Real Estate Fundraising: A Possible Upswing?

After enduring roughly two years of challenging market conditions, private real estate may finally be hinting at a turnaround. Early indicators from the third quarter of 2024 suggest that the sector’s downward trajectory might be leveling out. In particular, the proportion of banks tightening lending standards on real estate loans has begun to decline, and commercial property price indexes are showing the first signs of improvement in quite some time.

Lingering Uncertainty in the Market

While these data points are encouraging, the road to recovery remains paved with uncertainty. The Federal Reserve’s stance on rate cuts is unclear, largely due to concerns around persistent inflation. If inflationary pressures resurface, further monetary tightening—or at least a longer wait before the Fed pivots—could dampen the measured optimism currently flickering in the market.

This wait-and-see approach is reflected in private real estate fundraising. Despite signs of improvement, 2024 is shaping up to be one of the slowest years in a decade for private, closed-end real estate vehicles. Many investors are holding off on commitments, awaiting more clarity on interest rates, valuations, and inflation before diving in.

Affordable Housing: An Ongoing and Pressing Need

Amid this broader market uncertainty, the urgent need for affordable housing only grows. Renters across the country face limited housing stock that fits lower- and middle-income budgets. Rising construction costs and high interest rates exacerbate the problem, making conventional multifamily projects challenging to develop at affordable price points.

Repurposing Vacant Offices and Infill Development

Developers and municipalities alike are looking for new ways to boost the affordable housing supply—and not all solutions require ground-up construction. One approach involves repurposing vacant or underutilized office buildings into residential units. With office vacancies mounting in certain urban cores, these conversions can help developers bypass some of the time and cost associated with new builds.

Similarly, infill development—building on vacant or underused land within established urban areas—is another strategy to increase housing density without overextending public infrastructure. By leveraging existing utilities, roads, and public transit, infill projects can often be more cost-effective and environmentally friendly than building on previously undeveloped land.

Interest Rates and the Debt Service Conundrum

Securing favorable financing is still a major challenge. Higher interest rates effectively lower the maximum allowable loan-to-value (LTV) thresholds because projects must satisfy minimum debt service coverage ratios (DSCR). The U.S. Department of Housing and Urban Development (HUD), for example, often requires a DSCR of at least 1.15x. In a high-rate environment, even well-structured deals can struggle to meet these strict coverage requirements, limiting available capital and slowing the pace of new development.

Closing the Gap: Grants, Impact Funding, and Cost Segregation

With traditional lending constrained, creative capital sources are stepping up to fill the void:

• Brownfield and Infill Grants: The U.S. Environmental Protection Agency (EPA) provides Brownfields Assessment and Cleanup Grants, helping communities safely transform environmentally impacted sites. States and municipalities also offer infill grants to encourage the redevelopment of vacant or underutilized land.

• Impact Investments: Socially conscious investors and philanthropic organizations are increasingly supporting real estate projects that address affordable housing or community redevelopment. These investments can include everything from low-interest loans to equity stakes in projects demonstrating measurable social impact.

• Cost Segregation: Developers and investors can tap into tax-saving strategies like cost segregation, which accelerates the depreciation of specific building components. This approach can boost near-term returns by reducing tax liabilities—helping offset higher borrowing costs.

• Structured Capital: Tools such as C-PACE financing (Commercial Property Assessed Clean Energy) lower operating costs through energy-efficient upgrades, improving DSCR. Ground leases can free up equity by separating the land from the improvements, and other gap-funding programs—like brownfield remediation funds, tax credits, or HUD Community Development Block Grants—can mitigate otherwise prohibitive project costs.

By layering these sources of capital and incentive programs, developers can craft financing solutions that make otherwise infeasible projects pencil out, especially in the vital affordable housing sector.

The Generational Buying Opportunity—If You Can Fund It

Despite the uncertainty, some investors still see a generational buying window. Distressed office properties and other undervalued assets could produce a significant upside if and when the market regains its footing. The main hurdle is financing—tighter standards and higher rates demand innovative capital stacks and creative strategies like cost segregation to keep returns attractive.

Looking Ahead

The question on everyone’s mind: Will these early signs of stabilization turn into a durable uptrend? If inflation moderates and credit markets ease, we could see faster recovery. In the meantime, the chronic shortage of affordable housing continues to push developers, municipalities, and investors toward more inventive approaches. Converting idle office buildings, leaning into infill sites, and leveraging grants or structured financing could reshape urban landscapes in the coming years.

For now, most of the industry remains in a holding pattern, keeping a close watch on economic indicators, property price indexes, and signals from the Federal Reserve. But when the tide finally shifts, those who have proactively harnessed grants, impact funding, and cost segregation strategies—and positioned themselves for opportunistic acquisitions—may be the first to profit from a market once again on the rise.