5 Trends to Consider when Making Real Estate Investments in the United States in 2024
The year 2023 was characterized by global changes which affected the costs of capital significantly. A combination of rising inflation, high interest rates, regional political turmoil, disruptions to the global supply chain against the backdrop of the war in Ukraine, and tensions between China and the United States, led to uncertainty in markets, a fall in transaction volume, and rising prices.
Conversely, low unemployment rates and a strong economic starting point in the United States curbed the negative trends thereby preventing a significant slowdown in the economy. A recession predicted by some economists was in no hurry to materialize.
In Israel, the legal rebellion, the damage to the high-tech sector and the accursed war towards year’s end impacted heavily on the national mood and the economy against the background of huge national expenditures with a deficit expected for years to come. As a result, many Israelis are continuing to seek ways to invest in private equity real estate in the United States and western Europe.
Today, it is more difficult than ever to foresee the future and yet, we are harnessing our knowledge and that of our partners together with economic research studies in order to indicate the trends most likely to influence real estate investments in 2024.
1. Inflation, Unemployment and Interest Rates
2023 started with annual inflation of 6.5%, a short-term interest rate (Federal Fund Interest Rate) of 4.5%, an unemployment rate of 3.5% and grave fears of a recession and a significant deterioration in the economy. The year ended with annual inflation of 3.1%, a short-term interest rate of 5.5%, a low unemployment rate of 3.5% and grave fears of a significant recession which were not realized in the year 2023, although they may still materialize, according to some forecasts. From the most recent Federal Bank meeting and according to market estimates, it appears that the interest hike period that commenced in March 2022 has ended and that in 2024 the trend is expected to overturn with a fall in interest rates, even if only a slow one.
The yield to maturity of ten-year US government bonds, which already passed a 5% threshold in calendar 2023, recently fell below 4% and is expected according to the estimates of global research company CBRE to fall further in 2024. Despite the still present concerns about higher-than-target inflation and a certain economic slowdown, it seems that the continued decline in inflation, the strength of the labor market in the United States, and the expected fall in interest rates, could create an attractive environment for real estate investments in calendar 2024.
2. What is the Right Price? Buyers and Sellers Have Not Yet Reached Agreement
The dramatic increase in the interest rate and economic uncertainty are affecting the value of properties, but the property owners are in no hurry to realize losses as long as there is no necessity to do so – necessity which usually arises with expiry of a loan or the end of a fund’s lifespan. In 2023 there was a sharp fall in the scope of real estate transactions relative to previous years. In Europe, the fall was particularly steep, and the volume of real estate transactions fell close to the low point of the years of the great financial crisis.
In 2024 the picture is expected to become clearer. About one trillion dollars of loans backed by commercial real estate are expected to be up for repayment in the years 2024-2025, most of which were taken at low interest rates and at higher leverage rates than is customary today. The need of property owners to refinance at high interest rates, or else to buy expensive interest rate protections, will oblige a growing percentage of property owners, either voluntarily or through coercion by the lenders, to adjust the property prices to the new environment, and a price discovery process is expected to generate investment opportunities for experienced entrepreneurs with financial capabilities.
Looming US loan maturities
Maturity dates for loans backed by commercial real estate in the U.S. by the date on which they were drawn down where most loans originated in years when the interest environment was particularly low.
3. An Unprecedented Gap Between the Average Rental Cost of An Apartment and The Average Cost of Owning One
The combination of an increase in private home prices in recent years along with the doubling of interest on mortgages, has led to an unparalleled gap between the monthly cost of maintaining an average apartment (mainly consisting of mortgage payments, insurance and taxes), and rental prices. This gap increases the demand for multifamily properties by renters who cannot afford to purchase an apartment in which to live thereby supporting the stability of investment in this sector.
In the charts below, one can see that in 2023 only 25% of the population in the U.S. could afford to buy a median-priced home, compared with about 45% or more in most of the previous years. One can also see that maintaining ownership of an apartment is on average about 70% higher than its rental.
4. Watch Out for The Cost of Insurance
Climate changes are casting an increasingly dark shadow on the planet. In 2023, several climate records were broken, and scientists expect that it will be the hottest year since records began. Real estate assets, by their very nature, cannot be moved and such investment is made for the long term, therefore making them more vulnerable to the effects of climate change and even more so in certain regions whether due to the asset’s physical location and/or applicable regulatory changes. Another aspect, which is more immediate than changes in the weather, can be found in insurance costs. If extreme weather events escalate, as some scientists predict, insurance outgoings are expected to increase as is already evidenced over the past two years.
Data from MSCI U.S. show that insurance expenses as a share of income have doubled and more in the last five years. In the graph below, which refers to multifamily properties, one can see that the rate of growth in insurance premiums in the most recent year (through to the end of Q1 2023) were more than 20% higher in the U.S., while in the coastal cities, which are more prone to bad weather, they were as much as 40% higher. Insurance expenses are an important parameter when taking new investments under consideration, while for experienced asset owners with asset diversification and large portfolios it may be possible to significantly reduce these costs through joint policies for a portfolio of assets.
5. The High Cost of Construction of New Projects Led to a Fall in The Number of Constructions Starts
Rising construction costs, higher interest rates, and tougher financing terms make it difficult for entrepreneurs to raise capital for new real estate construction starts. CBRE forecasts that the scope of new multifamily construction starting in 2024 will be lower by approximately 45% relative to the pre-Covid pandemic period, and by about 70% from the record figure logged in 2022. In the field of industrial and logistic properties, the volume of construction starts in 2023 decreased significantly, falling below the long-term average with expectations that it will drop further in 2024.
Although in 2023, there was an increase in the supply of multifamily and industrial properties, which is expected to continue in 2024 in light of construction completions arising from the accelerated starts in 2021-2022, the current fall in construction starts will mean a huge decrease in new supply entering the market in 2026 and beyond, which may support an accelerated recovery in some markets, high occupancy rates and rent growth beyond the long-term average.
Summary & Final Thoughts
Some investors react to uncertainty and high interest rates by diverting investments towards short-term risk-reduced investment avenues currently offering higher interest rates than in the past. Past experience shows that the vast majority of investments made during downturns and periods of crisis have produced significant excess returns over time.
2024 may well provide investment opportunities in the real estate market at attractive prices to experienced investors who look at the long-term. It is important to remember: Even in a market in crisis, the price is only a starting point and is never an alternative to professional and responsible management of the investment.