2024 Interest Rates: How PropTech supports real estate investment in a higher-for-longer environment

Despite early forecasts of multiple interest rate cuts in 2024, few changes are expected until later this year. How can you strengthen your real estate portfolio while it’s still expensive to borrow capital for new deals? Learn how advanced PropTech solutions help you closely monitor and manage your portfolio to uncover efficiencies and unlock hidden value during this time of higher-for-longer interest rates. 

What is “higher for longer?”

Emerging from the COVID-19 pandemic, the United States saw a booming economic recovery. However, the combination of a tight job market and rising wages brought a dramatic increase in inflation. To tame the hard-charging economy and avoid a recession, the Federal Open Market Committee (FOMC) raised interest rates 11 times between March 2022 and July 2023 to its current range of 5.25–5.50% – the most restrictive monetary policy in 40 years. The FOMC plans to keep interest rates high until achieving a 2% inflation rate of Personal Consumption Expenditures (PCE), which is the committee’s preferred inflation gauge.  

Investors began 2024 optimistically with forecasts of interest rate cuts. As recently as March, the FOMC was discussing three quarter-point reductions by the end of the year. However, the economy hasn’t cooperated. Reported job growth and spending levels have remained above expectations, keeping PCE inflation stubbornly above 2%. As a result, the committee has avoided rate cuts and kept the economy in a “higher for longer” interest rate scenario. 

The good news: Inflation seems to have stabilized and further interest rate hikes aren’t expected. In the US, the FOMC is now signaling at least one rate cut this year, and already short-term Treasury yields are down after a long period of an inverted yield curve (in which short-term rates are higher than long-term rates). Similarly, on June 5, 2024, the Bank of Canada cut its key interest rate from 5% to 4.75% and again on July 24 to 4.5%. Based on the current inflation trajectory, Canadian interest rates could be 4% by the end of the year. The concept of a “soft landing” for the economy – and the interest rate cuts that come with it – looks possible, but any actions will be delayed until the PCE better aligns with the FOMC target rate. 

How high rates are affecting real estate investing

While the economy isn’t as bad as it was a few years ago, it’s not quite great. High interest rates have been tough on the commercial real estate industry. It’s more expensive to raise traditional capital from banks, which have become much stricter with lending and refinancing criteria. This environment is not conducive to larger deals. Investment volume was down by 5% compared to 2023. Still, the drop was mild compared to 2022–2023, which saw a painful 45% decrease. 

With reduced investment activity came smaller returns across multiple portfolios. A CRED iQ analysis showed a 42% average decline in real estate valuations overall, with retail properties declining 49% and offices declining 50%. At the same time, CBRE found capitalization rates rising through the same period. The interest rate expense is causing investors to delay decisions, even while properties can be bought at a discount. The environment implies a 20% decline in values for most property types before stabilizing at the end of the year. 

Reduced levels of investment and budgetary limitations for borrowing have narrowed options for exit strategies in real estate portfolios. Many companies grew their portfolios with highly leveraged assets using floating-rate debt when rates were much lower. Those assets have now lost value to the point where the outstanding value of a property’s debt may be greater than the value of the building itself. Combined with the difficulties and expense working with major lenders, companies must find ways to create shareholder value other than selling existing assets and buying new ones. 

Still, opportunities exist. Research from Newmark indicates about $2T worth of commercial real estate loans maturing in the next three years. The growth of private credit and debt markets means companies facing equity challenges can shift some focus to private lending to improve their returns. Organizations with large resources available will also have an advantage, as portfolios that can handle all-cash transactions will have little competition acquiring resources. 

Where does real estate investment stand now in 2024? Think of it as the “meh” economy. While conditions aren’t completely predictable, they aren’t getting worse. Real estate organizations don’t have to plan for interest rate increases or related factors like rising material costs. However, with that stability comes a lack of investor enthusiasm where portfolio managers must make their funds stand out in a world of alternative investment vehicles that might (for now) offer more attractive returns. 

PropTech’s role in overcoming economic uncertainty

As the higher-for-longer scenario continues, what can real estate investment firms do to navigate this environment? PropTech solutions are one path forward, helping portfolio managers closely monitor and manage assets through uncertain times. Even with a lack of large deals, the right automation and strategies can help firms test assumptions, strengthen decision making and boost investor confidence and retention, keeping portfolios well-positioned as the economy and the real estate market evolve.

More accurate scenario forecasting and testing

The biggest challenge for portfolio managers is predicting how interest rates will affect their decisions on refinancing, selling, or buying an asset. With the unclear picture of when interest rates will begin to drop (and by how much), real estate investment firms must develop portfolio strategies for multiple scenarios.

Planning across factors

While portfolio managers have the advantage of not needing to build in buffers for interest rate hikes and the volatility of those increases on other economic factors (such as tenants’ ability to pay rent), they still face plenty of unknowns. They must also consider increasing capitalization rates in certain segments, the growth of alternative funding sources like private lending, and how continuing low unemployment rates will increase operational costs. Firms must also carefully plan and budget for how debt will shape future strategies. This evolving environment requires even more detailed analysis, due diligence, and investor scrutiny than ever before to ensure maximum ROI and revenue. 

Fortunately, testing the many variables in play doesn’t have to get in the way of timely decision making in a dynamic market. Advanced technology solutions help investment firms understand their portfolios’ sensitivity to market fluctuations across a broad range of factors and build multiple plans quickly based on different scenarios.

Forward-thinking organizations can use asset modelling to test different scenarios and analyze the effects on asset performance and valuation across their portfolio. In the current environment, this approach means testing not only for different amounts of interest rate reductions; it’s also important to see the effects of when these reductions could happen. If the market continues in a higher-for-longer stasis through the end of the year, portfolio managers can uncover efficiencies at the asset level to squeeze more value out of their current holdings. If interest rate reductions happen sooner, they must be prepared to have assets ready for buyers re-entering the market.

Analysis timing

Another important factor in portfolio success is the frequency of interest rate scenario analysis. Traditionally, real estate organizations test the effects of different interest rates only when considering whether to buy, sell, or refinance an asset. The current economic uncertainty means portfolio managers must keep a much closer eye on fiscal policies and real estate market conditions. The most successful managers won’t wait until the end of an asset’s lifecycle before testing interest rate scenarios. Frequent analysis across multiple factors will prepare organizations for different market and interest rate possibilities – and help them avoid letting new opportunities pass by.

The need for dedicated solutions

In any scenario, organizations can use advanced PropTech to gain a competitive edge. A dedicated asset modelling solution can make forecasts across this breadth of economic and market factors. The calculations are simply too complex for a simple Excel spreadsheet to handle accurately and quickly. What’s more, asset modelling software is more intuitive than working in a spreadsheet, helping portfolio managers conduct deeper analysis across more factors and asset relationships.  

It’s also important not to overlook data quality. While many organizations have a wealth of historical data for asset management, economic uncertainty requires more up-to-date information. Open and connected real estate investment solutions like MRI Investment Central can connect multiple data sources (including third-party sources) across your portfolio, making it easier to combine asset, market, and economic data to facilitate strategic analysis. The combination of historical precedent and current data provides a stronger analytical foundation.

Stronger transparency and investor confidence

Commercial real estate experts at MRI Software have spoken with many CFOs about their insights into the higher-for-longer environment. A recurring theme is that while debt financing in this economy raises many challenges and concerns, it’s more difficult to secure new capital from investors. Historically stable and reliable core asset classes are suffering major vacancies and declining market values. With investors facing an unpredictable future, many are turning to alternative investments that promise greater – and potentially more predictable – returns. 

What can portfolio and fund managers do to guide investors back to real estate assets? While offering strong returns is important, it’s not the only thing investors care about. In the face of economic uncertainty, investors want to be confident in the actions taken by the organizations they entrust with their money. Organizations can strengthen that trust by sharing visibility into the tactics and strategies and ensure their assets are positioned for higher returns once the next cyclical upswing begins. 

Again, the right technology is critical. An effective investment tech stack should not only deliver accurate forecasts, but also provide a platform for communicating with investors and offering transparency into portfolio strategies. The platform should incorporate real-time portfolio and market data to generate robust reporting. It should also have an intuitive interface and dashboards so investors can quickly understand the effects of future changes on their investments. Consistent, frequent communication is also key, so the platform should let portfolio managers automate the sharing of news and regular updates with investors and stakeholders. Making all this information easily accessible helps organizations ensure no one is ever left in the dark. 

For example, MRI Investor Connect acts as a hub for aggregating and reporting on asset and portfolio data. The solution can import and centralize data across multiple sources, warehouses and systems. It increases transparency for users by including granular and contextual data (such as occupancy rates) that influence individual asset valuations and drive overall portfolio performance. This data can then be summarized in intuitive visualizations, dashboards, and reports. Portfolio managers, investors, and other stakeholders (such as lenders and brokers) can continuously track and monitor KPIs, get a more accurate picture of portfolio performance, and stay informed about the organization’s strategic decisions. 

Communication tools are also useful for reassuring investors who evaluate specific environmental and social criteria for where – and with whom – they invest their money. In an economic climate where investors are considering non-real estate options to meet their objectives, institutional real estate investment firms must take the necessary steps to meet ESG criteria and open themselves to additional capital investment. Having the technology to not only achieve ESG targets and objectives, but also communicate progress and results to a broad audience, will help companies set themselves apart. 

Strong ROI: The value of investment PropTech

Moving through and beyond the current environment, the most successful organizations will be able to easily pivot strategies and deploy capital quickly to take advantage of opportunities. That flexibility will keep their overall portfolios resilient and insulated from economic turmoil that impacts specific asset classes or regions. Advanced technology will help visionary portfolio managers test different approaches quickly and reshape their portfolio mix to maintain growth. The key is investing in those systems and processes now before interest rates change again. 

The right tech presents an opportunity for significant revenue growth, helping firms deliver the ROI needed to justify the business case for implementation. More importantly, newer platforms incorporate the latest advancements in artificial intelligence, which is proliferating quickly throughout the PropTech world. AI’s ability to automate mundane, time-consuming tasks will help organizations significantly reduce operational expenses and minimize (or avoid entirely) onboarding new staff. AI also frees roles at all levels to focus on spearheading strategies that will propel your business despite market headwinds. 

No matter what developments happen in the coming months and years, PropTech developed specifically for real estate investment will help organizations respond more quickly to market changes and maximize ROI for their investors. 

How can PropTech create a strong foundation for your business? Check out the Investment Management Buyer’s Guide from MRI Software to learn what factors you should consider.