Will interest rates come down in 2024? What is the economic outlook? What will happen with inventory by the time the rates go down? Why should you investing in different asset classes and markets? Should you buy real estate right now? Chad Zdenek, real estate investor, TV host, entrepreneur, and owner of CSQ Properties, shares his knowledge.

Tell us a little bit about yourself.
I'm an engineer turned business owner turned real estate investor over the last 25 years. I invest in multifamily properties and self-storage properties, and I also own a medical office building. I love real estate; I've had three distinct chapters in my life, the last one being real estate, and I'm happy to be here. There are a lot of advantages, and real estate has been great.

I left my engineering job in 2003. I worked for Boeing on the space shuttle main engines for seven years and then left to start a business with my brother. We did that for 17 years; he bought me out in 2018, and I've been doing real estate since then. I also have a strong background in construction, so I got my contractor's license early on, was in construction management, and tend to do value-add, take on deals, and undertake many construction projects. That's how I became a real estate investor.

You are very in tune with the economy and economics. We have some interesting news on interest rates recently; let's dive into that and see where your thoughts are for 2024 and 2025.
The interest rates and how fast they increased have been a big shock to the real estate system. Any industry relying on borrowing has been challenged by the interest rate increases, and real estate has been hit particularly hard because we normally have 60 to 80% leverage on the commercial side, and that involves a lot of loans. Anyone on variable-rate loans has been feeling the pressure.

At the Fed Funds meeting, they mentioned they're not planning on increasing rates. They didn't increase rates, shifting away from the narrative we've been hearing for a while, which was higher for longer, meaning these interest rates, which increased the fastest in 40 years, were expected to remain high. The Federal Reserve aimed to take some steam out of the economy, but they've seen that while unemployment is still low, inflation has come down. That's encouraging, and they indicated they are looking towards three interest rate decreases next year. The 10-Year treasury, on which many mortgages in the commercial world are based, has already been retreating, and that good news for investors with debt on their properties. It will also indirectly affect cap rates, correlated with interest rates. Cap rates, how we value properties, have expanded, meaning property values have gone down, and different real estate sectors have seen different decreases, but with interest rates coming down, we hope cap rates will compress, and values will go up.

We had Neil Bawa and he said that existing prices today are at a 15% discount which is free money. You just need to be able to get a loan, so figure out a way to buy properties right now. Did the Fed give some guidance for 2025?
Even looking at 12 months is pretty far; I have less faith in what's going to happen two years out. I think many investors are looking to restructure their loans to move out of variable-rate loans into fixed-rate products for 5 to 7 years, which will be less affected by interest rate changes. You'll still have cap rate issues, which look positive in the next year and beyond. One thing I think we're going to see, having a big effect in the two-year mark, is inventory, particularly in multifamily. A lot of new inventory is coming on the market now, affecting the market. However, there's a pause on new construction permits, so in the two-year mark, we'll have less inventory coming online than now, potentially increasing pricing and decreasing cap rates.

I'm not sure where interest rates will go. When we were at 3-4%, historically very low, right now at 6 to 7%, even 8% on the single-family side, those are 40-year averages. For people with a shorter window of experience, it might seem high, but in a historical context, it's about average. They might decrease a bit more; I do believe they will. Will they go back down to that 2-3% for a single-family or 4% for a multifamily? I'm not sure; I wouldn't bet on that. I certainly wouldn't be getting into a business plan-type deal that is banking on that. It could happen, but if I had to guess, I'd say it's unlikely to go that low.

Regarding inventory, when people stop building and developing, there is a shortage of inventory when things go back to normal. Does that happen in every single cycle?
It has a significant effect on the market, and it's market-dependent. Geographical location matters; if you have many new units coming online, it affects the market, especially during the lease-up period. Developers offer promotions, and a new unit at a discount is attractive, so the rest of the market responds. Migration is also a big issue, seen since COVID, with people leaving certain states and going to others. If you have that migration tailwind, it can be good for real estate values. Insurance rates in states people are migrating to, like Texas and Florida, are high. Do research and get a quote before starting anything. The bottom line is to get your land in contract and start getting things entitled so that you're ready to develop sometime next year.

You started with multifamily and then moved to different asset classes; can you share a little bit about your reasoning behind it? Why did you pick those other asset classes?
I'm investing in three asset classes: multifamily, medical office, and self-storage. For people newer to real estate, they might see real estate as an asset class, but within real estate, there are several different asset classes. It could be industrial real estate, self-storage, mobile home parks, or single-family. There are many different areas to invest in within real estate. I was heavily invested in multifamily and knew I should diversify because you never know what will happen. I diversified into self-storage properties, which has been great. I also invest in California and out of California. Living in LA, I'm one of the rare investors who invest in California and out of state. Diversifying within different asset classes has been a good way to spread out the risk, especially with tenant rules and regulations constantly evolving, they're a lot more strict with multifamily than with self storage. Migration patterns affect both asset classes similarly, but tenant laws and COVID restrictions apply only to multifamily, not self-storage. During COVID, seeing restrictions in multifamily, I realized my investors were exposed to legislative liabilities. Diversifying into self-storage, with less regulation but good returns, has worked well.

You mentioned being one of the rare investors investing in California. I'm getting a development entitled here. Why are we doing this? Share from your perspective, please.
I'm a third-generation Los Angeles guy, and traditionally, cash flow is leaner in tier-one, tier-two locations, primary markets, but appreciation is high. If you can live with less cash flow, you can get into properties that do well with high appreciation. I have several apartment buildings in LA; it's been tough during COVID, but on the appreciation side, it's been great. Developing projects here is tough, which is good for investors like me. Bringing on new products is hard due to limited space, heavy regulation, and costs, making existing products valuable. It's done well on the appreciation side, and we cash flow too, albeit potentially lower than in other secondary markets. It's tough to beat the appreciation here though.

We have recently co-authored a book, would you like to talk a bit about it?
You and I are both co-authors in a book with several other people that became an Amazon number one bestseller in different categories, called "The Transformational Journey." Even if we've known each other through real estate circles and conferences, until we read our stories in the book, where we open up quite a bit, you learn so much more about somebody. Everyone has had challenges, ups and downs, and what matters is how they transform through those challenges. You and I share our stories in the book, along with others. It's a great book; if anyone wants a copy, you can get it on my website, ihelpbizownersretire.com.

Is there anything else we haven't covered today that you think is important for our audience to know?
The last 18 months have been crazy in the real estate world, and some people have a mutual fund or stock mindset, trying to time the market. A common saying in our world is that it's not about market timing; it's about time in the market. These should be long-term investments. Whether you buy at the bottom or 10% off the bottom, they should be viewed as long-term. Real estate goes up over time; that's what we're banking on. Real estate investing should not be done for short-term goals like paying for kids' college in four years or saving up for a wedding. It needs to be a longer-term play, and with that long-term vision, market timing doesn't matter as much; just get in. The earlier you get in, the better, because in 20 years, you'll wish you had.

Right now is even better. It's time to buy, however we cannot time the bottom. If you had purchased Nvidia stock at $150 versus $200, it doesn't matter, so long as you purchased it at either time. The same concept applies to real estate today. Don't be afraid because during economic times, people think it will never end. Every single cycle that was a down cycle has ended, up until now.

Chad Zdenek