As we approach the end of 2024, it’s clear this has been a year of challenges, opportunities, and shifting paradigms in the real estate world. Let’s take a moment to reflect on what happened—and what didn’t—in the commercial real estate markets, the progress we’ve made as a firm, and where we see things heading in 2025 (plus some Firm updates for the new year).
To state the obvious - we have a regime change here in the United States. I don't have a crystal ball to what Trump 2.0 is going to herald. The only certainty in life is uncertainty. So be conservative (in underwriting)!
This year was a tale of a lot of big predictions going in didn't really materialize (sure - some did, but I think the big ones did not). There was a common consensus that rates would drop, deal volume would pick up and sellers would get bailed out by dropping cap rates (in rough terms that was the thesis). That didn't materialize this year. Rather, inflation stayed stubbornly high(ish) and deal volume had another abysmal year.
I would argue that even if rates had tanked, I don't think deal volume is coming back in a big way (yet). The reason is that you cannot underestimate the bearishness of sponsors out there. A lot of people have a lot of egg on their face right now, as the market really whipsawed a lot of people. Nobody wants to make the same mistakes. Also rate volatility is a huge issue. It's very hard to build a business plan around a building right now (or even know what your interest rate is during DD) when rates are as volatile as they have been. Check this chart out.
In May 2024 the 10-year spiked up to 4.7%, and by October it was down to under 3.7%. Then back up again. Also we started the year at 3.9%. That means a couple things - if spreads were stable (huge if) your interest rate could range from potentially the high 5% range to the low 7% range. At any given point this year. That makes a huge difference in prospective return for your deal.
Try to envision trying to do deals this year. Imagine being in contract on a deal in March 2024, closing May 2024, and needing to decipher what's going to happen before you've been able to lock your rate. Good Lord - the only real answer is to be much more conservative in your underwriting. The great news, in my opinion, is that everybody is doing this so if you're on the buy-side and trying to put deals together you don't have silly money pushing cap rates down and valuations up.
No discussion of 2024 is complete without discussing the debacle that is insurance. The last few years have witnessed a serious increase in operating expenses for most multifamily operators. Labor costs are way up. Taxes are up in most jurisdictions. But the worst culprit right now is interest rates. We wrote a long form post on interest rates (see it here), but suffice to say insurance is a serious issue for most operators. It's a challenge for existing assets and a huge opportunity for buyers because it is repricing a lot of buildings.
Great deals, in fact, from our perspective. I'll get into some of the opportunities we see in 2025, but suffice to say there are in fact great deal opportunities out there for the bold minded.
It was also a tale of (different) markets. Real estate is always a regional matter - and this year was no exception. To focus on our own markets.
The SF Bay Area continued to be anemic, driven by misguided local politics and terrible policies. More importantly, local politicians messed with a really important fundamental - they caused instability in rule and regulation. It's very hard to be an investor with an interest in deploying capital into a city when the city itself changes the rules constantly.
Seattle I would describe as a city in transition. Seattle has some rather aggressive major corporations in terms of getting people back into the office. We do expect that'll result in some good outcomes for rent growth for the city. At the same time, anecdotally, leasing was a big more difficult.
Portland was awesome. I don't know how else to describe it. Rents grew (in our portfolio). Occupancy stayed really strong, and re-leasing activity was great. It's a bit surprising because of our three major markets, I think Portland has the "least deep" business bench, but you can't speak enough to two major developments here. First - a resumption of law and order, which is a huge benefit to the city. We successfully elected a pro enforcing the law District Attorney, and immediately saw a difference on the ground around homeless encampments and more.
The other area that I think helped drive good performance here is that Portland is further ahead on the "supply" delivery phase. What I mean by this is actually a great story about why we like cities like Portland. Portland started requiring what they call inclusionary zoning (IZ) which requires new developments to deliver some % of the total building stock of affordable housing. End result was a complete stagnation of new permits coming in.
Thus, Seattle is still working through a supply dump. The Bay Area is the same. Portland is ahead of the curve on this particular topic, and so I think the market here is tightening more. Lastly - it's just such a beautiful place - it's hard to argue with a city that is literally the least expensive West Coast city, and only 1 hour from either the beach or the mountains.
Nationally, multifamily did OK. We saw a series of big failures on multifamily portfolios mostly focused in the Red State exodus locations (ahem; Texas, Arizona). It doesn't mean they aren't good long term , but it does mean that the fundamentals there are more challenging right now. Supply is an issue there, as well - though to be fair, the supply is driven also by good underling fundamentals. Nonetheless, if you bought something there in 2021 or 2022 on a bridge loan, you've got a problem. I do think a lot more distress is coming in 2025, especially in some of these "hot" markets.
For us at Lombard Equities, 2024 was a year of strategic growth and consolidation. We continued to expand our portfolio, now managing ~$150 million+ in assets, while focusing on delivering value to our investors through disciplined asset management.
Some highlights from the year:
Through it all, our focus remained on long-term value creation, operational excellence, and adapting to the rapidly evolving market landscape.
As we look to 2025, it’s clear the challenges of the past two years aren’t going away—but neither are the opportunities. According to our 2025 Outlook, we anticipate the following trends to shape the year ahead:
At Lombard Equities, we’re doubling down on what we do best: identifying opportunities in uncertain markets, managing assets with precision, and delivering results for our investors. We’re also investing in technology, thought leadership, and education to position ourselves—and our clients—for success in the years to come.
A few things coming in 2025 on this front:
Please touch base if you're interested in chatting about the upcoming Fund, or our views more generally. If you're a new investor or "rising sponsor" - i.e. somebody who wants to emulate what we've done here - we also have resources for you and would love to talk.
You can email me at arie@lombardequities.com on either topic - look forward to discussing.
Cheers to 2025!