Annual Outlook- 2024

It seems like the last several annual outlooks have started the same way – inflation and economic uncertainty, strife and war abroad, and political divide and polarization. Opinions are still greatly different, and conviction is still diverse in nature.  

The last twelve months were some of the toughest on record for real estate, specifically in the multifamily arena. We had (and still have) a perfect storm of headwinds that has created an untenable situation in many respects. As dour as this may seem, fear not – we may just be on the other side of one of the most aggressive interest rate tightening campaigns since the Volcker years. Optimism is growing, and that drives opportunity. 

As always, this report represents an outlook from our point of view. We have built our reputation on detailed underwriting, analysis, and strategic selection of both assets and markets, resulting in strong performance for our limited investors. Most importantly, we are transparent and offer counsel and accessibility in the most critical times. 

General Economy 

Last year, we predicted that the marketplace in 2023 would be heavily dependent upon Jerome Powell’s Fed – unfortunately, this year will be a continuation of that dependency. 2023 was a year characterized by a rollercoaster of market activity in the public markets, historic volatility in the Treasury markets, and a constant stutter-step with inflationary pressures. Month-to-month the market anxiously sat around waiting for the next report to give some indication of whether we were on the other side of the tightening cycle. As of the date of this writing, we have been on pause for some time. We are seeing some indications that while layoffs are not increasing dramatically, hiring momentum has slowed. A flurry of positive reports (indicating a cooling economy) close to year-end drove the ten-year Treasury, a bellwether index, down from roughly 5.00% to below 4.00% for the first time since the summer on renewed optimism that Fed cuts were right around the corner.  

We believe that rates have stabilized here for now and expect interest rate cuts to take place beginning in 2Q24. While we aren’t going to comment on the pace and magnitude of the cuts, most market participants expect 75-150 basis points (0.75-1.50%) of interest rate reductions in 2024 through a series of between three and six cuts. The ten-year Treasury, while not mechanically related to the Fed Funds rate, moves to some degree in correlation with broader cuts and the outlook on the economy. It’s worth noting that absent pulling off the “soft-landing” that has been in discussion for the last 24 months, a pace and magnitude greater than what the market would expect would likely indicate some sort of significant economic contraction or rockier road on the horizon. Cuts in the level of interest rates would likely stimulate renewed economic activity, and help avoid a deep recession.  

A topic we’ve been discussing for some time is the end of the “easy money era.” The time when everything increased in value just because, is over. What that implies for all investing, is a return to fundamentals– and that means buying value. Whether you are buying public market securities or investing in private real estate, it’s about finding things that are overlooked underappreciated or can benefit from a strategy to bring these assets up to par with the marketplace. This allows you to disconnect from broader market trends and generate value irrespective of the macroeconomic climate. As we predicted last year, the return to cash flow is real. Investment opportunities in favor right now are things that generate real rates of return, and can be improved over time. Deep speculative opportunities have fallen out of favor as a result of both capital markets uncertainty and preference for tangible, immediate cash flow. 

Outside the financial markets, we’ve continued to closely follow the geopolitical situations overseas and their resulting effect on our domestic economy. Additionally, we are at the beginning of what is shaping up to be a very interesting election year. Election years are always wild cards for decision and policy making, and we expect this year to be no different.  

The Real Estate Market 

Prior to 2023, negative real rates and ample liquidity sloshing around the system led to some of the wildest transaction volume years on record. In 2023 we experienced some of the steepest contractions in transactional volume that we’ve seen since the Great Financial Crisis. Interest rate tightening and uncertainty in the markets absolutely eviscerated investment confidence and created one of the slowest years in memory. We saw capitalization rates begin to widen from the all-time lows experienced just a few years prior. On the residential side, we saw 30-year mortgage rates touch highs not experienced in the last 15 years, all but crimping home affordability in most major metros. The very top end of the market and low end of the market suffered the most, as folks bought “less house”, and the trickle-down effect ruined the ability of lower-income individuals to capture the dream of homeownership. Last year, we predicted 10-15% home price erosion, which happened in certain markets, but a different effect underscored 2023 – the lock-in effect. Similar to commercial real estate, deal volume trickled to a stop, as inventories were extremely low and virtually non-existent in some cases as homeowners with favorable mortgages stayed put. 

While cheaper to rent than buy in almost any market in the US currently, we’ve seen rental growth reversing significantly, and in the best markets, rent growth is flat. The years-long narrative of providing additional supply to the marketplace finally came to fruition with the 2023-2024 delivery years set to be some of the best in forty years. Between stretched household budgets, and thousands of new rental units coming online, supply/demand imbalances began to come back to parity. We are starting to see the effects of household deformation – something I have long referred to as the greatest existential threat to the multifamily space. Simply put, household deformation is moving in with a family member or significant other or getting a roommate. Everyone may need a place to live, but not everyone has to live on their own. From the Great Financial Crisis onward, economic prosperity coupled with low inflation drove household formation. Cost of living challenges and economic headwinds have reversed this trend. 

Last year, we predicted that industrial and other cash-flowing asset classes would become more investable in 2024. We also predicted that cash flow would return as the great arbiter and driver of decisions. The market will value deals based on their economic utility upon investment. Valuation will return to less of a situation where the buyer is paying for future value upfront and more of a situation where valuation can still be improved and increased, but cash flow will be a greater component of this from the onset. For industrial, for example, we believe tenancy is sticky, and the folks that are occupying industrial space will have tailwinds from improving supply chains as well as onshoring and reshoring trends, especially near high growth markets. Warehousing needs will grow greater in 2023 and beyond as firms are still reeling from supply chain shortages and are conscious to avoid these moving forward.  

As of a result of our investment beliefs, we have begun to build out a light-industry strategy here at Lucern. In the last twelve months, we have purchased or developed almost 200,000 square feet of this product and are exceeding our pro forma projections in all cases. Cash flow has been resilient and rent growth has been consistent and durable. These properties are scarce and supply/demand imbalances are strong, helping to support occupancy and rent growth trends. These properties are also well insulated from other challenges we see in the multifamily market – rising costs, insurance issues, staffing shortages, and landlord/tenant issues, among others. We believe we will continue to find opportunities in this space that make sense for our investors.  

Key Takeaways & Predictions 

  • Predictions of what’s to come for the economy are wide ranging and varied 
  • The Fed will generally be in the driver’s seat as they have been for the last 24 months 
  • Fed activity has generally been on pause, and most participants expect a series of 3-6 cuts in 2024 
  • Return to cash flow driven investing is real, the “easy money” era is over 
  • Return to cash flow driven investing is real, the “easy money” era is over 
  • Interest rate increases have crimped availability and residential inventories are some of the lowest on record 
  • Rent growth is flat to declining as a result of affordability challenges and highest supply in 45+ years 
  • Lucern has been pivoting towards light industrial, as we see it being one of the best risk/reward corners of the market currently, with approximately 200,000 square feet of deal volume in the last twelve months. 

The Future of Lucern Capital

The future of Lucern Capital continues to be bright. Through every downturn comes great opportunity. We are durable and resilient, and our underwriting is as strong as the day we opened our doors. Our track record is strong, our investors are growing and loyal, and we are transparent and accessible. As always, we are incredibly proud of our success, and we thank you sincerely for your continued interest and investment in our platform.


Frank Forte & Team Lucern