Jay Frank, President, and Chris Milner, Managing Director and CIO of Real Assets at Cantor Fitzgerald Asset Management, joined Keith Black, Managing Director of RIA Channel, to discuss the dynamics of the real estate market.
While commercial real estate values have declined in recent years, Milner notes that there are many indicators that property prices bottomed in 2024. Rising REIT prices tend to be leading indicators of future positive returns in the private real estate market. Since REIT prices bottomed in late 2023 near the time of the Fed’s last rate increase, prices of office REITs rose 12%, retail REITs rose 27%, and multifamily REITs rose 16%, with flat returns on industrial REITs. Private real estate managers have substantial dry powder that can be used to purchase properties. Frank states that buying fundamentally sound properties with strong rents and occupancy below replacement value and at high cap rate spreads has historically been a good entry point into real estate. Declining interest rates are likely to increase transaction activity.
Each region and property type has different pricing dynamics. Milner notes that multifamily, logistics, and digital real estate (cell towers and data centers) are the favored sectors. Due to strong supply growth in apartments in the Sun Belt region, apartment prices have been stronger in the Northeast and the Midwest. The multifamily sector is likely to continue to show strong occupancy trends, as the 20-year average $400 discount of renting vs. buying a house has increased to $1,100 with today’s higher mortgage rates and recent home price appreciation. The affordability gap is exacerbated by the tight supply of single-family homes for sale, as homeowners with mortgage rates of 4% and lower can’t afford to move. In addition, deliveries of new multifamily supply in 2026 and beyond will decline substantially from 2024 levels, as the interest rate increases from 2022 to 2023 are making it more expensive to finance new construction today. Opportunities to invest in distressed real estate may be created as property owners might not be able to afford higher mortgage rates when their low-rate loans mature and they face refinancing at today’s higher rates.
Frank states that it is a compelling time for advisors to reevaluate their clients’ allocation to real estate. The after-tax return of a 9% yield on private credit may have a similar after-tax return as a 6% yield on tax-advantaged real estate investments, but real estate may also provide capital appreciation.
Before investing with a real estate manager, due diligence should be performed. It is important to understand the strength of their balance sheet, the degree and cost of leverage, the maturity of the debt, and whether the loans are at fixed or variable interest rates. The net asset value of the fund is also important, as some private funds have not reduced their NAV to match the value of properties in the current market. Structure also matters, as an interval fund registered under the Investment Company Act of 1940 can only own securities, which works well for private credit and real estate debt. Non-traded REITs may be a preferred structure for real estate investments, as properties can be directly owned in this structure.
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