This year will favor investors who focus on what they do best, base their growth plans on solid due diligence, and embrace old-school underwriting principles.

Things won’t be boring in 2024 as some markets start to heat up, others cool, and rumors of possible interest rate cuts swirl around in daydreams of better days ahead. CNBC noted that in 2024, the Fed could lower interest rates as many as three times, giving new optimism to both investors and buyers. That said, there is no crystal ball, and this is an election year.

Factors to consider (beyond the rates and prices that seem to be stabilizing) are always the Big Two: exit and payment. These two issues are affected, especially in 2024, by the murky projections for unemployment, the constant flow of migration to new markets, and the international flow of money into the investment real estate sector. One tide rises while another falls.

Employment and Wages

According to the Bureau of Labor Statistics January jobs report, employers added 350,000 jobs in January alone, posting the highest or strongest (depending on who you ask) gains in more than a year. December numbers were “revised” to show strong numbers as well, corrected from 216,000 to 333,000. One could argue, therefore, that the employment sector is picking up steam, thus embracing investors’ ability to find strong exits with strong end buyers.

Jobs create growth in varied MSAs and support the drive for (in at least certain areas) new construction and mid-market rehab properties. Federal Reserve Chairman Jerome Powell has stated in numerous interviews that his goal is to reach a 2% goal of inflation. Again, no crystal ball, and no one is a financial Nostradamus, but with strong jobs sectors come stable real estate markets. Certain metros will benefit greatly from this. There will be solid values, short sales cycles, less listing time on the market, and higher rental/DCSR values.

Growing employment numbers also bring growing, or at least stabilized, wage numbers. The same jobs and economy report states that wages are on a slight uptick from a small decline in early 2023 and massively up from the pandemic. This can be misleading, however, as some areas (e.g., the Texas Triangle, Kansas, Oklahoma, northeast Arkansas, and the Florida Panhandle) of the Southeast are firing off like a Roman candle in real estate values and income levels, whereas other cities are stalled and may not come back, thus needing investors who are hyper-local and prepared to play the long game.

Many investors are waiting for a bottom in some of these Midwest and Pacific Northwest markets, as jobs continue to move South and into Central Plains states. According to the Bureau of Labor Statistics, as of December 2023, Western states, specifically California, Washington, Oregon, and parts of Arizona, show a massive jump above average in unemployment and high numbers of migration as families and younger Americans move to more stable and affordable markets.

The numbers for international investors/buyers are also up for markets in California, Seattle, and Oregon, whereas the number of unemployed is much lower in Texas, the Central states, the Carolinas, and Florida. Along with the unemployment rates being lower in these markets (proven for the past 18-24 months), there is a massive opportunity for housing development and rehab of older and existing properties. Job creation corridors bring new people, more jobs, and massive long- and term short-term investment options. As everyone knows, bringing new life into declining markets is a gamble and long-term game at best, and most certainly a volume play.

Growth Considerations

You’ve probably heard the following two sayings many times: “Stick to your swim lane” and “Do what you do best—and leave the rest.”

This year is going to require a keen eye for each investor group, debt fund, trust deed crew, and direct lending hybrid. Private investors are looking to invest in funds with a clear two- to three-year growth plan; that is, these debt fund investors are looking for stability and strong exits. When asked what products they are looking for as a fund investor, the resounding answer is “stable properties” (i.e., ones they won’t get stuck with because the investment just sits with no distribution).

The sting of 2008 still lingers to this day. Fund managers who want to attract investors with capital need to (1) make sure underwriting meets their PPM and mission statement, (2) select markets where they have a solid footing, and (3) never attempt to launch a whole series of new lending products that are new to both the manager and the investor.

Now is not the time for a debt fund to be an inch deep and a mile wide. This market may be like a store where there is a “hat for every head,” but “not every head fits every hat.” Stick to the asset classes and markets that fit your proformas best, where you have experience (and success), and where things are manageable should the capital markets go haywire again.

During the past few market cycles, many companies have been more concerned about growing footholds in new markets and have gotten caught learning on the downside of a trend rather than the upside.

This is not to say to look away from growth in 2024; growth is necessary to survive. Growth, however, needs to be managed with deep due diligence and extensive market research; in other words, a “look before you leap” mindset. Growing just to grow is never a solid idea without having the information necessary to inform your opportunities and risks. Without it, you may as well be running through a minefield. Sure, you may make it; but it’s not a game that will last long, and it could end quickly in a bad way.

Another topic often discussed by market speculators is the new “thing” in assets and niche funding products. Every market has its new “darling”—build-to-rent, multifamily, office space conversion, accessory dwelling units (ADUs), halfway houses, ground construction, managed health care—you name it!

Lately, there has been a significant push for ADUs (especially in college and student housing markets, job creation corridors, and coastal areas with short raw land availability) and halfway houses in certain markets and build-to-rent and office conversion in others. As mentioned earlier, it appears 2024 will bring more stability; however, it’s also an election year. Everyone would do best to circle the wagons and stick to their core competencies without trying to grab every new lending or real estate concept that comes down the pike.

2024 will favor companies that are an inch wide and a mile deep. One thing is as sure today as it was 100 years ago: Investors won’t invest in what they don’t understand, and they certainly won’t invest in a random niche investing idea that has a six-week shelf life.

If we focus on what we do best, grow using information gleaned from solid due diligence, and embrace old-school underwriting principles, 2024 will be better for us all.