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Positioning for a Real Estate Comeback

  • By: admin
  • On: 06/03/2025 16:56:59
  • In: News
  • Comments: 0
While valuations may decline in the near-term, the underlying fundamentals for real estate remain strong — especially in markets experiencing sustained population and job growth. 
By: Braden Merritt and Jonathon Cline, Humphreys Capital

After three years of economic turbulence, commercial real estate investors are looking for signals that suggest a renewed buying window. Institutions, in particular, appear to be lining up opportunistic capital to take advantage of mounting stress in the market. This has been the case for Humphreys Fund V, where three state pensions and a state trust have been early movers in contributing to the fund's $102 million of initial commitments.
 
The Case for Staging Patient Capital
Real estate markets are experiencing a dichotomy. The combination of high interest rates and high supply in many markets has created near-term strain. Debt service is up, rent growth is down, and leveraged equity is taking write-downs as assets are repriced.1 And yet, over a longer term, the U.S. economy is proving resilient, demographic growth continues to drive absorption, and the supply wave seems to be passing. As markets move in cycles, this appears to be a moment when cash will be king. Investors with healthy balance sheets should be poised to recapitalize distressed investments before entering a new phase of recovery.

Over the past four decades, private real estate funds have delivered positive returns across a variety of economic cycles. Evidence suggests that this performance was aided by a long-term trend of declining interest rates — a trend that reversed in 2022 when the Federal Reserve responded to rising inflation with a sustained series of rate increases.2

Since then, higher borrowing costs and a slowdown in transaction volume have placed downward pressure on valuations.3 4 This has been especially evident in interest rate-sensitive sectors such as multifamily housing. In an August 2024 white paper, this relationship between multifamily cap rates and 10-year Treasury yields. We found that this historical relationship is significant when adjusting for a delay of six to eight quarters for price discovery. This indicates that the coming months may lead to further declines in property values, even as the Fed provides longer-term relief through additional rate cuts.

Challenges with valuations stand to be exacerbated by a wall of maturing debt that will require refinancing at new terms and under fresh appraisals. Low distress enabled banks to extend maturities in recent years. However, as distress rises, we believe the more pressing need for recapitalization will eventually force assets into the market.

Data on multifamily distress rate sourced from CREDiQ Multifamily Distress rate, estimated from 2020-2024 through CMBS and CLO either delinquent or in special servicing. Data on Expected Multifamily maturities from 2020-2023 sourced from Walker and Dunlop. (2023) citing the Mortgage Banker's Association. Expected Maturity in 2024 from the Mortgage Banker's Association 2023 Commercial/Multifamily Loan Maturity Volumes. Forecasted data of Expected Multifamily Loan Maturities from 2025-2029 sourced from the Mortgage Banker's Association 2024 Commercial/Multifamily Loan Maturity Volumes.

While valuations may decline in the near-term, the underlying fundamentals for real estate remain strong — especially in markets experiencing sustained population and job growth. The Southern United States has been a leading destination for domestic migration. Since 2021, more than 750,000 people have relocated to the region annually, reinforcing long-term demand for commercial and residential real estate.5 6 At the same time, new development has slowed. Construction starts have dropped to their lowest levels in more than a decade.7 We expect this rebalancing of supply with continued demand growth will create a favorable leasing environment in the years ahead.

While exercising patience in this phase of the cycle can be challenging, we believe the best opportunities for new investment have yet to arrive. Even after the Great Financial Crisis, the buying window for some of the strongest returns extended from 2009 all the way through 2012.8 When opportunities present themselves in the new cycle, prepared investors with ready access to capital should be positioned to capture them. 
 
Humphreys Fund V: A Thesis in Action
Despite recent volatility, the key drivers of enduring real estate value remain in place. This backdrop sets the stage for the launch of Humphreys Fund V. We anticipate the coming season will bring assets to market well-below replacement cost, driven by the need to retire maturing debt. Early participation by institutional allocators in the fund's initial close have affirmed the return of this opportunistic, patient capital to the market. Our team is following this dynamic closely, staged and ready for a compelling entry point with mitigated downside and strong fundamentals.

About the Authors
Braden Merritt is the President of Humphreys Capital and a member of each fund's Investment Committee. He joined the firm in 2017 after building experience with Boston Consulting Group and Google, and he was formerly on the Rising Leaders Council for the Institute for Portfolio Alternatives (IPA). Braden began his career as a reconnaissance officer in the United States Marine Corps, and his combat deployments include Iraq, Afghanistan, and at sea with the U.S. Fifth Fleet.

Jonathon Cline oversees strategic communication at Humphreys Capital, ensuring clear and consistent engagement with investors, partners, and external audiences. He also supports the firm's fundraising efforts by developing communication strategies and investor materials. Since joining the firm in 2022, he has played a key role in strengthening brand visibility and investor relations. Previously, he served as senior art director for a lifestyle brand in Dallas, TX.
 
1 U.S. Census Bureau 2010-2023 net domestic migration for all Census Bureau-defined regions of the U.S.
2 Capital Economics, Census Bureau. 2023 net domestic migration totals.
3 CoStar. 2021-2024 total multifamily and industrial starts.
4 Hines, NCREIF. Median North American real estate fund IRRs. “Real Estate Price Index” refers to the NCREIF PPI for funds of a specific vintage.
5 Green Street's Commercial Property Price Index® (CPPI) is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted.
6 FRED. Federal Funds Effective Rate [FEDFUNDS], Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS.
7 FRED. Secured Overnight Financing Rate [SOFR], Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SOFR.
8 RCA, Newmark Research. Commercial Real Estate Debt Obligation Volume. Data as of 4/21/2025.
 

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