{"id":27805,"date":"2025-01-15T04:44:07","date_gmt":"2025-01-15T04:44:07","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/real-estate\/10-things-im-pondering-going-into-2025\/"},"modified":"2025-01-15T04:44:07","modified_gmt":"2025-01-15T04:44:07","slug":"10-things-im-pondering-going-into-2025","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=27805","title":{"rendered":"10 Things I\u2019m Pondering Going into 2025"},"content":{"rendered":"


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Typically, at this time of the year I\u2019m down in Florida, enjoying some time in the sun with my family. However, this year is a bit different. We\u2019re patiently waiting a new baby, providing some extra time to ponder the year ahead. It\u2019s the calm before the storm.<\/p>\n

Nobody needs another year-end roundup or set of predictions, but this isn\u2019t for you. It\u2019s for me.<\/p>\n

One of the reasons I enjoy writing so much is that I find it helpful to craft narratives around all the messy data, events, and random chaos that surrounds me. It provides a much-needed sense of calm.<\/p>\n

This is the story I\u2019m telling myself today \u2013 it\u2019s the one that\u2019s going to propel my actions in the year ahead. \u00a0<\/p>\n

Unlike 2023, which brought pain with little hope<\/a>, 2024 was a transitionary year for the real estate market, for Atlas as a firm, and for me personally.<\/p>\n

The year ahead is filled with excitement and optimism.<\/p>\n

Here are 10 things I\u2019m pondering as we head into 2025.<\/strong><\/p>\n

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1. How will the Southeast multifamily fundamentals play out?<\/strong><\/h4>\n

Starting with the most general, the southeast multifamily market fundamentals are on solid footing and the outlook is bright. We\u2019ve hit peak new supply in nearly all markets, housing starts have dropped to the lowest level in a decade, wage growth has outpaced rent growth for 22 straight months, single-family housing remains historically expensive relative to renting, and demand remains near record levels.<\/p>\n

Rents are projected to turn positive in nearly all markets by the end of 2025.<\/p>\n

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Will this dynamic be disrupted? If so, by what? Barring any demand shocks, multifamily is poised for a significant run up in rents.<\/p>\n

2. Multifamily real estate is not about cash flow.\u00a0<\/strong><\/h4>\n

I tweeted this out a few weeks ago and it elicited some good feedback.<\/p>\n

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Multifamily assets don’t really cash flow. People assume they do, but they really don’t once you layer in debt service, routine replacement costs, AM fees, reimbursable owner expenses etc.<\/p>\n

Money is made by growing NOI and generating a spread between the stabilized yield and\u2026<\/p>\n

\u2014 Joe Stampone (@Joe_Stampone) December 13, 2024<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n

This isn\u2019t a new phenomenon. Multifamily real estate, as an investment vehicle, is about growth, not about cash flow. As institutional capital has flooded the real estate market, performance expectations have changed.\u00a0\u00a0 \u00a0<\/p>\n

This is especially notable in today\u2019s environment, where the investment thesis is driven by future growth as opposed to in-place cash flows. \u00a0<\/p>\n

3. Avoiding the value trap.<\/strong><\/h4>\n

It wasn\u2019t long ago that deals were trading at 3 caps, well above replacement costs, with the expectation rates would stay near zero and rents would continue to grow at an outsized pace.<\/p>\n

The world has changed dramatically since that investment landscape in 2021\/2022. However, there seems to be an assumption that we\u2019ll get back to a world of abundant capital and unbridled optimism.<\/p>\n

Many deals today look cheap when compared to peak pricing, but yields are thin, and cash-on-cash returns are non-existent. \u00a0<\/p>\n

Investors today are justifying purchases based on a combination of discount to replacement cost, diminished supply pipeline in 2026-2028, and yesterday\u2019s prices as reasons to buy.<\/p>\n

While we believe in that thesis broadly, that doesn\u2019t mean every purchase will be a good deal.<\/p>\n

It\u2019s my job to find high-quality assets in good locations with a high probability of achieving mid-teens IRRs with the potential to outperform.<\/p>\n

Don\u2019t get sucked into the value trap.<\/p>\n

4. How long will the historically large discount to rent versus buy last?<\/strong><\/h4>\n

I feel terrible for any young person in the market to buy a home today. They\u2019ve been completely screwed.<\/p>\n

Higher rates have only exacerbated a pre-exiting issue of demand outpacing supply. Layer in higher costs for taxes, insurance, and maintenance, and you come to today\u2019s record discount to rent vs. buy.<\/p>\n

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This is a major issue which I don\u2019t see going away any time soon. Even if mortgage rates come down in 2025, those price savings would likely be offset by more price appreciation.<\/p>\n

The decision to rent vs. buy isn\u2019t entirely economical. People will continue to get married, have kids, and eventually buy homes when they can afford to do so, regardless of housing costs. Of course, this is happening later in life (avg first-time homebuyer is 38) keeping individuals in the renter pool longer.<\/p>\n

5. When are we going to accept that we can\u2019t predict interest rates?<\/strong><\/h4>\n

I know the answer here is never, but if the past few years has taught is anything, it\u2019s that no one can predict interest rates.<\/p>\n

Check out the chart below. The purple line is what experts predicted, and the blue line shows what actually happened.<\/p>\n

We\u2019ve been wrong for a decade straight.<\/p>\n

On top of that, we can\u2019t believe what the Fed says. Remember the message that there is \u201cno urgency to raise rates\u201d a few weeks before they began a rapid increase?<\/p>\n

Don\u2019t invest in deals where success is driven by declining interest rates. Buy deals with great long-term fundamentals that will outperform if rates come down. \u00a0<\/p>\n

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6. Will operators keep throwing good money after bad?<\/strong><\/h4>\n

The defining activity of 2024 for multifamily owners was \u2018extend and pray\u2019<\/strong>. Over-levered and underwater owners raised preferred equity and extended loans with the hope things improve quickly.<\/p>\n

The equity in most deals acquired during the market euphoria in 2021\/2022 is somewhere between impaired and completely gone.<\/p>\n

Instead of selling these deals at a loss, investors bought themselves an additional 12-24 months by throwing good money after bad.<\/p>\n

Will that dynamic continue in 2025? I don\u2019t think so.<\/strong><\/p>\n

It\u2019s time to face the music. All these GPs who have downplayed the severity of the situation to keep raising capital for new deals will have to come clean.<\/p>\n

The tragic part here is that most LPs would have been better off if deals were sold in 2023 or 2024 as opposed to being encumbered by expensive preferred equity for 24 months.<\/p>\n

7. The challenge or opportunity of being stuck in the middle<\/h4>\n

As a multifamily owner-operator, it feels like you have two options to operate your business.<\/p>\n