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