The Compass Spins Toward New Horizons

Where is this all headed? The first hours of the new administration did not bring about sweeping, immediate tariffs. Investors breathed a sigh of relief. But now the threat of universal, aggressive tariffs is back. Maybe? The mixed macroeconomic signals go well beyond the bluster of a new administration.?

Inflation seems on the verge of flaring back up, yet the most recent figures came in below expectations. Collectively, the real estate industry has signaled optimism about a deregulatory, growth-oriented regime. Yet transaction volume has not yet taken off. (The National Multifamily Housing Counsel’s Sales Volume Index, a measure of transaction appetite, fell from 67 to 41 quarter-over-quarter — the first drop in the metric in over a year.) Treasury yields have skyrocketed, and mortgage rates are accordingly stuck around the high point of this cycle.?

With another jobs report reading, the economy still very much appears on track to realize the “soft landing” dream. From the Chief Economist at LPL financial:? "The data suggest minimal stress in job markets. As long as wage growth outpaces the rate of inflation, the economy will chug along, and the Fed will not cut rates as much as expected only a few months ago."

What’s it all mean for real estate investors?

Rates staying elevated — or only coming down gradually — doesn’t sound awesome. Neither does tepid transaction volume. But there’s still plenty of reason for optimism. For one thing, consider that the Fed benchmark rate now is 66 basis points lower than the average rate for all of the ‘90s. Private-market real estate, proxied by the NCREIF ODCE, still returned a robust 10.48% average annual return for the years 1994-’99. The kind of returns that were targeted for real estate private equity in the “era of free money,” ending in 2021, may not be realistic now. But stability and attractive risk-adjusted returns are still very much possible in this interest rate environment, even if rates do not come down much, or at all, in 2025.?

A few other positive dynamics for real estate investors:

• Broad demand drivers support a number of CRE sectors. Multifamily and industrial pipelines are both thinning rapidly. With the single-family market showing no signs of loosening, demand could outstrip supply by an increasing margin going forward. CBRE reported that the national multifamily vacancy rate fell for the first time in over two years at the close of Q3 ‘24.???
• Certain demand trends that stand largely apart from market volatility dynamics. This may be due to demographic trends or high inelasticity of demand for goods and services in certain sectors. When this is the case, niche CRE asset classes may benefit. At present, for example, skilled nursing facilities, senior housing, and data centers are all in Green Street’s top five CRE sectors for expected private-market returns. EquityMultiple allows individual investors to access these more niche types of CRE investments.??
• If treasury yields and interest rates remain elevated, real estate private credit may stand to benefit. If lending remains tight, but the broader case for real estate investing remains strong, private lenders may command higher rates and better risk-adjusted returns.

So this may be a moment for tempered expectations and a balanced approach. Real estate private credit and private equity should be balanced to account for uncertain future interest rate conditions.?

Real Talk on AI

Companies in the real estate ‘fintech’ space have been crowing about Artificial Intelligence applications since well before there was any reasonable way of using the nascent capabilities. While the advent of “artificial general intelligence” may be a ways off, today’s models have clearly advanced to the point that they can aid analysts and underwriters. BlackRock has announced plans to add an AI “investment committee member.” The firm’s leadership is quick to add that an artificial IC member will not replace humans, but rather serve as a sounding board, uncovering insights that may have eluded the biological brains of other committee members.?

EquityMultiple’s stance on AI is similar. Real estate is a fundamentally human business. Solid investment choices and asset management depend on sophisticated analysis. But success also hinges on instinct and relationships. EquityMultiple benefits from a large and growing first-party data sets on market fundamentals, transaction activity, and investment performance. This data foundation is bolstered by our strategic partnership with Marcus & Millichap, the country’s largest CRE brokerage and a leading research institution. In the background, data is being refined and compiled for use by AI agents, contributing to models that will provide novel insight for investment origination and vetting.