Dave:
We talk a lot about the housing market, but what about the other real estate market? You know, the one that’s worth $24 trillion, um, of course talking about commercial real estate, including multifamily assets. Commercial real estate is a market that has struggled as of late. Some would even go so far as to say that it has crashed, and frankly, I wouldn’t argue with them. But as we sit here in 2026, commercial real estate may be poised for a rebound. So today, we’re digging into the outlook for commercial real estate in 2026 and exploring the potential opportunities that could exist for real estate investors in the coming years.
Hey, everyone. Welcome to On The Market. I’m Dave Meyer, real estate investor, housing market analyst, and chief investment officer here at BiggerPockets. Now, on this show, we usually talk about residential real estate because that’s frankly what most people in the BiggerPockets community, the people who listen to the show, invest in. But I know from talking to you all, this community all the time that many of you currently invest in, or at least aspire to invest in multifamily, meaning anything five units or bigger, maybe self-storage or even retail or office space in some cases. And that aspiration or the reason you invest in those things already is with good reason. Commercial real estate can offer, frankly, scale that residential real estate just can’t do. It can offer opportunity. It can generate amazing returns, but it is really different from residential real estate. You can’t really apply any of the data or the information that we regularly share on this show about residential to the commercial real estate market.
Just look at the last couple of years, right? Commercial real estate has arguably crashed. You can’t argue that values have declined almost across the board, no matter what area of commercial e- real estate that you’re looking at. Meanwhile, the residential market is still holding up. They are totally different markets. And on the show, I’ve said a lot recently about my expectations for the residential market this year, but we haven’t really touched on commercial real estate yet for 2026. So in this episode, that’s what we’re gonna talk about. First, we’re gonna get into a brief history of what’s been going on in commercial real estate in the last couple of years. Then we’ll talk about the outlook for 2026. We’ll give you a bear case and a bull case what people are saying about whether commercial real estate is poised for a rebound. We’ll do a breakdown of which subclasses, you know, talking about self-storage or retail, office, multifamily.
Which of those subclasses of commercial real estate are set to perform the best in the coming year? And of course, we’ll end with recommendations and strategy tips for investors in the coming year. With that, let’s get into our first look at commercial real estate in 2026. So you may know this, but commercial real estate, it’s in a rut. Okay. To be fair, it’s in worse than the rut. It is probably crashed by most measures of a crash. That word doesn’t really mean much. No one has really defined it. But I think if values fall in any market, 20% more from peak to trough, it’s kind of hard to argue that it’s crashed. And that, I think, has happened in commercial real estate. It’s actually harder than you would think to get a single number of this, like how far values have crashed. And everyone is gonna say a little bit different depending on the data source that you look at.
But when I aggregate all the information out there, I could say pretty confidently that multifamily, at least on a national basis, pricing is down somewhere between 15 and 25%. It’s pretty big. Office is down even more. 25%, 35% I think is pretty reasonable across the board on a national basis. Some markets, you’ve probably heard some of these crazy stories. Some markets are seeing office values down more than 50%. Meanwhile, retail, self-storage, they’ve held up better, but they’re still down somewhere between 8% to 12% since they peaked in 2022. That’s pretty ugly, right?
That is something that you might wanna at least start underwriting. Massive discounts on office. It’s not my area of expertise, but there’s probably some good deals out there. You’re starting to see discounts on cash flowing assets. There is potentially some stuff to like here, but you have to invest sort of thinking or at least betting that things are gonna turn around, or at least at the very least, they’re not going to continue to decline. So the question is, is this gonna happen? Is this the time to jump into commercial real estate before prices start coming back and everyone jump back into the market? That’s the question that we’re going to answer today. And to do that, we need to first look at why prices are so depressed in the first place. And I’m gonna talk a little bit as we go about office and retail and self-storage, because those are popular in the BiggerPockets community.
But for now, I’m gonna focus on multifamily because that’s what we hear in the, on the market community mostly look at. And I just wanna be clear that there are different definitions of multifamily, but what, when we’re talking about commercial real estate, it means any property that has five units or more, because anything that is five units or above needs commercial pricing. You can’t go out and get a regular mortgage on a five unit, six unit, and above. Anything four units or less, you can, so that’s considered commercial. So when I say multifamily, I’m not talking about duplexes, triplexes, quadplexes, I’m talking about five and above. So with that, let’s talk about what the heck happened here
Multifamily is priced differently than residential real estate. Residential real estate is largely priced based on comps. What have other similar assets sold in similar neighborhoods for in recent months? That’s how you price a single family home. Same thing with a duplex, a triplex, or a quadplex. But multifamily is priced by a combination of net operating income, basically a, a measurement of your profits and cap rates. And when mortgage rates or interest rates on debt for real estate like commercial loans rise, so do cap rates. That’s just kinda how it works. It’s sort of complex, but I can give you a general idea of how this works. Cap rates, people have different definitions of them, but basically what they are are a reflection of market sentiment. They reflect how investors are feeling about risk, about opportunity, about value in the market that you’re working in. So let’s just say multifamily.
It’s a reflection of, do people feel like there’s a lot of risk or opportunity if there’s good value in the multifamily market? So because they’re a reflection of market sentiment, they’re always moving up and down based on a lot of different conditions. But one of the things that traditionally and pretty consistently pushes up cap rates is when the return of a risk-free asset increases. So there’s a couple terms in there that you should need to know, but a risk-free asset, there’s really no such thing, but generally in finance, people consider things like bonds as risk-free assets, especially US Treasury bonds because to date, the US has never defaulted on their loans. So when you look at, you can buy a 10-year US Treasury and get a four and a half percent return or a 4% return, that is as close to a risk-free investment as you can make.
And so when the value that you can get from buying one of those risk-free assets goes up, all other investments change, right? It should change your mindset because you’re saying, “Hey, I could go get four and a half percent for pretty much no risk.” That 5% cash on cash return for multifamily no longer sounds very good compared to buying a treasury because there’s so much more risk in multifamily than there is in buying a treasury. And so when bond yields go up, which they have a lot over the last couple of years, that’s what’s pushed mortgage rates up. When those treasury yields go up, it pushes cap rates up at the same time. Now, cap rates, whether high or low cap rates are good, really just depends on whether you’re a buyer or a seller. If you’re a buyer, you typically want to buy at a higher cap rate.
That means you are buying proportionally more cash flow and more profit for less money. If you are a seller, you want to sell at low cap rates because that means you are going to get more in terms of your sale price for every dollar of profit that your asset is producing. Now, I know that can sound confusing, so let’s just do a little bit of math here, and I think you will all understand this. So if you had a property that throws off, I’m gonna use a nice round number of $100,000 in net operating income. NOI, it’s just a measurement of how much profit you’re putting out. It doesn’t include CapEx, it doesn’t include financing costs. Just in your operating of the property, how much profit are you producing? So let’s, just for this example, we’re gonna say we have $100,000 in NOI, and you are selling that at a 4% cap rate.
The way you figure out the value of that property is you divide your net operating income, $100,000, by your cap rate of 4%, and that gets you your price, which would be $2.5 million. Now, it doesn’t always work exactly like that, but roughly, that’s how you get valuations in a lot of commercial real estate transactions. So two and a half million dollars at a 4% cap rate. Now, if that cap rate were to go up, say interest rates went up, which they did, this is pretty close to what’s actually happened, say that cap rate went up from 4% to 5%. Doesn’t sound like a lot, right? It’s just going from 4% to 5%. Then that math, if you now divide $100,000 in NOI by 5%, that value of that property drops to two million. It was at 2.5 million, and now it’s at two million.
That seemingly small difference in cap rates makes a huge difference in valuation. And for those who are math or numbers inclined, you probably see why this happened, right? We had a 25% increase in cap rate from four to 5%, and that led to a 25% decrease in valuation from 2.5 million down to two million. Now, that is just one example, and there is huge variance in cap rates regionally by asset class, but the general estimates right now are that cap rates went up 80 to 150 basis points, so 0.8% to 1.5%. And again, might not sound like a lot, but as you can imagine, and our example shows us, just that small change can really decrease valuations across the board. So that’s number one, is interest rates going up, the yield on treasury bonds going up, and therefore cap rates going up. That has really decreased pricing in multifamily.
The second thing that you need to know why prices are going down comes down to debt. Now, I talked about rates going up, but the debt structures matter here as well. There’s sort of two things going on with debt. First and foremost, over the last couple of months, lenders have really gotten a little bit stricter. They have tightened their underwriting, they have reduced their LTVs, their loan to value ratios, meaning that you can take out less debt to purchase a property. They have required higher debt service coverage ratio. So basically, it’s just harder to get debt than it was that makes it harder to pencil, which means there are less buyers, right? If someone wants to go out and sell a property, there’s gonna be less demand because even if those buyers are interested, they want to buy that asset, they might not be able to get the loan that they need to make that deal pencil, and that has decreased demand for multifamily assets.
That’s the first thing with debt. The second thing that’s going on with debt is that commercial real estate … Remember I said that we’re talking about five units and above because if you have a five unit or above, you have to use a commercial loan. Commercial debt is very different than residential debt. You typically cannot go out and get a 30-year fixed rate loan on a commercial asset. Usually, you are getting a adjustable rate mortgage with a balloon payment, and those loans can adjust at three years, five years, sometimes seven years. Now, you can imagine if you bought a property in 2020 or 2021, you had a really low rate. You might have had a three in front of your number, you might have had a four in front of your interest rate. Now, three years later, you’re adjusting to a rate that might have a seven in front of it.
It might have an eight in front of it, and that really hurts cash flow. It can actually create forced selling, like you probably hear these things in the news. There are multifamily operators that can no longer service their debt, and they have to sell their assets at a discount, and that puts downward pressure on pricing as well. Even if you can hold onto that debt, it just compresses cash flow, right? Because if you had an asset that was producing, let’s just call it a 10% cash on cash return with your old loan, and then your loan adjusts to a much higher interest rate, you are not making as much. And when someone comes along and looks at that deal and thinks about buying it, they’re like, “Actually, that’s not as good of a deal. I can’t pay as much for this asset as someone could three years ago when they were getting much better rates.” And again, that puts downward pressure on pricing.
So first two things, just as a reminder, are interest rates going up and the structure of debt and debt underwriting rules are two things that have pushed down multifamily prices. And the third is supply, right? So the supply of multifamily assets has gone through the roof. During the pandemic, developers were seeing, “Man, there is so much demand for housing. Rents are going up like crazy. I wanna build more multifamily.” They thought it was a very profitable time to build multifamily properties, and a lot of them did. We had one of the strongest pipelines of multifamily that we have seen in decades, and all of them started to come online at the same time. We talk about this a lot in the show in context of rent growth, but it bears true here in terms of valuation for multifamily that because there was so much multifamily coming on at the same time, that doesn’t in itself push down values necessarily, but it has caused a lot of vacancy, right?
We have seen vacancy rates across multifamily go up, and higher vacancy means lower NOI, right? Your profit will suffer if you have higher vacancies, or in a lot of cases, you have to lower rents, and that’s gonna hurt your NOI as well, or maybe you just can’t grow rents, you can’t raise your rents in the way that you could in a normal year, or certainly during the pandemic, and so NOIs are compressing. And so rent growth has been slow, vacancy has been going up, and all of that is happening not at a good time. It’s happening at the same time where other expenses like taxes or insurance or maintenance costs are all going up. So NOI is getting squeezed on both sides. We’re seeing lower rents and lower income, higher expenses, that means lower NOI. So if you add these things together, you know, higher debt costs, lower NOI, it’s just not as profitable to own these assets as it was a couple of years ago.
So this is kind of a near perfect storm. It’s not a perfect storm because there are actually some good things going on and we’re gonna get to that. But if you think about it, higher cap rates, lower NOI, tighter lending, all that points to declining values in multifamily, which is exactly what we’ve got. This stuff makes sense when you understand the fundamentals. Now, that’s just multifamily, but a lot of the same challenges exist in other parts of commercial real estate too. Those debt problems and the higher interest rates exist across the board. But the reason that you see self-storage, for example, or retail doing a little bit better is they don’t have the same pressure on NOI as multifamily. The vacancy rates in self-storage and retail haven’t been as high. And so that’s why multifamily has seen bigger declines than those two asset classes. And on the other end of the spectrum, it’s why we’re seeing office get absolutely demolished because their revenue is getting crushed.
They have much higher vacancies. Rent rates are going down significantly in the office spector, so their NOI losses are worse and that’s why valuations in office have fallen the furthest. So generally speaking, this is the backdrop for multifamily over the last couple years and other commercial assets. But when we come back from this quick break, we’ll get into whether or not this is going to change. Could this be the year that multifamily actually bottoms and we start to see opportunity again? We’ll discuss that right after this break.
Welcome back to On The Market. I’m Dave Meyer talking about the outlook for commercial real estate in 2026. Before the break, we talked about some of the backdrop for why things have declined. And now, because we understand sort of the fundamentals that have led us to where we are today, we can examine the case for commercial real estate rebounding in 2026, and we’re gonna look at both the bull and bear cases. On this show, what we like to do is present arguments for both sides because no one really knows, and there are arguments in both directions, and I’m gonna share both of them with you right now, and then I’ll give you my general opinion, how I interpret these arguments and all of this data, and frankly, what I’m going to do about it. So first up, we’re gonna talk about the bullish case for 2026, why things could potentially turn around.
The first argument is basically that the market has corrected and it has stabilized. It’s not like it has been in a continuous free fall. We actually see that most of the declines in multifamily happened from early 2022 to early 2024, and then actually by some measures, we’ve seen modest gains in pricing in multifamily in 2025. If you look at some projections like from Green Street, they’re actually predicting that appreciation will continue in 2026, and this is largely because this exercise of what’s sometimes called price discovery. Basically, when market conditions change, sellers and buyers have to readjust. They have to, you know, sort of feel each other out and figure out what’s a fair price in this new paradigm. Given everything we know about interest rates, NOIs rising expensive, what is a fair price? And so the argument for that things are turning around is that that price discovery exercise has already been done, things are starting to stabilize and maybe we’ve found a bottom where we can start to grow off of.
Argument number two for why things might start to turn around is that capital markets might actually start to thaw. I mentioned earlier that one of the challenges in multifamily of late is that lenders have tightened their underwriting. They have made it harder because they’ve sensed a lot of risk. But as the Fed lowers rates and as the, the tide starts to turn, there is a general sense that capital markets are gonna get a little bit easier. It’s gonna be a little bit easier to get loans, and that means that might bring more demand back into the market, right? Not only could rates come down, but more people will be able to get the loans and qualify for the loans that they need to purchase multifamily. And if that’s true, that should help prices, right? In basic economics, if there are more people who can afford to buy products that leads to more demand, and that puts upward pressure on pricing.
The third argument for why things might have bottomed is just that multifamily supply is coming down, and this pendulum that constantly swings back and forth in terms of multifamily supply might be swinging in the other direction. Remember what I said earlier that during 2020, 2021, developers got super excited about building, they started all of these projects. Those projects didn’t really hit the market until 2024 or 2025, and that’s why in the last two years we’ve seen so much supply, it’s compressed NOI, it’s brought down rents. But starting in 2022, when mortgage rates went up, when lending got harder, development really stopped. This pendulum swung, like, almost all the way in the other direction. And we went from a time where there was a ton of construction to a time where there are really, really low levels of construction. So this is actually something that you can pretty easily forecast because it takes two, three, four years to build a multifamily property.
We actually know with a fair degree of confidence how much new supply is coming on in the market this year, next year, and the year after that, and it’s not a lot. And so if you look at that, there is a good argument to be made that rents are gonna start going back up because if there is a decrease in supply and there’s still housing demand, and by all measurements, we still have a housing shortage in the United States. If that supply goes not just back to normal, but actually swings all the way to being not a lot of supply, that bodes well for rent growth, and that could help NOIs grow in the near future. So there are obviously other cases and arguments to be made, but those are the three big ones that at least I buy into for why multifamily might turn around.
Now, of course, there’s a bearish case too. A lot of people don’t think this is the year that things are gonna turn around, and these are the main arguments. Number one is that the refinancing pressure from adjustable rate mortgages, that hasn’t really gone away, right? We still have a lot of people who bought in 2022, 2023, and the COVID years basically whose interest rates haven’t adjusted yet. Maybe they got a five-year arm in 2021 or 2022. And so we’re gonna still see people have a lot of pressure on themselves, not all operators, but there’s still a good amount of operators who are now gonna see their cashflow significantly compressed, their NOIs come down because their loan adjusts, and that could actually lead to forced selling. And as we talk about in residential, it is true here in commercial too, when there is forced selling, that puts downward pressure on pricing, and that could still remain in 2026.
The second thing is that, yes, I said that supply is going to come back to earth. That’s mostly on a national level. There are still a lot of markets where there is a lot of supply glut that hasn’t been worked out yet. There’s still negative net absorption, basically mean there is more supply coming on than there is demand, and that could suppress the entire industry. And then the third bear case for why multifamily might not rebound is because there’s just still kind of a lot of garbage out there. There’s just not that many quality assets on the market. Not a lot of people who have great, strong performing assets are choosing to sell right now, because if you don’t have to, it’s not the best market to sell into. And so if there’s not good inventory on the market, it’s harder to pull buyers off the sidelines into the market to buy junk, right?
Like if there’s just really bad deals out there, people are gonna, who have been sitting on the sidelines, they’re gonna continue sitting on the sidelines. If however, all of a sudden we see really strong assets and great locations come on, we might pull people off the sideline, but there’s still a lot of junk to work through in terms of inventory, and that’s another reason why 2026 might not be the year to rebound. So when I read these, I think there’s strong arguments on both sides, but when I interpret this stuff, personally, I think in 2026, what we’re gonna see is a recovery, but only in a very specific section of assets. It’s going to be good assets in markets where there is not a lot of supply. The markets where there is still too much supply, I’m thinking places like Denver or Austin or places in the Southeast or any not great assets, I think they’re still going to struggle.
I don’t think this is one of those times or one of the years where just everything gets better. I don’t think there’s gonna be some big tailwind that pushes up valuations across the industry. I think it’s only gonna be in certain markets and for certain asset classes. That’s my take at least on multifamily, and I’ll talk a little bit in just a minute about what to do about that, but I first wanna just talk a little bit about other commercial real estate. I just wanna say other areas of commercial real estate, not my expertise. I do a lot of research on this, but I don’t buy retail, I don’t buy office, and I don’t own any self-storage. So take this all with a grain of salt. This is really more of an academic research. It’s not based on my personal experience that I have in other parts of the market like multifamily and residential.
In retail, the general sense is that it is the most likely commercial real estate asset class to recover. And I know that sounds surprising because you would think retail’s getting crushed right now, but there’s just not the same level of supply in retail that there is in multifamily or in office. And because building costs are so high, financing costs have been so high, development for new retail has been low. That keeps rent growth strong, it keeps occupancy strong, and you might actually see rent growth growing. Analysts are more bullish about retail recovering than really any of the other subsectors of commercial real estate that I’ve seen. In terms of office, man, I, I have a hard time thinking things are going to recover. I do think in a similar vein of multifamily, great assets are gonna continue to go. We’re gonna have this continued sort of fight flight to quality because tenants, right, and office tenants are gonna have a lot of choice, and they’re probably gonna choose prime buildings because they can get great deals on those.
And so you might start to see office recovering, but I think frankly, we don’t know how office space is going to be used in the future. We hear sure a lot of high profile back to office cases, but hybrid work is still very prominent and I think it’s here to stay. And I just don’t think companies see the value investing in high quality office space or huge office footprints as they used to. And so personally, I stay out of office and I think that it is very uncertain if it’s going to recover. So if you’re gonna invest in office, you better know what you’re doing. Self-storage, I think there’s a little bit of optimism here, but it’s gonna, again, be really market dependent forecasts. We actually see in self-storage a lot of the supply issues that we see in multifamily, there has been a lot of building of self-storage.
If you look at Yardi, they’re a big data analytics firm. They actually revise their forecast up for 2025, 2026, and the total number of units delivered. And unless the housing market falls a little bit, I think that’s going to be a challenge because from what I understand, one of the main drivers of self-storage is transaction volume in the housing market. People get self-storage units when they move, and we are at about 4.1 million transactions in the residential housing market this past year. I think it’ll get a little better, but I don’t think it’s going to get much better. And so I’m not sure there’s gonna be a huge uptick in demand for self-storage at a time that we are seeing more supply. That is not to say that certain markets won’t do well, but I think overall as an industry, it’s probably gonna continue to struggle and main a little bit suppressed in 2026.
So overall, when you look across these asset classes, I do think it’s kind of a bottoming out year, right? More than I think, generally speaking, that’s a recovery year. I think we might see sections that see some exciting stuff, but I do think bottoming out in itself is kind of exciting, right? Things have to bottom out before they can turn around. And I get the sense that in 2026 we’ll work through some of the issues. I think 2027 is looking like a great year, but that actually doesn’t mean that you shouldn’t buy right now. And actually, if you look historically at business cycles, it is often this, like, trough period where they are bottoming out, that’s the best time to buy, right? If you wait till things get exciting again, that’s when there’s more demand. That’s when sellers raise their expectations. And if you’re willing to get in now when there’s still some inefficiency in the market, that is often when you can find the best deals.
So we should now turn to what to do about this. What should you actually do about a bottoming out year in 2026? How do you plan for that? We’re gonna get into that right after this quick break.
Welcome back to On the Market. I’m Dave Meyer talking about the commercial real estate outlook for 2026. Before the break, we talked about different subsectors and my general belief that we are gonna probably bottom out in 2026, but there’s gonna be good opportunity in specific markets and in specific asset classes. So what do you do about this? How do you, as a real estate investor, plan for this kind of market? I got four tips that I’m gonna go through with you right now. I’m gonna talk mostly about multifamily here, but this is true for other asset classes too. Number one, focus on supply. I talk a lot to real estate investors every single day, and I think that one of the common oversights that people have is they look at demand and they don’t look at supply. I think people say, “Oh, people are moving to this market.
Jobs are going to that market.” That’s great. But if there’s so much supply that they’re, all of those new people are gonna get absorbed and then some, that’s not really good. I think Austin, Texas is probably a perfect example of that. Jobs are going to Austin, people are moving to Austin, but the market there has really suffered both in residential and commercial because there is just too much supply. And so if I were looking in multifamily, and I am, I am looking Looking to buy multifamily this year, I would start my analysis by looking at places where the supply glut has either passed or there never was a supply glut in the first place. This is something you can look up on Yardi or CoStar is a really good source for that. You can actually just find this on Fred too, the Fred website. They show new construction starts, but what you wanna look for specifically, if you wanna get into this, is look for deliveries.
That’s the industry term for how many new units are coming online. You can even just Google, like, how many multifamily deliveries are expected in Atlanta in 2026 and 2027 and do some research there. The higher the number of deliveries in the short term, the higher the risk for that market, because you don’t know if they’re going to get absorbed, that’s probably going to suppress rent growth. If you instead look at a market where there are low numbers of deliveries, especially in areas where there are low numbers of deliveries, but there is high demand, there are people moving there, there are jobs there, but they’re not building a lot. That is a recipe for success and a market that I would personally look at, whether I’m looking at multifamily, in self-storage, office, retail. Look for those supply and demand dynamics. You want an imbalance, right? You want more demand than supply.
And so that’s the number one thing I would look for if I wanted to get into commercial real estate in 2026. Approach number two is to underwrite scared. This is something I talk about all the time, whether you’re in residential or in commercial, but you don’t want to project a lot of rent growth right now. In the last two years, depending on who you ask, rent growth’s been flat or negative. And right now, even if the supply is low in your area, there’s a lot of other things going on in the market that could suppress rent growth. I actually debate this a lot with my friends in real estate. I was talking to Scott Trench about this recently, former CEO of BiggerPockets host of The Money Show. He thinks rent growth is gonna go crazy. Not crazy, but we’re gonna see high rent growth this year, four, 5%, 7%.
I personally don’t. I am a little bit more bearish on rent growth. I get it that supply is gonna work its way through the market, but when I look at things like the labor market with wage growth declining, with the unemployment rate for young people being near 10%, when I look at those things, I think household formation is going to slow. I don’t think we’re gonna see a big uptick in demand for housing. And that might not necessarily mean negative rent growth, but I think it’s going to weigh on rent growth. So if I am underwriting a multifamily deal, I’m not counting on rent growth in 26. I might not even count on rent growth in 2027. Now, if you said, “Dave, what’s your best guess you have to make a prediction?” I do think rent will grow the next two years, but in my underwriting, I’m not gonna do it.
I just think it makes more sense right now to be a little bit more risk averse and to just assume that rent is not going to grow the next couple of years. And again, this is true in multifamily, but I think the same thing applies to self-storage, office retail. I would not count on your revenue increasing in the next two years because that’s just smart. If you can underwrite a deal where rent doesn’t grow and it’s still pencils, that’s a deal you can buy with confidence, but you don’t only wanna buy deals that make sense if things start to grow again, because it’s very uncertain when that will happen and to what degree. Tip number three, and I think people are going to disagree with me on this, and you are welcome to. I’d love to hear your comments in the debate, but I am still worried about adjustable rate mortgages.
Like, I know that the trend right now is to lower mortgage rates. And I am, I have said, I think in the next year, next two years, maybe in the next three years, we’ll see slightly lower borrowing costs than we have over the next couple of years. But in five years, in seven years, I really don’t know. I’ve said before on this show, and I’ll say it again, that I think the long-term outlook for mortgage rates and for the interest rate you’re gonna get on debt is very uncertain. I think there’s a chance five, seven years from now, our interest rates are higher. I’m not gonna get into that in super details, but it has a lot to do with the, the amount of debt that we have in this country, but I just wouldn’t count on rates going on a long downward decline. And so for me, I’m literally doing this.
When I’m looking at multifamily, I am willing personally to pay a higher interest rate to lock in either a longer term arm or fixed rate debt. I would target a seven-year arm, a 10-year arm, or I would pay up for fixed rate debt because that just gives me more confidence. I don’t wanna take a risk right now, given all this uncertainty, but if I can find a great asset that I can lock up with fixed rate debt, it’s gonna be more expensive. Don’t get me wrong, that will be a more expensive loan, but I would be willing, and I would prefer to pay for that more expensive loan. Obviously, the deal still has to pencil, but I would prefer that over adjustable rate mortgage because I wanna reduce my risk in this kind of market. Tip number four is if you’re gonna do value add, it has to be reflected in the PNL soon.
Now, what does that mean? It means that if you’re gonna do a renovation, a lot of people like do renovations to boost the long-term appeal of something. For me, if you are gonna do a value add project, it has to raise your rents. You have to be doing something where you’re gonna say, “I’m gonna renovate this property, and in 18 months, I’m gonna be able to get my rents up to market rate, or I am going to start to cash flow in the next 12 months after I do that. ” I do not think it is the time to buy an asset, invest in it, and say, “You know, we’re gonna get rents up, but it might take three or four years, and we might have vacancies for two years while we do this big project,” which is common in multifamily. Sometimes it takes two years to turn something around, or you wanna do it slowly, not really the time to do that.
I think you need to find deals where you can instantly add value. Now, instantly is probably a not good word
I think I probably talked to at least two or three brokers this week. I’m looking for four to 20 units where I could do modest value add that I can get done in six to nine months, ideally, where I can get ideally fixed rate debt, and I can get to stabilization and a positive cash on cash return of six to 8% within 18 months. That’s my buy box, and I’m only really looking for them in markets with low supply. That is the key. I am looking at markets that have strong demand, low vacancy, and a very weak construction pipeline. I don’t wanna see multifamily buildings anywhere
It’s something I’ve, I’ve invested in syndications over the last couple of years that I’ve done well using these t- same types of things, and I’m looking in 2026 for direct ownership opportunities for the same thing to buy these four to 20 units. I’m stealing this from Brian Burke, you’ve probably heard him on this show before, but he convinced me that this is kind of a sweet spot between four and 25 units because institutional investors aren’t really looking at it, and it’s an opportunity for small investors like you and me to get really good assets at good prices. So that’s what I’m doing. But please, let me know in the comments what you are looking at, if you like commercial in 2026, if you’re planning to get into the market, or if you think it’s still better to sit on the sidelines. That’s our show for today.
Thank you all so much for listening. I’m Dave Meyer, and I’ll see you next time.
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