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Real Estate

U.S. Real Estate: Fundamentals Under Pressure as Values Correct

August 2023 – 9 min read

The commercial real estate market downturn persists, but unlike prior downturns, this one has not been accompanied by an economic recession. The Barings Real Estate team discusses how this backdrop is presenting both challenges and opportunities in the U.S. real estate market.

Economy
  • While lower interest rates may be coming, the U.S. Federal Reserve maintains its inflation-fighting efforts by continuing to tighten credit.
  • Despite a strong labor market, the effects of tighter credit may reveal themselves in a recession—a mild and shallow one—later this year or in the first half of 2024.
  • Exposure to maturing loans on commercial real estate (especially office properties) remains a driver of real estate distress, which could take time to work through the system.
Property Market
  • The challenged office property sector continues to deteriorate. Two bright spots: newer buildings have seen positive rates of absorption and the number of employees fully working from home seems to have bottomed out.
  • Transaction activity, at $84 billion in the second quarter, is 63% below year-ago levels and the weakest since the second quarter of 2020.
  • Following macroeconomic fundamentals, real estate demand has also flagged. Q2 2023 net absorption as a percentage of stock was below the quarterly post-pandemic average for all major property types.
  • Elevated supply in the South helped push U.S. apartment vacancy rates higher to 6.9%, while asking rents increased by only 1.2%, less approximately 30 bps in concessions.

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Dags Chen, CFA

Head of U.S. Real Estate Research & Strategy

Lincoln Janes, CFA

Director, Real Estate Research & Strategy

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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