What’s in Store for 2024?
Despite tight monetary conditions as well as growing geopolitical uncertainty, the US economy remains on solid ground heading into 2024. Along with massive fiscal support, strong consumer spending and job growth have been welcomed news.
The sharp drop in U.S. inflation from its peak in 2022 and, more importantly, a decline in inflation expectations over the next three years, has prompted the Federal Reserve to shift to a dovish monetary policy stance, which would help to further push interest rates lower and stabilize the capital markets.
Infrastructure Well Positioned
Infrastructure remains in a good spot in 2024 due to its defensiveness against inflationary pressures, relatively high yield, and substantial global policy backing. It also has a high exposure to the secular growth trends of digitalization and decarbonization, according to a report by Macquarie Asset Management, titled Outlook 2024: A world in transition.
With a dearth of capital and higher financing costs, private infrastructure fundraising witnessed a notable decline in 2023, after funds raised a record $175.8 billion in final closes in 2022, according to Preqin data.
Based on second-quarter 2023 data from Inframation, cited by Macquarie, the asset class raised only $11 billion in final closes, which are taking longer, and $45.6 billion in interim closes in the first half of 2023.
However, fundraising activity should pick up in 2024, as institutional investors continue to underinvest in infrastructure by an average of 98 basis points relative to target allocations, according to Cornell University’s Program in Infrastructure Policy, Hodes Weill & Associates’ “The 2023 Institutional Infrastructure Allocations Monitor.”
“Given that infrastructure has fundamental traits (defensiveness, inflation protection, high yield) that investors should find attractive in the macroeconomic environment that is likely to prevail in 2024 and beyond, we would view any significant move lower as an attractive entry point to acquire infrastructure assets,” according to the authors of the Macquarie report.
Macquarie emphasized the positive trends in digital infrastructure. Due to increased build and operational costs, the mismatch between strong demand and restricted supply in data centers resulted in enhanced pricing power for incumbent operators in 2023, which is anticipated to continue in 2024 as supply-demand mismatches persist.
Real Estate Opportunities
Real estate, meanwhile, is more sensitive to the high interest rate environment than infrastructure, but it has also experienced larger price swings. While cyclical headwinds persist, opportunities to invest are emerging in the sector.
Following two difficult years, the pricing reset in real estate is likely to generate opportunities. If the most recent dovish market/ dovish Fed pivot scenario concerning rate cuts next year materializes, market cap rates have most likely peaked.
This would be a game-changer for real estate: “at worst, it would remove a major headwind to valuations; at best, it would create tailwinds for future performance, should cap rates follow interest rates lower,” noted DWS in its 2024 Real Estate Outlook.
“We believe that 2024 will mark a turning point for U.S. real estate, as easing financial conditions offset a soft patch for fundamentals. Beyond 2024, prospects are increasingly bright, in our view,” DWS analysts wrote. Lower prices have increased income returns to their best level in over a decade. Fundamentals are generally good, and supply constraints may drive high rent growth in the next several years, the global asset manager added.
High interest rates have been a major impediment in real estate underwriting, while the lack of price discovery between buyers and sellers continues. Furthermore, the onslaught of maturing real estate loans creates enormous refinancing risk.
Nonetheless, there is a near-record amount of uncommitted dry powder, according to Tim Wang, head of research, and Julie Laumont, research officer, at real estate investment firm Clarion Partners. The firm predicts that asset pricing will be more stable in 2024. More real estate transactions should be completed in 2024 as investor sentiment improves.
Overall, the mood for 2024 is cautiously optimistic, and current market dislocations may generate good buying opportunities over the next 12 to 18 months, subject to the typical caveats of sticky inflation, higher-for-longer interest rates and a potential recession.
