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The commercial real estate market hasn’t had the easiest of years in 2023, and you could almost hear a collective, industry-wide sigh the other day when Kyle Bass said that the US banking industry could lose hundreds of billions of dollars because of exposure to the office market.
The residential market has proven more resolute, of course, fuelled by solid employment numbers earlier in the year. The US Bureau of Labor Statistics said earlier in the month that the American economy is set to add 4.7 million jobs in the next ten years.
That said, the market might start to plateau in the coming months. Student loan repayments are set to resume in October, which will be sure to put a dent in the disposable incomes of many across the US. Indeed, while the US BoLS says the economy will add 4.7 million jobs, that’s a view that’s a decade long, and we saw in July that the job market has continued its recent cooling-off form when compared to the beginning of the year.
Still, we’re seeing good activity in new residential real estate funds looking to raise money. They’re not necessarily looking to do deals in the major metro areas – they are looking at smaller developments where they can be more opportunistic with a longer-term view on the location as a growth area. Indeed, residential real estate has been one of the bright areas in terms of new launches among our client base this year. Obviously, in the hedge fund space, long short equity strategy launches are frequent, but in private markets, where some are staying on the sidelines in, say, venture capital and buyout, the residential real estate folks are still getting out there.
One thing that a couple of managers have mentioned to me is a – albeit mild – contagion effect on the residential side from the commercial side. The question from a potential LP as to whether the ‘problems in real estate’ will affect a new multifamily real estate manager is understandable, if misplaced, and while it’s straightforward to explain the differing sources of return, you might wonder how many are staying on the sidelines and not engaging because of everything they’ve read about the CRE market.
That’s something we’ll never know, but I’d still say that the pipeline in multifamily real estate is healthy – at least, considering the broader economic environment – and I’d expect the smaller, more nimble managers to continue to find good residential opportunities going forward.
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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
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