The Monthly Multiple — May

Another month, another news cycle dominated by inflation and interest rates. For better and worse, not much has happened. Inflation continues to prove sticky (which, in retrospect, feels very obvious). While the Fed, as anticipated, did not cut rates, it has signaled a low probability of more rate hikes anytime soon. “Right now, the probability of rate hikes is very low,” remarked a Fed governor earlier this week.

Yes indeed: “higher for longer” has replaced “soft landing” as your financial markets phrase of the year. For a refresher on how present market conditions can favor alternative assets, here’s recent EquityMultiple perspective from CFA Institute.

You might think this is bad news for real estate investors. It isn’t, or at least not entirely. Though higher rate increase cost of capital — bad in a vacuum — higher, but stabilized, rates could offer the following benefits:

• Debt and preferred equity positions can command higher rates for longer, potentially benefiting EquityMultiple’s Ascent Income Fund, for example.
• The fact that rates have largely stabilized (there’s little chance that they’ll move much in either direction for some time) means that investors can more confidently pencil out pro formas and buyers and sellers can more easily get together on pricing. More transaction volume likely would mean more choice for individual passive investors.
• Higher rates for longer (especially if this is clearly telegraphed by the Fed) means that asset operators who are already feeling distress, or have loans coming due, may be forced to liquidate, creating opportunities for operators who are holding dry powder.

On that last point, this may be a key moment for middle-market real estate opportunities (where EquityMultiple generally plays). This is because underwriting timelines or balance sheet exigencies may keep institutional players on the sidelines for a bit longer.

But what do the institutional players say about the state of CRE markets these days? Here’s JPM on the state of markets. Some key points:

• Luxury apartment vacancy rate was nearly 200 basis points higher than class B and C. Meanwhile, especially with the nuances of persistent inflation, workforce housing is a critical need across markets.
• Smaller, smarter retail is the next phase of the retail sector. Office vacancies are at an all-time high, but “desirable office properties in the most active locations will likely outperform.” In other words, we may be at an inflection point for the two sectors hit hardest by the pandemic years.
• Lower rates mean lower returns on liquidity. Higher rates mean higher returns on liquidity. Managing liquidity to take advantage of opportunities as they arise is key.

Re: liquidity, this advice is as applicable to individual investors as it is to institutional investors. This is the point of Alpine Notes, which recently crossed the $200M threshold in invested capital. Investors have the ability to roll over into a real estate investment as soon as 30 days after allocating to a Note, giving investors the opportunity to tap into attractive rates while staying liquid for opportunities as they emerge in a fluid market.