Multifamily has shown an interesting pattern with importance beyond the category. Core and value-add metrics outperformed expectations in the third quarter of 2024 and core asset IRR targets rose as underwriting stabilized in Q4. CBRE reported “substantial movement” in unlevered IRR targets for core assets, which increased.
While they focused on multifamily, the performance of core capital has a broader meaning, according to Cushman & Wakefield. Overall, core capital fundraising in 2024 tripled that of 2023.
“That’s right, annualized year-to-date core capital fundraising has rebounded, outpacing last year by a factor of three,” Abbey Corbett, senior economist and head of investor insights at the firm, said in a video. “To give you some context, closed-end funds have pulled in over $10 billion this year, compared to just $2.5 billion last year. This bounce back is significant because core capital is in many ways the tip of the proverbial spear, or the foundation of CRE capital flows.”
Corbett explained that cycles of development, improvement, and sales across different types of asset types, particularly after “periods of market disruption.”
After a substantial period of concern and pulling back, investors “regain their footing” and consider their strategy going forward, including timing, property types to focus on, and, importantly, the type of investing they prefer — core, core plus, value-add, and opportunistic.
There is a common pattern where core capital rises in prominence after market disruption. After volatility and uncertainty, that is understandable. Core properties are high-quality and low-risk with stable operational metrics like cash flow and NOI. These assets are largely trustworthy and dependable, just what many want after a tumultuous time. They provide a haven where an investor can retrench and start building again.
“Core and core-plus closed-end funds are capturing 12% of capital raised across strategies, the highest share since the post-GFC era in 2010 when core captured 20%,” Corbett said. “Ultimately, core capital acts as a bellwether for the broader CRE capital markets.”
The predictive power happens over a few years. It takes time for fund managers to invest large sums. That gives value-added and opportunistic owners and investors an idea of where the market is going, so “those funds can expect to sell to the new and existing core funds being formed.”
The core capital flow can create competition and even a sense of urgency for value-added investors to move now and be ready for the near future.