As part of our recent State of the Market Roundtable webinar series, AppFolio gathered top minds in the real estate industry to discuss the current state of the market.

The panel included a selection of top-performing fund and syndication managers from different regions, asset focuses, and company sizes:

• Devin Elder, Principal, DJE Texas Management Group. Devin Elder is the Founder & CEO of DJE Texas Management Group, a vertically integrated multifamily investment firm based in San Antonio, Texas.
• Kris Benson, Chief Investment Officer, Reliant Real Estate Management. Kris Benson is the Chief Investment Officer, part of the investment committee, and manages investor relations for Reliant Real Estate Management.
• Morris Groberman, Principal, North West Commercial Real Estate Investments, LLC. Morris Groberman has been in the commercial real estate business for over 30 years and is a principal in Northwest Commercial Real Estate Investments.

Here are our key takeaways from the discussion:

1. Overall views on the current state of the market

Generally, our experts believe that the market is in a negative state, but they did describe some caveats that modify that outlook. They referenced the famous quote by Warren Buffett, who once said you should “attempt to be fearful when others are greedy, and to be greedy only when others are fearful.” However, that’s not easy to do.

• The multifamily market has had a wild ride since 2020, and now investors are dealing with a rapid increase in mortgage rates. Many are in a “hang on and get through” state of mind.
• Some investors who are well-capitalized can take advantage of the market by providing rescue capital to those who are in trouble. Examples include those that have maturities due or rate cap expirations.
• The commercial real estate market hasn’t seen the same pressures as some of the other markets, but investors know it’s coming. As a result, raising money from investors is very difficult. Many are waiting for the right opportunity, but those are few and far between.
• Self-storage professionals are fearful but see this as a time that can help build next-generation wealth. They’re in a “wait and see” mode.

Asset classes and markets that will face the biggest challenges or biggest opportunities

Today’s market is going to affect each asset class differently. Our panel offered their predictions:

• Self-storage typically does well in a recessionary period as the demand for storage increases.
• Office space will probably suffer the most because of the large amount of debt that will mature soon.
• The most lucrative classes could be storage, multi-family, and city retail.
• However, depending on how the market moves forward, multi-family might be challenged because the rate caps on floating rate debt will expire over the next 18 months.

Thoughts on interest rates

The panel agreed that if an investor finds a reasonable deal in this market, it will do very well in a lower interest rate environment. They also agreed that it was impossible to predict what interest rates would do, but they had several thoughts about interest rates.

• Hopefully, we’re at the highest interest rates now, and the Fed will cut the rates to get the economy red-hot before the next election cycle.
• The days of 3% or 4% interest rates are over. More likely, rates will be 5, 6, 7, and maybe 8%.
• Rising interest rates push prices lower, but they make it more difficult to get cash flow for investors.
• Rising interest rates push some buyers out of the market, which reduces competition.

How inflation is affecting projects

Inflation is affecting all areas of the real estate market. But the impact is different depending on the market and geographic area.

• It’s important to get projects bid, started, and completed quickly to avoid increases in labor and material costs that will reduce profitability.
• Many operators are just hanging on until the economy levels out and working to be smart with their cash.
• Margins are compressed, and cash flow at properties decreases.
• Labor issues include lower quality of people looking for work, and many of those have less interest in working. Technology offers the opportunity to reduce payroll, and those savings fall to the bottom line.

2. Managing investor communication in today’s market

There’s no doubt that today’s real estate market is a challenge for everyone involved. All panel members believe that keeping in touch with investors during this time is critical.

• For some, communication during the height of the COVID pandemic disruption went from monthly to daily or semi-weekly. Now, investor communication happens every month without fail.
• Information about distributions is a crucial part of communications, along with data points that investors expect and can assimilate.
• Even if you can track communications and you know that many investors don’t read them, you must create a place where investors can review past communications as needed.
• An important measure of a real estate investment firm is the quality and timeliness of its communications.

3. Maintaining and improving operational efficiencies to keep costs low

Keeping costs low is a goal in any type of market, but it’s particularly important in times when market factors are unsettled.

• Many are focused on technology to improve agility and reduce costs.
• Operating in the cloud, using document management, digital signatures, customer resource management (CRM), collaboration tools, and other applications that streamline operations is making a very positive impact.
• Technology is being used to obtain signatures on private placement memorandums (PPM), send distributions using ACH rather than paper checks, and more. It saves time and reduces costs.
• In the self-storage industry, consumers want to start a transaction on their phone and finish it on their phone. This touchless leasing is especially important to younger generations.

It’s still possible to find great deals in today’s real estate market

There’s no doubt that real estate professionals are working in a tough economy. However, the panel of experts identified some key tips to find great deals.

• Don’t overextend. If your organization is well-capitalized, you may find opportunities to buy out or take over partnerships by providing rescue capital. When rising interest rates eliminate some buyers in the market, take advantage of the decline in competition.
• Be patient. Good deals are out there, but you’ll have to wait for them to materialize.
• Diversify. Find opportunities in classes that aren’t as hard-hit as others.
• Communicate. Don’t leave your investors out in the cold wondering what to do next.
• Automate. Take advantage of technology to increase productivity and reduce costs.

Learn how AppFolio can help you drive operational efficiency and reduce costs. Book a free demo with an AppFolio Investment Management expert today.