“Hooray” as we ring in the New Year 2024! At this time of year we like to make resolutions on how we pledge to improve our behavior and our decision-making skills. However, we also need to remember that there is an old saying, “The more things change, the more they are the same.” Which is to say, that we learn that the underlying fundamentals stay unchanged despite what may happen on the surface.
Expect the Unexpected
This was brought to mind as I was reviewing the book Same As Ever, by Morgan Housel. His point is that we get used to a normal steady life, and then, out of nowhere comes an unpleasant surprise, maybe even a calamity. But we had become so lulled into the “new normal” that we forgot there is always danger lurking. Example: no one expected the Covid-19 calamity that is still impacting our lives. Or how about the Great Financial Crisis with the Lehman Bros. bankruptcy and banking meltdown. My own career began just before the Savings & Loan Crisis of the late 1980’s, a true Depression for Texas real estate.
So, every ten years or so, IT hits the fan and we are shocked. But we shouldn’t be surprised, because a new unexpected crisis keeps happening every five to ten years! Housel’s point is, “If you want to understand a changing world, start with what stays the same.” And, “We are very good at predicting the future, except for the surprises – which tend to be all that really matters.” So, we need to slightly over-prepare for the unexpected crisis, that is to say, Expect the Unexpected. My personal addition is that, “We never know how good, Good will be, or how bad, Bad will be.” Just be sure you have prepared for the inevitable bad surprises, for we know that we must survive before we can thrive.
So, 2022 and 2023 were not really so calamitous for real estate, but we certainly had a major contraction of credit as interest rates spiked faster than any time in history. We all know that credit and borrowing drive real estate, because it is typically highly leveraged with construction loans and mortgages.
Improving Sentiment and the CRE Rebound
Now in late 2023, I think we are seeing the green shoots of a rebound in commercial real estate. One way to judge sentiment is by looking at publicly owned real estate, such as Real Estate Investment Trusts (REITs) and Homebuilders, as represented by the Exchange Traded Fund VNQ from Vanguard that holds the stocks of 167 publicly traded real estate companies.
VNQ dropped 38% from the beginning of 2022 to the end of October 2023! This is a much more volatile benchmark for the value of all types of commercial real estate than privately held real estate that only trades every few years. However,it is a good indicator for the attitude and sentiment that the public has toward real estate, and let’s just say it’s been down-right terrible the past two years. But now everyone is seeing light at the end of the tunnel in this seemingly dark night.
Future Interest Rate Drops Expected in 2024
The FED is pausing the increases in Interest rates with expectation there will be several rate decreases next year. The 30-year mortgage rates actually dropped from over 8% in October to 6.7% recently. This should spur home buying in the new year, albeit, November was a down month for home sales nationally. And our friend, VNQ, has rocketed higher by nearly 25% since the end of October, indicating that public perception of real estate is now suddenly much more favorable.
World’s largest commercial brokerage, CBRE, forecasts Year 2024 will see an economic slowdown in the first half and this will keep bank lending very tight. The volume of investment transactions will continue to decline, by maybe 5 percent. The decline in values over the past two years will bottom out in the first half of 2024 at about a 20% overall decrease in values. While interest rates have started to decline, capitalization rates are still edging upward, by maybe a quarter to a half of a percent, which equates to a drop in values of 5 to 15%.
Office, Retail, and Industrial Occupancy Levels Vary
However, each sector is different with office buildings declines at the high end of the range, while industrial buildings are seeing the smallest declines.
Retail has been very stable, with strong occupancy levels and consistent sales volumes.
Office sales, however, have dropped from a high of $200-million a quarter back in 2019 down to only $45-million in Q3 2023. This does not help the office building owners who must refinance their mortgages in 2024. In fact, recently, the venerable McAllister Plaza on US 281 at Jones Maltsberger, near the Airport, was purchased by local SageView Partners, when the owners couldn’t refinance the building, though it is 91% leased.
Texas’ GDP more than Double the U.S.
In Texas, we are doing pretty well, as shown by the Texas Workforce Commission recent report that the state added 26,800 jobs in just the month of November, a nice turnaround from October, where we actually lost 1,300 jobs. Up to that point, Texas had positive job growth every month for nearly three years. For the year from December 2022 to November 2023, we created 407,000 jobs, a 3.1% rate, comparing favorably to the U.S. rate of 1.8%, as reported in the Dallas Morning News. Couple these stats with the fact that Texas’ second quarter GDP grew at a rate of 4.9%, more than double the U.S. rate of 2.1%. Good job, Texas!
So, let us toast the start of a New Year!
We survived ’23, so let’s roar into ’24 to thrive in ’25!!!