultimately closed down just 2bp on the month. In their November statement along with the cut, the Fed stated "labor market conditions have generally eased".
November non-farm payrolls showed an impressive +227,000, but we remain concerned. The household survey shows employed persons down 355,000. Diving deeper, multiple job holders was up 275,000, and 883,000 fewer Americans hold jobs versus this time last year. "Eased" for sure.
Producer Price Index (PPI) was up 0.2% in October, versus 0.1% in September, or 2.4% annualized. Core PPI was up 3.1% on an annual basis, up from 2.8% in September. Larry Summers pointed to this stat, as well as October's 3.3% annualized core inflation to support a concern that "The Fed and markets are still underestimating the overheating risk".
With prices rising, and jobs showing serious underlying risk, the Fed has worked themselves into quite a corner. In 2025 we may get a chance to see which part of the Fed's dual mandate (price stability and maximal employment) truly drives decision making.
2025 should be exciting!
INDUSTRY INSIGHTS
PwC and the Urban Land Institute have declared "The Skies Are Finally Clearing over Commercial Real Estate" in their 2025 Emerging Trends report. They are calling the start of a new bull cycle, while predicting interest rate cuts that typically fuel a struggling economy pushing the sector higher.
As macro factors remain firmly uncertain, commercial real estate has continued to gain favor among the large investment firms. General CRE sentiment in 24Q4 hit its highest level since 2021. The consensus seems to be that there will be a resurgence in the multifamily space, the question is when the outsized deliveries will slow down, and the resurgence will begin (Starts are down 50% in Q3 to the lowest levels since 2013, and vacancy fell to 5.3%, so has it already started?)
ECI Group has partnered with Almanac to invest $350MM of equity in Sunbelt multifamily, along with an additional $250MM in private lending alongside Smith Hill Capital. The total AUM growth from the two partnerships is expected to be $3B over the next 3-5 years.
The large apartment REITs see an end to the supply glut, with MAA underwriting a Sunbelt rental recovery as early as this spring, and Equity Residential spending $1.26B in 24Q3 on 14 new acquisitions after doing just 1 deal in the first half of the year. Invitation Homes also increased its forecast for 2025 after a strong Q3.
Brookfield raised $21B in Q3, $14B of which was from its credit arm, to capitalize on "growing investor interest in alternative financial products".
Standard Communities closed on a $1B affordable housing portfolio of 6,000 units across 60 communities.
Evergreen has raised over $1B for residential real estate investment to capitalize on the "institutionalization of the residential asset class".
TPG Angelo Gordon is targeting a new $2T addressable market, homeowners borrowing against their appreciating home equity without refinancing, due to higher rates.
Transaction volume stabilized at $90B in Q3, down just 2% Y/Y, and we expect to see volume increasing again as conviction grows and larger players continue to re-enter the space. Core & value-add multifamily cap rates fell in Q3 to 4.90% and 5.19% respectively, as Q3 net multifamily absorption hit +153,000 units, the second highest quarter since the CBRE study was founded in 1985.
OTHER THOUGHTS
Knightvest's multifamily sentiment report expects long-term renting to become the new normal for Gen Z. Drivers included no longer viewing homeownership as a status symbol, high cost of ownership, and lower maintenance responsibilities associated with renting. This should continue to provide strong demand in the space for years to come.
WSJ has seen a large increase in rental property investment amongst the ultra-wealthy, as 36% of those with over $5MM in investible assets have diversified into residential rental properties in 24Q3, up from just 23% in Q2.
If you want to want to discuss this trend and are interested in hearing more about our next deal, reply to this email or schedule some time with me before the holidays to capitalize on the start of a new market cycle!
As always, thanks for your support.
Thank you,
Will Matheson