Rising interest rates, tightened credit and declining occupancy patterns for office and multi-use properties caused many real estate investors to view 2023 with one goal in mind: stomaching short-term risks and debt until profitability is again in sight.
Given current market challenges, many investors have slowed or paused acquisitions while waiting for property price points and interest rates to reconcile. As a result, property transactions as a whole fell significantly in 2023.
Deals that returned profitability often did so through the savvy leverage of available incentives, including tax credits, TIF subsidies, municipal grants, energy credits and opportunity zone supports.
It’s likely the rocky property investment climate may continue into 2024. As a result, wins in the coming year will require strategic decision-making and awareness of razor-thin profitability margins.
2024 priorities for U.S. real estate firms
To best prepare for success in the year ahead, real estate investors should consider these three priorities:
1. Invest in operational improvements
While the current market may not deliver immediate profitability, it offers investors the perfect opportunity to reset and invest in tools to upgrade their long-term operational efficiency and effectiveness.
Many investors are finding ways to maximize profitability on their current and future holdings by:
- Outsourcing key tasks to third-party specialists: Like all industries, the real estate sector faces significant employee shortages. To overcome staffing gaps, many investors have opted to outsource tasks like property management, asset management or accounting services to dedicated third-party vendors. In the process, many achieve greater time and cost efficiencies compared to baselines when managing these tasks in-house.
- Embracing data analytics to drive better decision-making: New, data-driven platforms can provide investors with real-time insights into the current values of their existing properties and profitability potentials for future investments. With these tools, investors can rely on reputable data and analytics — rather than dubious hunches or guesswork — when deciding what to buy and sell.
- Updating and standardizing accounting and reporting systems across their holdings: Cutting-edge software systems can modernize and streamline accounting and data management processes, saving time and preventing errors by reducing the need for duplicative data entry. These tools provide investment practices, both large and small, with an effective pathway to upgrade the reliability and accessibility of their accounting and operational reporting.
2. Engage available incentive programs
Until interest rates decline, investors will need to continue actively engaging in cheap funding through municipal, state or federal incentive programs if they hope to push upcoming investments into the black.
Energy efficiency incentive programs, in particular, continue to be a key legislative priority, with several energy tax credits currently available to developers, including some that offer solar credit transferability.
New federal funding lines have also been unveiled to support office-to-residential conversion projects, and a proposed 20% federal tax credit for qualifying projects is currently under legislative consideration.
There’s also talk that the coming year could bring potential federal extensions or even expansions to the qualified opportunity zones program. First launched in 2017, the popular incentive allows developers to defer capital gains tax for investing in low-income areas. But without an extension, the program is set to expire at the end of 2026.
3. Adopt a realistic, long-term profit horizon
The current market doesn’t support the quick-turn, three-to-five-year profit horizon that had been driving development prior to the pandemic. Instead, deals may now take 10 to 20 years to become profitable.
Investment firms need to be aware of this timeline shift and pivot their risk analysis accordingly.
Investors also must be realistic about their profit expectations since rates of return are not as robust as they used to be. In today’s market, a successful deal might return 10% to 12% profit on investment — not the 20% or more that had been common in more bullish markets.
Given these parameters, well-established, family-run investment firms may find themselves optimally positioned to justify signing on for the types of long-horizon projects currently available on the market. On the other hand, private equity-driven development groups, which typically seek opportunities that promise more immediate returns, may prefer to wait until the market settles to secure major investment deals.
How Wipfli can help
Unsure about how best to navigate the current, uncertain real estate market? Experienced Wipfli advisors can help developers and investors identify marketplace opportunities while leveraging available tax credits and other financial supports to lower the out-of-pocket costs of their projects. Learn more about Wipfli’s real estate services.
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