Listen: Real estate investors ready to make plays ahead of possible interest rate cuts

Madison International’s Ron Dickerman joins TRD’s Deconstruct to discuss the best and worst bets in 2024

Investor Pivots to Single-Family Rentals and Industrial Assets
Madison International’s Ron Dickerman (Madison International, The Real Deal)

2023 was a challenging year in real estate, marked by cautious investors waiting for signs of market improvement. Now, they are looking to get off the sidelines.

“Investors now are starting to look for ways to go on offense. I think people expect 2024 to be a transitional year,” Ron Dickerman, president of Madison International Realty, told The Real Deal’s Deconstruct podcast.

The Fed’s tentative plans to cut interest rates are reason for optimism. But such elation does not extend to every sub-sector of the market. 

Dickerman highlighted the hesitancy around investing in office assets, saying he expects it to take years for the market to reach a healthy equilibrium. Rather, his firm is focused on single-family rentals and industrial assets.

The Madison exec also highlighted the importance of preferred equity, mezzanine loans and other gap financing for commercial owners, and how the high cost of capital could leave some owners in trouble. 

While there is still a small appetite for investing in office, the emphasis is on Class A spaces where tenants are willing to pay premiums. But when it comes to residential conversion of Class B spaces, Madison has little interest, thanks to the high costs of conversions. 

“I can’t remember a time in 35 years of investing in real estate where asset class performance has been so differentiated,” Dickerman said. 

As for the long-term outlook for the office market, Dickerman sees a sliver of hope on the horizon, pointing out how retail has found a healthy place in the market years after Amazon and other e-commerce companies disrupted the space. But the question is how long that recovery will take. 

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In the meantime, Madison will stick with what’s working.

“We think the U.S. is undersupplied by between 3 and 4 million units of single family homes,” Dickerman said, pointing out that there are more multifamily homes being developed than single family homes right now. 

The move to single family rentals is driven largely by demographics, as aging millennials with families look for more living space. But high mortgage rates and housing costs have made it difficult for those buyers. 

Within industrial, Madison has a strong preference for the cold storage subsector, rather than traditional warehouses. 

“Home delivery of groceries got a big shot in the arm during Covid,” Dickerman said. “Class A industrial, the big bomber warehouse buildings, are a bit overbuilt.”

Dickerman also discussed the growing need for gap financing for many commercial owners, who have been forced to take on outside money “to help them roll over debt or to plug holes that senior lenders are not willing to advance.”

That infusion capital comes at a high price today, though, with investors seeking returns in the mid-teens on capital. For some owners, the cost will be too high. 

“Not everyone is going to be able to accept the cost of capital that the market is demanding,” Dickerman said.