Liquidity in the Real Estate Market

• Inflation is expected to stabilize in the 2.3% range by the end of 2025.

• Key points include significant declines during the Tech Bubble (-2.9%), Global Financial Crisis (-30.7%), COVID (-2.5%), and recent interest rate hikes (-11.8%).

• Historically, the market has rebounded strongly after such periods, with average returns of +14% and +12% following the 2002 and 2009 downturns. Looking ahead, there's potential for real estate values to rebound again after 2023.

• Assets are generally trading below replacement costs today.

10-Year Annualized Total Returns by Sector

• In the second half of 2024, Clarion Partners expects to see notable improvements in overall real estate liquidity and deal flow. While credit spreads have narrowed and financing costs are beginning to improve, a full recovery in real estate capital markets will depend heavily on the Federal Reserve's policies.

• With new supply levels stabilizing, demand fundamentals across all property types are projected to strengthen in the coming years. This is especially true in sectors poised to benefit from key investment drivers: demographics, innovation, shifting globalization, housing, and resilience.

• Clarion remains cautiously optimistic about the upcoming year and believes that real estate offers attractive risk-adjusted returns in the long term.

Liquidity in the Real Estate Market

Let's take a second to understand liquidity's meaning before diving in, according to Business Insider liquidity refers to the level of cash on hand, and how quickly something can be converted into cash (how sellable or marketable it is).

The concept of liquidity is not well understood, there is no universal language that can be used to understand liquidity across markets. The best way to understand this would be to relate liquidity to rapid price discovery during periods of high volatility.

Additionally, liquid assets don't necessarily equate to liquid markets. Bank deposits, for example, are likely the most liquid financial asset. On the other hand, real estate can tend to be illiquid, which means that it can be difficult to trade the property in exchange for cash.

The International Monetary Fund (IMF) states the five key characteristics of a liquid market; low transaction costs, immediacy in execution, depth of potential buyers and sellers, breadth of size and volume of bids, and resiliency.

Transactions

Due to the large number of parties involved—including buyers, sellers, attorneys, brokers, accountants, and property inspectors—selling real estate can be a challenging process. Bidding, obtaining mortgage financing, performing due diligence, and registering property rights are just a few of the many papers that must be managed during the transaction.

It is more difficult to quickly convert property into cash when this complex procedure takes weeks or even months to finish. Real estate asset liquidation is further complicated by the necessity for significant resources and the high cost of transactions.

Real Estate Private Market

As a real estate investor extensive due diligence must be conducted in private markets. To obtain further information that can not be found as easily on the internet this will lead to speaking with agents directly and even visiting properties personally.

Compared to public markets (stocks, bonds, and ETFs) that provide easily accessible information, real estate transactions are private. Public markets provide complete transparency with pricing, returns, and corporate reports.

Importance of liquidity

Liquidity plays a critical role for real estate investors, providing them with the flexibility to access cash when necessary.

Here are two key reasons why liquidity is valued:

1. Handling Unexpected Expenses

Keeping liquid assets on hand is crucial for managing unforeseen expenses or emergencies. The ability to rapidly convert investments into cash helps investors navigate unexpected financial challenges and maintain stability.

2. Seizing New Investment Opportunities

Liquidity enables investors to quickly capitalize on emerging investment opportunities. Without readily available funds, investors may find themselves forced to sell existing assets, like real estate properties, to finance potentially more lucrative ventures.

What does liquidity look like today?

Transaction-based measures would be the best way to truly understand where we are at today. The chart above compares 2023 with the pre-pandemic average to present an understanding of "normal" in the real estate market.

The U.S. and the Asia Pacific Region experienced relative resilience in deal volumes, but the sharpest fall in liquidity can be seen in Europe.

Equity Residential Invests $964M in 3,500 Apartment Units

Equity Residential has made a significant move by purchasing a portfolio of apartment buildings from Blackstone for approximately $964 million.

The acquisition includes 11 properties located in key markets: Atlanta, Denver, and the Dallas-Fort Worth area. These properties encompass a total of 3,572 apartment units. The individual deals are anticipated to close during the third quarter of 2024.

Link to learn more.