When Demand Is There But Prices Are Not

Private real estate investment firm, Rastegar Property Company, like many others generally in CRE, has been seeing pain.

Whether that’s high interest rates and demand not keeping up with supply, or fears of recession, there are a lot of uncertainties that remain currently.

PENT UP DEMAND IN CRE SLOWDOWN

Rastegar, which operates in 13 states and 38 cities, focuses on seven different asset classes from office to industrial – with its core focus on workforce housing. Ari Rastegar, CEO of the Austin, Texas-based firm, said he is seeing what he calls “pent up” demand, meaning there’s still hesitancy in CRE – but there’s optimism as the Federal Reserve is expected to start cutting interest rates next month.

“I think it’s a lot of frustration,” he said.

“There is money that needs a home, but the economics and the cap rates are not allowing that to transpire for other economic reasons. But the demand is there, but the pricing [is not] so there’s this big disparity.”

Across its portfolio, which includes a 16-unit apartment complex the company is converting to condos in Dallas or its $200 million industrial redevelopment project in the city, Rastegar said he is seeing “ridiculously low offers” that are “not based in reality.”

With cap rates up, he admitted that some properties might be down 25 percent in value. But the company is getting offers that are 50-70 percent below the actual value, according to  Rastegar.

Of the regions covered, he noted that Austin is where it’s getting the lowest offers.

“The media has done a bang-up job of talking about this Armageddon that is Austin real estate.” Rastegar said.

“The prices have dropped. The tech companies are leaving.”

Austin was one of the two cities that posted median rent drops in June compared to May, according to CoreLogic’s latest Single-Family Rent Index.

KEEPING FAITH IN AUSTIN AND TEXAS

While it’s been a tough past 18 months for the region, Rastegar said not to sleep on the “massive growth” Austin has seen over the past decade-plus.

“Growth and the sustainability of the population numbers are still insane,” he said.

“[Austin] has two of the fastest growing cities in the United States of America, one being in North Austin and Leander Georgetown.”

While the developer does keep an eye on the Sunbelt as a whole, its main focus is Texas. Right now, its sights are set on the city of Kyle – particularly on single-family rental workforce housing.

One project there is called Inf1nity Square, which is a community that will include a combination of single-family units, multifamily, parks and trails, and retail space. This represents the company’s concept of what it calls “Futuristic suburbanism.”

“We’re continuing to build out that platform of more acquisitions that replicate this Kyle project, which is Futuristic suburbanism that links Elementary School, single-family, home, commercial space, large green space,” Rastegar said.

“We have 61 acres of green space on a 318-acre parcel. We donate 11 acres to the city of Kyle, taking that pocket community concept, and build it out in different markets that are 20, 30, [or] 40 miles outside of major cities in the Sunbelt.”

DATA CENTERS AND SELF-STORAGE

In addition, Rastegar said the company is starting to see a surge in self-storage and plans on expanding its efforts on that. In fact, nationwide deliveries of facilities are expected to rise to their highest levels since 2020, according to a forecast from RentCafe. Self-storage was something that Rastegar focused on when it was first founded in 2015.

Also, Rastegar plans to explore data centers and cold storage for the first time.

“Data centers and is going to be a huge focus around dense population, dense areas, and also in remote areas around farms and other areas very close to large power substations,” Ari Rastegar said.

PAIN OPENS OPPORTUNTIY

But overall, the question is how the overall state of CRE will look in the future. Right now, Rastegar refers to the current state as a “painful reinvention,” with high interest rates leading to difficulty in refinancing and smaller banks having issues with balance sheets.

He sees the struggles continuing through 2025. But Rastegar indicated that the company could use that to its advantage.

“I think there’s going to be a lot of blood in the water, which for folks like us that have very strong balance sheets and very deep equity relationships, it’s going to be a massive buying opportunity to go directly to the special servicers, directly to the banks and pick up some stuff at substantial discounts to replacement costs.”