I had the pleasure of spending 4 days with Ken McElroy at the Investor Summit on Sand in Belize. Ken is a highly accomplished General Partner with a $2 billion real estate portfolio. He has a ton of experience in multifamily investments and shared a ton on the Summit. In this article, I’ll share his perspectives on key market trends, opportunities, and challenges that lie ahead. Hope it’s helpful!

1.       The Perils of Cheap Money: Ken highlights how the availability of cheap money can create bubbles, affecting both the stock market and real estate. Investors need to exercise caution and remain vigilant in their decision-making processes to navigate potential risks associated with inflated asset prices.

2.       Banks’ Predicament: Anticipating a rise in bad assets, Ken suggests that banks will reluctantly assume these burdens. Consequently, they will be compelled to negotiate existing loans on their books. This predicament underscores the importance of effective loan management strategies in the coming period.

3.       Bullish on Housing: Ken maintains an optimistic outlook on the housing market, citing a persistent undersupply. He particularly favors affordable housing opportunities, provided investors can identify strategies to make them financially viable.

4.       Shifting Towards a Renter Nation: Ken predicts a prolonged period of becoming a “renter nation“. He envisions a 10-year bull run following the current phase, where the percentage of rental households will increase. Investors should explore this trend and consider the potential benefits it presents.

5.       Construction Lull and Rent Inflation: As the industry experiences a lull in construction activity, Ken foresees a surge in rent inflation. Reduced housing inventory from slowed construction, combined with homeowners staying put due to favorable 3% home loans, will create an environment where rental prices soar. Investors should factor this in when evaluating investment opportunities.

6.       Embracing Smaller Spaces: To counterbalance the limited inventory, Ken believes people will increasingly choose smaller living spaces. This shift acts as a release valve for the housing market, offering alternative options for those seeking new residences.

7.       Navigating Inflation and Hard Assets: Ken cautions that controlling inflation will remain a challenge in the foreseeable future. However, he believes that hard assets will fare well under such conditions. Investors are advised to consider allocating their capital towards these assets for potential long-term gains.

8.       Interest Rate Forecast: Predicting an imminent 25 basis points increase in the Federal Funds Rate, followed by another increase in the subsequent month, Ken emphasizes that interest rates are unlikely to be reduced. Instead, they will remain flat for a period before potentially decreasing. Investors should plan accordingly to adapt to these evolving financial conditions.

9.       Repricing in Multifamily Market: Ken observes that the multifamily (MF) sector has already experienced significant repricing of 20-30% in some markets. This adjustment highlights the importance of staying informed and keeping a pulse on market dynamics to make informed investment decisions.

10.   The Looming Black Swan – Banks and Lending: Ken identifies the potential black swan event as banks and lending drying up. He predicts that as commercial office loans mature, defaults will occur due to rising vacancy rates and interest rates. This, in turn, will force banks to write off loans and slow down their lending practices. Investors should be prepared for the impact this could have on the market.

As the real estate landscape evolves, Ken’s insights provide valuable guidance for investors. Capitalizing on opportunities during this period requires a strategic approach, with Ken emphasizing the importance of assets with fixed-rate debt, cash flow, and leveraging inflation to maximize returns. Investors who can adapt and solve problems for the banks will find themselves in a favorable position during these changing times.

If you’d like to learn what CSQ Properties is doing during this time to continue to create passive income for investors, join our Investor Club by clicking the button below!

 

To Your Freedom,

Chad Zdenek and The CSQ Properties Team