Berkadia’s 2024 Powerhouse Poll Outlook

January 10, 2024

Optimism Growing Among Commercial Real Estate Professionals as Institutional Investors’ Transaction Activity Poised to Strengthen

Transaction activity will increase once the market perceives that the 10-Year Treasury Yield has stabilized. Once this occurs and investor confidence increases, cash flows will strengthen.

NEW YORK – January 10, 2024 – Berkadia’s 2024 Powerhouse Poll finds that private and institutional investors’ sentiment is expected to increase as economic conditions moderate. While the living sectors as a whole faced impacts from the ongoing recovery from recession fears, stubborn inflation, softening fundamentals, higher interest rates, and cap rate expansion in 2023, Berkadia’s investment sales advisors and mortgage bankers expect investors to be more active in 2024 as they pursue strategic investment opportunities in the year ahead.

Berkadia’s survey finds that institutional investors’ transaction volume will grow in 2024 (72%). Although some investors may continue their cautious approach against the current capital markets backdrop, the majority of Berkadia respondents agree that private investors will have a leading role in acquisition activity (78%), followed by institutional investors (42%).  We also believe we will see an increase of capital coming from international investors as international investors are expected to play a larger role in transaction activity in 2024 and beyond.

“Investors’ ability to navigate this challenging environment in light of anticipated, persistent headwinds through 2024 only reinforces our belief in the industry’s desirability,” said Berkadia Executive Vice President and Head of Production Ernie Katai. “While multifamily fundamentals may be cooling off in many markets across the U.S., we are encouraged by investors’ positive sentiment to pursue strategic opportunities, both equity and debt.” 

Mostly every investor is looking for some level of distress and we are beginning to see distress starting to bubble up in many corners of the market. These conditions are all functioning as margin calls on assets. As a result, we believe many investors will need to sell assets in 2024 to meet these margin calls.

The seventh-annual proprietary poll, conducted in December 2023, collected insights from 212 Berkadia investment sales advisors and mortgage bankers across 70 offices to assess expected multifamily real estate activity and opportunities for 2024 and beyond. To learn more about the survey’s findings, review Berkadia’s detailed Powerhouse Poll report, here.

Highlights include:

  • Class A and B multifamily properties are piquing investor interest. The multifamily market will center around Class A (40%) and Class B properties (28%), followed by True Affordable Housing (17%) in the year ahead. 
  • Next year will see lingering effects of high interest rates. Fifty percent of Berkadia respondents agree that higher interest rates will significantly impact investment transaction activity in the next year.
  • Younger generations are renting over owning. Consistent with last year’s poll, Millennials (58%) and Gen Z (30%) will remain the most active renters in 2024 as higher interest rates, home prices, and student loan debt influence their decision-making.
  • The Living Sectors are growing in popularity for investors as investors shift out of other sectors and new international investors move into the sector. Outside of multifamily, investors viewed single-family rental/built-to-rent (SFR/BTR) housing as the most attractive property sector (40%).
  • Multifamily supply and demand: Berkadians are split on whether rental demand will outpace new supply, with 46% saying it will occur compared to 41% who do not.
  • Market volatility’s lingering impact: The convergence of macroeconomic conditions remains top-of-mind, with Berkadia respondents expecting higher interest rates to significantly impact multifamily investment activity (92%).

Institutional Investors’ Role in the Future of CRE Financing

The short- and long-term disruptions stemming from inflationary pressures, high interest rates, and a tightened credit environment will continue to impact investors in 2024. As the regional banking crisis further tightened capital sources’ lending standards, it has also exacerbated investors’ increasingly cautious approach to volatile market conditions and the slowing rate of transaction activity in previous years.

In the year ahead, government-sponsored enterprises (GSEs) are expecting to be the most active lending sources in 2024 (87%). Among the various opportunities for institutional investors, distressed properties will be the most sought-after investment strategies (44%), with core and core plus opportunities closely following.

“As some investors remain cautious and take a ‘wait and see’ approach in response to current capital markets conditions, more opportunistic private and institutional investors will be more active in 2024 as we expect stronger transaction volume than 2023,” said Katai. “The ongoing impact of high interest rates, persistent inflation, and tightened lending standards underpins the importance of delivering timely, local, and global market insights to help support investors make better real estate in this volatile time, especially as Berkadia enters the second year of its alliance with Knight Frank.”

In-Demand Asset Classes as Renting Demographics Shape Investment Opportunities

To provide insight into the evolving trends shaping the commercial real estate (CRE) industry, Berkadia returned its focus on the asset classes that are piquing the most interest from investors. In response to Millennials and Gen Z’s rental activity, investors are expected to focus on the same asset classes from 2023 – Class A, Class B, and True Affordable Housing – as they seek to capture the heightened demand for rental housing.

“Ever changing employment trends and higher interest rates are increasingly driving Millennial and Gen Z populations toward renter lifestyles, and as a result, investors are focusing on Class A and B multifamily strategies,” said Katai. “Class A has steadily attracted reliable, high-income tenants which investors depend on when purchasing core properties for stable and predictable cash-flow. Investors today also feel they can acquire new Class A projects at a discount to replacement cost which makes this strategy desirable.”

Investors focused on Class B acquisitions have the intention of improving the property’s cash-flow to generate attractive risk-adjusted returns. Value-add investing tends to come with greater levels of risk as most of the investment return comes from appreciation when the property is sold.

“Today, we find there are three types of investors – those willing to acquire with negative leverage for a defined period, those wanting to acquire with neutral leverage, and those going in day one with positive leverage,” said Katai. “The role of our team is ever more critical as we equip investors with the knowledge and actionable insights required to achieve their strategic objectives, and emerging opportunities across asset classes is a key component of investors’ success.”

Despite investors’ focus on SFR/BTR (40%), investors also remain attracted to affordable housing (29%) and student housing (20%) as asset classes within both sectors are expected to face less headwinds as market conditions improve. With respect to affordable housing, Berkadia respondents agree that investors will be most interested in acquiring existing affordable housing properties and rehabilitating or preserving existing affordable housing properties in 2024 versus developing new ground-up projects. Student housing has been remarkably desirable to investors anchored by strong demand/supply imbalances.

Technological Innovations Poised to Transform CRE

The rise of innovative AI technologies and Generative AI platforms are beginning to reshape how transactions are executed. While CRE remains a highly personal, relationship-driven industry, the early stages of this digital transformation have already delivered benefits for producers and clients alike. Forty-eight percent of Berkadia producers agree that technology has helped expedite the production process, up five percentage points from last year. New technologies and software programs are helping aggregate data, pull timely market information, conduct virtual inspections, and ease the underwriting process.

“The surge in adoption of Generative AI tools, such as ChatGPT, is expected to speed up Berkadia’s production processes. Over time, this digital transformation has the potential to create even more efficiencies as we continue to discover, embrace, and implement new AI capabilities,” said Berkadia Chief Information and Innovation Officer Damu Bashyam.

Although ChatGPT has become a highly discussed platform, Berkadia respondents have diverging opinions on Generative AI’s ability to improve the production process. Among the investment sales advisors and mortgage bankers who have used ChatGPT or similar products, almost half say that they have created some efficiencies (48%). Berkadia respondents are using ChatGPT to assist with certain elements of the production process, as the top two use-cases were gleaning and validating insights related to regional market data and aiding in the creation of marketing materials.

About the Powerhouse Poll

The 2024 Powerhouse Poll data was collected in an online survey, facilitated by Berkadia through Microsoft Forms in December of 2023, to assess anticipated commercial real estate activity and opportunities for the year ahead. The sample was based among Berkadia’s 70 offices throughout the United States, consisting of 88 investment sales advisors and 124 mortgage bankers, totaling 212 overall respondents. To read more in-depth data that was collected, please see our full Powerhouse Poll here.

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