A Bumpy Path Ahead for U.S. Real Estate
Given how robust underlying economic fundamentals in the U.S. currently are, real estate performance could weather a mild downturn—but the near-term outlook has dimmed. The Barings Real Estate team sheds light on what's next for the asset class.
- September’s CPI data highlighted the need for the Fed to remain vigilant over restoring price stability. Core YoY inflation accelerated to a 40+ year high of 6.6%.
- The current health of underlying economic fundamentals is one of the reasons behind the speed and intensity of Fed rate hikes. There are indications that monetary policy is slowing the economy.
- The U.S. economy is not yet in recession with third quarter GDP growing at a 2.6% annualized, seasonally-adjusted rate. Investors are bracing themselves for a downturn as the risk of recession over the next year rises.
- Robust underlying economic fundamentals means property performance could weather a mild downturn without falling to perilous depths.
- Third quarter transaction activity totaled $172 billion across major property types, a decline of 21% over the prior year, reflecting elevated uncertainty in the macroeconomy.
- Apartment, industrial, and retail sales activity declined 17%, 18% and 9%, respectively, while hotel and office registered transaction volume declines of 21% and 33%, respectively.
- The rapid climb in base rates as exemplified by the 10-year Treasury yield has been the driving force behind the rise in real estate debt costs, which are at their highest in over a decade.
- Real estate investors should take comfort that as we may be transitioning to a “higher-for-longer” interest rate environment, real estate performance remains still correlated with secular demand tailwinds that were active well before the pandemic.