Maximizing Real Estate Returns In A Rate Cut Environment – Technologist

At long last, the time has finally come for the Fed to begin cutting rates in September. As a result, real estate investors will likely benefit from a tailwind over the next couple of years, after a rough prior two years.

Mortgage rates peaked in October 2023 but rose again from December 2023 through April 2024. Now, we can assume with greater confidence rates should continue trending lower as the Fed starts cutting the short end of the curve. As the economy softens, interest rates will likely stay muted.

In the spring of 2024, we saw some wild bidding wars, but activity has slowed for two main reasons. First, a significant number of buyers are waiting for confirmation of rate cuts before entering the market. Second, with the November 5, 2024, presidential election looming, many buyers are opting to wait and see who takes office before making one of the biggest purchases of their lives.

Given the drop in mortgage rates and the current hesitancy among buyers—especially during the traditionally slower second half of the year—there’s a window of opportunity to purchase residential real estate right now at better prices. Fall and Winter are my favorite seasons to buy due to less competition.

Demand For Real Estate Could Surge Higher

In my podcast with Ben Miller, CEO of Fundrise, we discuss how a negative real estate spread is holding back investment committees from approving commercial real estate deals. A negative spread occurs when borrowing costs exceed property yields, which has caused transaction volumes to drop significantly.

However, once we see a neutral or positive real estate spread—largely driven by falling interest rates—we’ll likely experience a surge in purchase activity, pushing prices higher.

That said, the future remains uncertain. Mortgage rates could remain flat or even rise again, dampening demand. But if the Fed starts cutting the Fed Funds rate while longer-term rates rise, we’ll see a steepening yield curve, which is usually a bullish signal for the economy. As long as the Fed continues cutting rates, real estate investors should benefit from positive momentum.

We’re already seeing real estate ETFs like XLRE and VNQ hit 12-month highs, along with public REITs such as O, SPG, DLR, and PSA. This surge is in anticipation of rate cuts and increased operating income. As a result, there may be an arbitrage opportunity to invest in private real estate funds that haven’t yet revalued their Net Asset Values (NAVs).

Investing In Real Estate During A Multi-Year Rate Cut Cycle

Click the play button in the embedded player to listen to our conversation, or go to Apple and Spotify directly to listen.

Here are my show notes for my conversation with Ben Miller, CEO of Fundrise about what’s next in real estate.

Main Theme:

Interest rates are the most significant driver of real estate prices, surpassing operational improvements. Apartments are likely to benefit the most by the end of 2025.

Real Estate Market Insights:

Apartments: Best-performing asset class. The less people can afford homes, the more they rent—benefiting apartment owners.

Office Sector: Facing permanent demand decline of 30-50%, compounded by a cyclical downturn. Still is unwilling to buy the space.

Industrial Sector: Moderately pro-cyclical, driven by economic flow of goods. Best asset class after Apartments.

Economic Outlook:

Recession Prediction: A mild recession is likely, which may be bad for stocks, but good for residential real estate.

Boom-Bust Cycles: Largely due to oversupply and undersupply. The industry is digesting overbuilding from 2020-2021, and there will likely be an undersupply again in 2025+ given underbidding from 2022-2024.

Class A properties are yielding 5.5%-6%, which means the market could “clear overnight” once borrowing costs decline to these levels or below, sparking a real estate boom.

Investment Insights:

Decision-Making in Funds: Institutional investors held back on buying commercial real estate in 2023-2024 due to negative real estate arbitrage (when interest rates exceed purchase price yields). This prevents deals from passing investment committees. However, To outperform, funds must invest counter to consensus.

Population Growth Is The Biggest Driver Of Real Estate Prices: Strong growth in Texas, Florida, North Carolina, South Carolina, and Georgia is driving real estate demand. The apartment sector could be the biggest winner by the second half of 2025 due to low supply, high migration, and lower interest rates.

Secular Trends & Government Policies:

Urban Decline: Collapse of downtowns due to declining demand for office space. Knock-on effect for government revenue and attracting more businesses. Not bullish on blue cities downtown, however, understands there are geoarbitrage opportunities within cities.

Government Policy: Potential $25,000 credit for first-time homebuyers and incentives for developers could impact the housing market. So could increasing tariffs on imported goods that may go towards housing subsidies and credits.

Investment Outlook:

Equity markets aren’t pricing in a recession, but credit markets are—a better predictor. Therefore, Ben is not buying public equities, and buying bonds, real estate, and venture capital instead.

Reader Questions

Share your thoughts on investing in real estate at the start of a multi-year interest rate cut cycle. Are you bullish, neutral, or bearish on residential and commercial real estate, and why? Do you think supply might outpace demand despite the significant housing shortage, particularly from 2022-2024 when borrowing rates surged?

If you’re considering investing in private real estate, take a look at Fundrise. They manage private real estate funds focused on the Sunbelt region, where valuations are lower, and yields are higher. Fundrise specializes in residential and industrial real estate, offering investors diversification and passive income potential.

Currently, Fundrise manages over $3.5 billion for more than 500,000 investors. I’ve personally invested over $270,000 with Fundrise, and they’ve been a proud sponsor of Financial Samurai for years.