Real Estate

U.S. Real Estate: Parsing a Different Kind of Downturn

May 2023 – 7 min read

The U.S. real estate downturn is proving painful. However, unlike prior downturns, underlying fundamentals are still relatively robust and likely to either mitigate a steep demand decline and/or backstop the current price correction. The Barings Real Estate team discusses.

  • Following the bank failures, concerns about contagion risk spiked. While fears have eased slightly since mid-March, financial system stability risk remains elevated.
  • The U.S. economy could slow substantially in the second half of the year, driven by the depletion of savings buffers, the tightening of credit conditions, the cooling of consumption, and firms’ margin pressures.
  • Inflation will trend down, but the path will be bumpy, and will likely require additional Fed rate hikes this spring. Any recession—this year or next—is expected to be short and shallow.
Property Market
  • The prospect of a mild recession is unlikely to mitigate the ongoing and substantial correction to U.S. property values—especially for the office property sector, which posted its biggest decline in demand since the midst of the pandemic.
  • Some real estate investors are already adjusting their expectations around higher base rates and real estate risk premiums. Implied public REIT cap rates, which react more quickly to inflection points in financial markets, have jumped to their highest level in over a decade.
  • Transaction activity totaled $85 billion in the first quarter of 2023, 56% below the same quarter the year prior—the weakest first quarter level since 2013. Sales are likely to remain subdued as lenders and sponsors work through existing loans, some of which are distressed.

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Dags Chen, CFA

Head of U.S. Real Estate Research & Strategy

Lincoln Janes, CFA


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