As we close out 2023, I am reflecting on the year’s challenges and opportunities and looking forward to what lies ahead in 2024. Unless you were living under a rock, 2023 was most likely one of the most challenging years in commercial real estate within the last two decades. The cost of capital skyrocketed faster than we have seen in nearly 40 years. This created capital market distress which negatively impacted commercial real estate values. Very few new construction projects started, loan-to-value ratios plummeted, and less buyers were active in the market. All that sounds dismal, but that should get you excited! Opportunities to buy well located coastal properties for fair prices is the best it has been in several years. Our most trusted Economic Forecast from Peter Linneman and his team, point out some great insights for commercial real estate in 2024. The theme of this article is to encourage you to implement Courage & Capital when others are fearful and reactive. Consider the following:
- “The Fed is always late, they’re always arrogant, they always believe they have more control than they do, and they always overreact.” -Milton Freidman
This quote from Milton Friedman could not be more relevant than right now. The Fed always must take the “play it safe” approach. Their reaction to the most recent inflation numbers were aggressive and fast. The Fed has hinted they may lower rates sometime in 2024. Eventually (most likely in the next 4-6 months) the Fed will declare victory against inflation in 2024, and we will see lower rates toward the end of 2024.
- Once interest rates do come down, the supply of capital will increase faster than the physical supply of properties. This will drive property values up and will cause cap rates to decrease (albeit modestly).
- Fundamentals of commercial real estate within the southern California coastal market are sound. Aside from office, vacancy rates are at historic lows and rental growth is healthy. Orange County specifically is forecasted to be amongst the top markets in the country to own retail shopping centers for both occupancy and rental growth projections.
- The competitive advantage right now is having Courage and implementing Capital. Most properties right now require more than a 50% down payment to cover the DCR (debt cover ratio) for lenders, which is not ideal. Equity is hard to come by and investors are clenching tight to their available cash. This is why having the courage to acquire a generational asset during this time of capital distress will serve you well in the long run.
- High inflation in recent years was directly caused by supply chain issues related to the 2020 global pandemic, not an overcooked economy. Inflation will likely normalize soon and the window of opportunity to acquire coastal investment properties at lower asset values will close.
- Owning commercial real estate continues to be one of the best hedges against inflation. This is even more true for properties within the southern California coastline that have historically seen the highest rental growth in the country.
Our team continues to move deals over the finish line both on and off-market. Coastal Commercial firmly believes that right now is an excellent time to acquire well located investment properties along the southern California coastline. Please contact us to discuss what properties we are currently working on, and how we can help you achieve your investment goals in 2024. We are so grateful to the many clients we continue to grow with, and we look forward to creating outstanding outcomes for you this coming year. Happy Holidays!
-Nathan Holthouser (President of Coastal Commercial)