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Investing in real estate syndication as a Limited Partner (LP) is an attractive option for generating passive income and building wealth. However, the viability of such investments significantly hinges on the specific deal terms negotiated at the outset. These terms shape the risk and return profile of the investment, influencing the overall financial outcome for LPs.

We just recently held our 2024 Multifamily Market Outlook webinar and a big part of looking ahead is looking back at some of the key moments in 2023 that lead us to the assumptions we make looking forward. So for this blog, we are going to focus on recapping some of the highlights of 2023 and current trends that we believe will most profoundly impact our investment decisions in 2024.

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2023 was one of the most eventful years for the commercial real estate industry since 2008. An industry renowned for its cyclical nature, the industry had been riding high for nearly 12 years until the inevitable realities of the market took hold. The age-old adage rings true: what goes up, must come down. The shift began in 2022, fueled by the Federal Reserve's aggressive rate hikes, and was further intensified by a range of factors from basic operational challenges to wide-ranging global events.

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Looking back at the beginning of 2023, which feels like ages ago, there was a sense of optimism, spurred by a temporary decrease in the 10-year U.S. Treasury index – a key indicator for our sector – to 3.3% from a high of 4.25% in October 2022. However, this optimism was short-lived as the index climbed again, hitting over 5.00% in October. The financial markets were further shaken by historic bank failures in March, leading to a sharp drop in lending and transaction volumes. Consumers began to feel the pinch, and the predicted downturn in rental prices materialized. As the year progressed, a series of events unfolded, adding stress to the real estate capital markets. Here, I share my thoughts on the three most significant events of 2023 in the industry and what we might hope for 2024.

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Key Events of 2023:

1. Bank Failures: The downfall of Silicon Valley and First Republic banks – the second and third largest in U.S. history – had a profound and lasting impact. The aftermath saw a significant decrease in construction loan availability from regional banks, critical for many developers, leading to a drop in new construction projects.
2. Federal Reserve's Inflation Fight: The Consumer Price Index reached a peak of 9.1% in June 2022. Since then, the Federal Reserve has been clear about its intention to raise the Fed Funds rate as necessary to bring inflation down to its 2% goal. This rapid and sustained rate hike has particularly impacted real estate businesses and developers reliant on floating-rate loans, which are closely tied to the Fed Funds rate. Many pro formas from 2020, 2021, and early 2022 did not foresee these rate hikes, resulting in a need for significant additional capital to cover rising interest costs. While the approach to achieving economic stability needs precision, the December CPI at 3.3% suggests that the Federal Reserve's strategy is having an effect.
3. Political and Geopolitical Turbulence: On a brighter note, a government shutdown was averted in November, though the issue may resurface soon here in early 2024. The conflict in Ukraine, now almost two years ongoing, continues to affect material and energy prices, among other issues. The events in Israel on October 7th were among the most shocking and tragic in recent memory, contributing to regional instability and unpredictable challenges and risks. The concurrent presence of two major geopolitical conflicts adds a layer of economic uncertainty.

When it comes to investing in real estate as a limited partner (LP), one of the most critical decisions you'll make is choosing the right sponsor. A sponsor, or general partner, is responsible for managing the investment property and executing the business plan. Their expertise, experience, and track record can significantly impact the success of your investment.