In this captivating episode of Passive Investing from Left Field, host, Jim Pfeifer, sits down with John Chang, National Director of Research Services at Marcus & Millichap. John shares his wealth of knowledge on the current state of the real estate market, offering valuable insights for passive investors looking to make informed decisions in 2024 and beyond.
A Passion for Real Estate from an Early Age
John’s journey in real estate began at the age of four, when he accompanied his father to view his first rental property. This early exposure ignited a lifelong fascination with the industry, leading John to pursue a career in real estate research. With his analytical mind and keen eye for market trends, John has become a respected authority in the field, regularly quoted in mainstream business media.
2024: A Year of Reset and Opportunity
As investors look ahead to 2024, John characterizes it as a “reset and staging year.” While he doesn’t anticipate any particular asset class to “blow the doors off,” he sees ample opportunity for those willing to roll up their sleeves and add value. Whether through property upgrades, skilled management, or leveraging industry relationships, investors who possess the knowledge and expertise to create value will find compelling opportunities that pay dividends over the next 5-10 years.
Navigating the Market as a Passive Investor
For Limited Partner investors, John emphasizes the importance of thoroughly vetting the General Partner and their team. In an environment where the tide is no longer lifting all boats, it’s crucial to understand the General Partner’s relationships, skills, and knowledge. Investors should examine how the General Partner has financed properties in the past, whether they were caught off guard by adjustable rate mortgages, and if they were prepared for market shifts.
While many strong operators may have been impacted by recent challenges, John advises Limited Partner Investors to dig deeper and assess how the General Partner responded to these setbacks. Did they have a plan in place to weather the storm, or were they caught completely unprepared? By understanding the General Partner’s track record and approach to risk management, Limited Partner Investors can make more informed decisions about where to allocate their capital.
Opportunities Across Asset Classes
John provides a comprehensive overview of the potential risks and rewards across various real estate asset classes:
- Multifamily: Despite a wave of new supply coming online in 2024, the long-term outlook remains positive due to favorable demographics and the affordability challenges in the single-family home market.
- Self-Storage: While this sector has performed well in recent years, investors should be cautious of the upcoming wave of new construction.
- Retail: Contrary to the “retail apocalypse” narrative, this asset class has stabilized and is poised for growth, with limited new supply and strong consumer spending.
- Industrial: Although some markets may face short-term challenges due to new supply, the long-term fundamentals remain strong, particularly in infill locations.
- Office: Suburban office properties are expected to outperform, while older, large-scale urban office towers may struggle. Investors should be prepared for a longer-term play in this sector.
- Medical Office: With the potential for long-term leases and attractive yields, medical office buildings offer a compelling investment opportunity.
- Senior Housing: Demographic trends support long-term demand, but investors must have a deep understanding of this complex asset class.
- Hospitality: Despite the challenges faced during the pandemic, the hospitality sector has largely recovered and is expected to perform well, barring a significant recession.
The Interest Rate Puzzle
One of the most pressing questions on investors’ minds is when interest rates will return to “normal.” John explains that the definition of normal varies depending on an investor’s experience and tenure in the industry. For those who entered the market post-financial crisis, normal may mean 2-4% for the 10-year Treasury. However, for seasoned investors who have weathered multiple cycles, the current rate environment is more in line with historical norms.
John believes that interest rates are likely to remain in the 4% range (plus or minus 50 basis points) for the 10-year Treasury over the next few years, barring any major economic setbacks. He advises investors to focus on creating value through strategic property improvements and effective management, rather than relying solely on low interest rates to drive returns.
Preparing for the Unexpected
When asked about potential overlooked factors that could impact the real estate industry, John emphasizes the importance of being prepared for the unexpected. While most economists predict a soft landing for the economy, there is still a 25% chance of a recession or a resurgence of inflation. Investors should evaluate the recession resistance of each asset and property type, considering the demand drivers and potential risks.
John also highlights the need to monitor geopolitical events, such as the recent attacks on cargo ships near the Suez Canal, which could disrupt supply chains and drive up shipping costs. While these “black swan” events are difficult to predict, investors should remain vigilant and adapt their strategies as necessary.
Continued Learning and Networking
For those eager to learn more from John Chang and connect with like-minded investors, he will be presenting at the upcoming Best Ever Conference. His three-hour workshop on using information to build investment strategies promises to be a valuable resource for attendees. John will also participate in the conference’s popular debate session and deliver a closing keynote on the final day.
As the real estate landscape continues to evolve, passive investors who prioritize education, due diligence, and strategic partnerships will be best positioned to navigate the shifting tides. By staying informed, adaptable, and focused on creating value, investors can uncover compelling opportunities and build long-term wealth in the years ahead.
To stay up-to-date on the latest research and insights from John Chang and the Marcus & Millichap team, be sure to follow him on LinkedIn, where he regularly posts videos, market analysis, and announcements of new research releases. With his passion for real estate and commitment to empowering investors, John Chang is a valuable resource for anyone seeking to thrive in this dynamic industry.
