Q1 2025 Commentary: the commercial real estate market is shifting
This is the second time we’re publicly posting one of our quarterly commentaries. In the past, we shared the market commentaries with only our investors in our quarterly reports. Going forward, we plan to post the quarterly commentaries on this blog. We hope you find it helpful as you consider investing in commercial real estate!
After what we would characterize as a “winter season” for commercial real estate that began in 2022, we believe the market is beginning to shift in a positive direction. This is good news for most, but since the seeds of future failure are planted in the soil of success, this good news comes with warnings against repeating the mistakes made in previous cycles.
Let’s start by looking at the current shift we’re observing. Then we will discuss potential implications and how Wellings is attempting to respond.
The Shift
While it’s not possible to know the top or bottom of a market (except in the rearview mirror), we can draw data-based conclusions to assess where we are and act accordingly. In his book, Mastering the Market Cycle, Howard Marks said:
“Like so many other things in the investment world that might be tried on the basis of certitude and precision, waiting for the bottom to start buying is a great example of folly. So if targeting the bottom is wrong, when should you buy? The answer’s simple: when price is below intrinsic value.”
Recent data suggests that CRE market sentiment is shifting. And we are experiencing this ourselves as deal flow and investor appetite have increased in Q1 2025 compared to 2024.
Below is a snapshot of what’s happening and what it could mean for us as investors. This MSCI chart shows the positive evolution of CRE returns through the end of 2024:
And this CBRE chart shows increased buying intentions for the CRE sector in 2025:
The recent feedback we’re getting from investors is optimistic.
We offered a $5.5 million manufactured home community sidecar opportunity in May 2025. It was fully subscribed in under a week and we had a waiting list of 43 more investors wanting to get in. We got a cold reach-out today from an investor who would have liked to invest $1 million in that opportunity.
And the feedback we’re hearing from other CRE sponsors is quite similar. Of course, there’s no guarantee these trends will continue. But if they do, we can draw several conclusions:
Discounted opportunities may become less common.
More capital is chasing deals at an increasing pace.
This could be good news for previous investments—many of us have been waiting for capital to return from deals made in earlier years. But it could also create headwinds for new investments, reducing opportunities for deep discounts.
Why?
As the market rebounds, some distressed assets will stabilize, making refinancing possible.
Rising returns and surplus capital may push prices higher.
If this trend continues, future returns for both debt and equity investors may compress.
Multifamily Supply and Demand
There’s more data available on multifamily than other CRE sectors, so let’s take a look.
Yes, many Sunbelt markets saw record deliveries and softening demand, pushing rents down and halting new construction. But that’s changing.
In the chart below, CBRE notes that even Austin, TX—among the last major holdouts—is expected to stabilize within a few quarters. However, the chart also highlights that several other locations are still experiencing rent contractions. Note that the triangle marks peak annual deliveries, not the current position of each city.
One significant factor is the cost of homeownership, which remains historically high versus renting. This continues to buoy multifamily demand.
And this affordability gap isn’t going away anytime soon.
Combined with a major slowdown in new construction, this affordability delta creates a compelling long-term case for multifamily. And it’s even more favorable for manufactured home communities, where supply growth is essentially zero and affordability is unmatched.
Conclusions
“There’s nobody’s predictions that we’re interested in, including our own.” — Warren Buffett
I’m well aware that the economy, the markets, and any particular asset type could shift on a dime. Wall Street’s kneejerk reaction to Trump’s tariff plans provided recent evidence of this reality. But it’s still reasonable to draw some conclusions based on what we know now.
IF this shift plays out, profitable assets (with other sponsors and within our funds) could sell in the next few years. That’s a potential win for you.
IF this shift plays out, paused distributions or capital calls on some investments may recover—though lingering interest rate pressures could still cause pain. Please note that Wellings has not paused distributions or issued any capitals for any investment vehicles.*
IF this shift plays out, we may be entering the early phase of another long run-up in prices. That often ends with a bubble. Human behavior rarely changes. (You’ve been warned…again!) Read Mastering the Market Cycle and let’s talk.
IF this shift plays out, your focus should probably be on value—mispriced deals with asymmetric upside. These are often acquired from mom-and-pop sellers who haven’t optimized operations or value.
IF this shift plays out, who you invest with matters more than ever. In the past, many rode the rising tide with amateur sponsors. That’s not a good plan. Selecting knowledgable sponsors is challenging—but critical. Do you have the tools to perform background checks, on-site audits, or forensic NOI audits? This is the role Wellings Capital seeks to play. While we can’t guarantee success, we believe our due diligence improves your odds. One investor recently told me that six of her seven deals have paused distributions or called capital…all except the one with Wellings. And the diversification offered by our fund structure is designed to be beneficial if one or two deals do go south. This is why we exist.
What is Wellings Capital up to?
In any market, we keep seeking out the best operators who find the best deals. These operators share our commitment to create income and wealth by buying right and making strategic upgrades rather than relying on unpredictable and uncontrollable market forces that can shift on a dime.
And we’ll continue to adapt our structures—like our new JV hybrid equity—to balance downside protection with upside opportunity. We are excited about this structure and think it brings a new evolution in our quest to create the best possible risk-adjusted returns for investors.
We’ll keep assembling diversified funds to help reduce exposure to mediocre (or worse) performance in any one deal. In June 2025, we launched two new funds. These funds provide investors an opportunity to customize their desire for current income versus long-term appreciation. Many investors are investing in both.
Thanks again for trusting us. It’s a privilege to help steward your wealth.
- Paul and Ben
If you have any questions, please contact us or use this link to schedule a call with us.
DISCLAIMER: This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. Wellings Capital Management, LLC is an Investment Adviser registered with the SEC and currently has Wellings Real Estate Income Fund open to accredited investors. All investments pose risk, including the possible loss of all principal invested. Past performance is no guarantee of future results. There is no guarantee that any projected results will be achieved. Investors should consider the investment objectives, risks, charges, and expenses of any Welling Capital investment vehicle before investing.
The information contained in this article is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing. Information and any opinions contained in this article have been obtained from sources that we consider reliable, but we do not represent that such information and opinions are accurate or complete and thus should not be relied upon as such.
*Past performance is no guarantee of future results.
