By Mark Pasierb, President of Kingbird Investment Management
Looking ahead into 2025, there are many opportunities in commercial real estate—specifically in the resilient multifamily sector. Those opportunities are fueled by many factors including market corrections, changing housing needs and other economic shifts. This article explores why we believe this may be a once-in-a-generation opportunity for investors in multifamily property.
The Tailwinds
With the Federal Reserve recently approving its second consecutive interest rate cut of the year in November, continuing its efforts to right-size monetary policy, we at Kingbird, are cautious and thoughtful about the resulting environment for real estate financing. Even if rates remain high—or higher for longer—and transactions remain muted, there remain opportunities for new acquisitions.
One trend we are seeing in the multifamily sector now is distressed assets that were acquired two – three years ago at extremely low cap rates are now entering pre-foreclosure territory. These assets often come from deals that were too aggressively priced during a time of low interest rates and high valuations and many are now overleveraged, creating unique off-market opportunities.
Kingbird has already committed capital toward these distressed acquisition opportunities. We have looked selectively in high-growth regions with supply constraints and higher barriers to entry, in particular. By partnering with lenders to take over high quality assets before they fall into disrepair, we can unlock value and deliver strong returns for our investors.
Refining Strategy and Selective Locations
We have pursued traditional multifamily deals throughout 2024 but each day, we continue to refine our investment focus to maximize returns. A significant advantage we hold is our ability to take Co-GP positions. These positions have consistently provided a 300-basis point premium over traditional LP investments, but access to these positions is limited to strategic capital providers like Kingbird who have existing capital relationships and can put in place highly negotiated joint venture agreements with local operators. Our size also provides us with the flexibility to be selective. We target mid-size deals in niche markets, leading to stronger returns without having to deploy capital at the scale of larger funds.
Different markets experience different expansion and contraction cycles so staying adaptable is the key to success because it allows us to be able to capitalize on high-potential markets across the U.S. rather than concentrating solely in a particular geographic area. In essence, we apply a “rifle shot” strategy—targeting precise submarkets within major metropolitan areas.
A Focus on Value-Add and Workforce Housing
Kingbird continues to prioritize value-add multifamily properties, particularly those in the Class “B” category that cater to young professionals and essential workers who need moderately priced housing. These properties, which often need modest upgrades, present an opportunity to enhance rents from, for example, $1,500 to $2,000 or higher.
Also, while workforce housing is part of our portfolio in terms of investment, we are focused on identifying the best risk-adjusted returns across a range of renter demographics. This approach to the market allows us to be agile and responsive to hyperlocal supply and demand dynamics and adjust to different shifts in the economy while still remaining committed to creating stable, quality housing options.
The Headwinds
While there is a strong structural case for multifamily investment, the asset class isn’t immune to all economic challenges. A broader economic slowdown could impact employment in certain sectors, especially high-wage jobs that support Class A rentals. If large companies continue to shed significant parts of their workforce, it could impact these types of apartments depending on the geographic market.
Another headwind is the recent shortage of transactions, which has tied up capital for many investors, making it challenging to close new deals. We have been dealing with rates being elevated for a prolonged period relative to the environment the last ten years and many property owners are still reluctant to sell at current valuations, resulting in deals being “stuck.”
Rising insurance costs are also a material concern for property investors, particularly in the Southeastern U.S. With major insurers scaling back coverage in regions prone to natural disasters, owners are exploring self-insurance and alternative risk management strategies to reduce property costs.
An All-Weather Asset Allocation
There is still a severe and unaddressed housing shortage across the U.S., with limited future supply – conditions which underpin the durability of residential rental real estate as an “all-weather” investment allocation – if structured and managed with a principal protection and downside risk management lens. Based on U.S. Census Bureau data, we estimate that, at most, the nation’s estimated 3.8- to 6-million-unit housing shortage was reduced by 290,000 units (from 2021-2023).
To fully address this U.S. housing shortage, the multifamily industry will need to produce a minimum of 1.8 million units annually for the next 10 years—a volume that is significantly above the historic average of 1.1 million units produced annually. This will take significant commitment from both the public and private sector and presents a notable opportunity for investors.
What does the Future Hold?
Comparable to the post-Great Financial Crisis (GFC) recovery, now is a time, we believe of the start of a robust period of real estate investment. As interest rates stabilize and more distressed assets become available, investors have a unique opportunity. They can enter the market before conditions normalize and before the competition intensifies.
The U.S. economy’s resilience, when combined with any further potential interest rate cuts, sets the stage for multifamily to thrive over the next five to 10 years—of course barring any unexpected geopolitical or economic disruptions.
Our selective investment approach, experienced, agile team, and commitment to providing strong risk adjusted returns, enable us. For those out there seeking to participate in a revitalized real estate market, now may be the perfect time to invest.