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Real Estate

U.S. Real Estate: Recovery Postponed but Not Cancelled

April 2024 – 11 min read

The U.S. commercial real estate market is approaching stabilization and recovery, supported by consensus that policy rate cuts will happen eventually, followed by lower debt costs. The Barings Real Estate team discusses how this backdrop is shaping opportunities across the asset class.

Economy
  • The first quarter of the year marked the seventh consecutive quarter of declining core real estate values, which are down 22.9% from the peak, according to the NFI-ODCE. That is the longest, deepest decline in the index value since the 2008-09 Global Financial Crisis.
  • While we make no pretense about getting the timing precisely right, the U.S. commercial real estate market is still approaching stabilization and recovery, supported by consensus that policy rate cuts will happen eventually, followed by lower debt costs.
  • Inflation continues to trend lower generally, but certain primary components of core CPI including the services and shelter components either reaccelerated or remained high.
  • Much could derail a prescribed path toward inflation and interest rate normalization—including armed conflicts around the world, ongoing geopolitical tensions, and uncertainty around the U.S. election.
Property Market
  • As of the first quarter of 2024, the distress build-up is slowing. MSCI RCA estimated that cumulative real estate debt distress across major property types reached $89 billion.
  • Transaction activity totaled $79 billion in the first quarter of 2024, a 16% decline year-over-year. All major property types experienced declining sales activity compared to the year prior.
  • Composite public REIT share prices are 24% below their prior peak with significant variation by property type. While the NFI-ODCE fund index value has fallen from the peak, the pace of capital value declines slowed over the quarter relative to the prior quarter.

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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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