Our View of the Market Q1 2024

Fri, 01 Mar 2024 00:19:40 GMT

The question at hand is...what happens next?

Honestly, we don’t think that’s a question anyone can answer right now. We, however, have multiple strategies to deploy depending on what transpires across the larger economy. For that reason, we remain extremely bullish on our prospects to identify opportunities in 2024 and beyond.

Looking at the big picture of the real estate market and macroeconomy, we believe the following:

Our decisions up to this point have put us in a unique position to take advantage of the uncertainty and disruption in the marketplace. These decisions include acquiring real estate with a long-term perspective, specifically placing long-term moderate leverage fixed rate debt.
We acknowledge that we cannot control outcomes. Instead, we focus on controlling the assets, financial structures, markets, and people we work with. As all participants realized in the 2022-2023 tightening cycle, we can’t fight the FED-driven interest rate cycle. What we can do is aim to create value by selecting quality assets in markets with strong fundamentals. By doing so we position ourselves to execute our business plan to position our investments to capitalize on the next appreciation cycle effectively.
As a team, we've discovered that within every economic cycle, winners emerge. It's our task to identify where and how to find them. In fact, given Corban and Mario’s depth of experience ranging from distressed to performing assets, Georgetown Partners is well positioned to identify opportunities for our investors in any market condition.

For most of 2023, the investment community anticipated further “challenges” for the real estate industry. These “challenges” are largely the result of an expectation that interest rates will stay “higher for longer.” In our opinion, interest rates and, by extension, FED policy have become the single most important element of the investment market. Therefore, explicit changes to FED policy contribute greatly to market sentiment and investment outlooks.

We believe that capital flows are the foundational layer of the investment market. This “flow of energy” determines which assets appreciate and which stagnate or fall out of favor. Liquidity and the velocity of money drive investable assets. We saw unprecedented capital appreciation across asset classes (real estate, equities, and crypto) as the effect of the FED’s various interventions aimed at supporting the economy largely via interest rate cuts and Quantitative Easing.

The “too good to be true” growth expectations as COVID fears subsided quickly shriveled away once cost inflation forced the FED to aggressively raise interest rates (in relative terms) in an abbreviated time frame. The FED made a strong pivot by March 2022 as it increased the Federal Funds Rate to 50 bps from 25 bps, marking the first rate increase since 2018 while simultaneously reducing its Quantitative Easing (a program designed to enhance market liquidity and support values by directly acquiring assets) by April 2022.

Fast forward to July 2023 and the FED elected to increase the Federal Funds Rate to 5.50%. Now, in January 2024, the FED has seemingly pivoted once more. Although they have not explicitly restarted Quantitative Easing, they have ceased their Quantitative Tightening efforts and started to posture toward decreasing interest rates once more. We could argue that this is inevitable for many reasons but, most importantly, this signifies a shifting point in investor sentiment.

If the FED does, indeed, cut rates in 2024, we will take the approach of investing in traditional value-add and ground-up multifamily, as debt will be accretive to pricing. We still believe in the housing crisis issues that most Americans are facing. There is a record amount of capital sitting on the sidelines waiting for a market recovery.

Alternatively, if the economy comes in for a harder landing than originally thought, we are still in an advantageous position as we will seek to capitalize on our ability to identify and execute on distressed opportunities. If the FED does not cut rates, there is $2.6 trillion in total CRE debt maturing through 2028. In 2024 alone, $49 billion in multifamily debt maturity will need to be refinanced or worked out. This wave of maturities in 2024 through 2028 will create an opportunity for special situation investment. We are actively tracking debt maturities in certain markets to see where we can capitalize on these troubled assets.

2023 Recap & 2024 Outlook

joe@gtownpartners.com (Joe Indiviglia) — Fri, 01 Mar 2024 00:14:56 GMT

Our year in review

In 2023, Georgetown Partners successfully navigated a tumultuous market by continuing to make decisions grounded in our philosophy of maximizing returns on value-add investments both already under management and through acquisitions. After back-to-back years of doubling our AUM in 2021 and 2022, we took a more conservative approach in the first half of 2023 while we let the market sort itself out.

We sold one property in San Diego, CA, earning a high teens IRR for our investors after an 18-month hold. We made a defensive decision to monetize this investment by divesting early because we had a short-term variable rate bridge loan, our only asset with this structure. We foresaw that a Q4 2023 refinance event would be difficult and, although we still deeply believed in the potential of the business plan, we prioritized the preservation of our investors’ capital and elected to exit.

In 2024, Georgetown Partners looks forward to expanding our portfolio of investments by continuing to pursue:

Traditional acquisitions of real estate assets as Sponsors
Co-GP partnerships with expert regional partners
Rescue or Structured Capital investments as capital allocators

Internally, we increased our staff by bringing on two individuals with diverse backgrounds in operations and marketing to assist with our continued growth, ensuring we will be able to scale without compromising our personal touch and commitment to investor relationships.

As a company, we will take a proactive approach to communication by launching new initiatives through email, social media and online channels in addition to composing and distributing ongoing thoughtful commentary about our perspective on the market.

gtown-partners

Our View of the Market Q1 2024

The question at hand is...what happens next?

2023 Recap & 2024 Outlook

Our year in review