As rates begin to stabilize, builders must strategize to better position themselves.
Real estate outlook key takeaways
Family office capital remains the focus of fundraisers across all real estate markets.
2023 CRE losses were not as dire as expected, but concerns persist about debt maturing in 2024.
Real estate trend #1: The shifting housing market presents opportunities for builders
Outlook
The shifting housing market presents opportunities for builders
As falling mortgage rates help stabilize the U.S. housing market, builders should strategize to better position themselves for opportunity ahead.
The U.S. housing market started 2024 with optimism as builder sentiment improved and mortgage rates dipped below 7%, but rising interest rates and home prices soon dampened this outlook. A persistent undersupply of homes, worsened by homeowners holding onto low-interest-rate mortgages and affordability challenges, has constrained home construction. Despite a housing shortage exceeding 3.5 million units, builders have limited new construction due to subdued demand and affordability issues. Home prices and rents have surged, making it difficult for average Americans to buy homes, especially with mortgage rates more than double pandemic-era lows. While construction material prices have eased, offering some relief to builders, affordability remains a major hurdle for potential homebuyers.
Real estate trend #2: Family office investment in real estate poised to increase
Family offices and real estate investors are increasingly turning to real estate for stability amidst a shifting market and global uncertainties. With the normalization of interest rates and clearer repricing, family offices are expected to boost their investments in real estate, both in megafunds and middle-market opportunities. Real estate remains crucial for preserving generational wealth due to its tax advantages, consistent cash flow, and long-term appreciation. While concerns over real estate corrections persist, family offices are adjusting their risk strategies by diversifying into private credit and debt positions, favoring megafunds for their risk-spreading capabilities.
Family office investment in real estate poised to increase
Family office investment in real estate will continue to increase as rates normalize and repricing becomes clearer, leading to increased deal flow.
Real estate trend #3: CRE maturities' true exposure for financial institutions
CRE maturities' true exposure for financial institutions
Here’s what commercial real estate maturities’ exposure looks like for financial institutions.
It has been over a year since the commercial real estate debt maturity scare ensued in the wake of several bank failures in March 2023. While CRE losses in 2023 were not nearly as dire as expected, concerns persist as nearly $650 billion of CRE debt is set to mature in 2024. Gross charge-offs for Federal Deposit Insurance Corp. banks increased 66% last year, compared to 2022; even so, CRE represents only 7% of that augmentation—a far cry from the expected crash haunting news headlines for months.
That data raises a question: If the industry was bracing for a crash within the CRE landscape in 2023, but actual CRE charge-offs showed only a modest uptick year over year and remained lower than average over the past decade, then what exposure to CRE deterioration truly exists in the United States, and how detrimental will it be to financial institutions?
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