A Year of Unpredictability
Monetary policies aimed at combating inflation, as well as the uncertainties surrounding an economic slowdown, have produced heightened market volatility and hampered global real estate transaction volumes this year.
At the end of 2022, calls for a recession by the end of this year were virtually a given. Although no recession has occurred, many experts continue to predict one in the near future (even a broken clock is right twice a day I suppose).
Last year, the real estate industry’s strategy was straightforward: ride out current dangers while repositioning for a period of sustainable growth and greater returns.
Even positive news, such as investors willing to acquire new assets, is tempered by grim industry data. For example, despite available equity, transactions are down and many in the sector point to situations where buyers and sellers can’t agree on pricing because the scarcity of sales hinders price discovery.
Transaction volumes totaled $234 billion through August, 58% lower than last year and 33% lower than the amount through eight months of 2019. Fundraising has slowed, with institutional real estate funds raising $70 billion, a 17% decrease from the previous year, according to FS Investments, a global alternative asset manager.
“We’ve seen real estate and private markets reprice. We’ve seen transaction volumes fall dramatically, and a lot of people are just waiting for the bid and the ask to start to close,” explained Jay Frank, President and COO of Cantor Fitzgerald Asset Management, to Connect Money.
Despite the downturn in real estate, cautious optimism is appropriate, as property fundamentals remain remarkably resilient in the face of significant market turbulence and economic uncertainty, according to a PwC report titled Emerging Trends in Real Estate.
“Despite the economic headwinds and the challenges obtaining credit, there are opportunities available for high-quality properties that meet the needs of today’s investors and tenants. Firms must learn to adapt their growth strategies to succeed in this period of higher for longer interest rates,” said Andrew Alperstein, Partner, Real Estate, PwC U.S., in the report.
Many fundraisers are still waiting for the right entry point, when costs will be low enough to make returns appealing. This may take some time, however, because few owners are in enough difficulty to force distressed sales. Most investors anticipate the end of interest rate hikes, which appears to be close, though actual rate decreases will take longer.
For the time being, macroeconomic uncertainty continues to weigh on fundraising sentiment, with markets attempting to find a new level of stability amid elevated interest rates. Although fundraising is largely anticipated to pick up in 2024, the depressed capital raising environment is unlikely to spring back to life in the first quarter or even the first half of the year.
According to a recent Hodes Weill & Associates report, investors remain wary about committing capital too rapidly while the market is still rebalancing.
“Raising capital from institutional investors as an emerging manager in the real estate space has become increasingly difficult,” noted Casey Wilson, Head of Investor Relations at real estate venture capital firm Loci Capital.
Nonetheless, the firm’s investment philosophy permits it to invest across the capital stack and across all asset classes. “This is a key reason that we’ve been able to maintain first quartile performance with extremely low volatility (0% realized loss ratio since 2011),” Wilson added.
Opposing factors continue to define today’s commercial real estate market, with high interest rates pushing against the pull of impressively strong fundamentals. Investors remain alert to pricing risks as some asset prices haven’t fully reflected the cost of debt.
There are many reasons to be cautious heading into 2024 but the market has so far defied the gloomy forecasts that have clouded the sector for much of the past year.