In a Nutshell
- U.S. real estate has responded to higher interest rates. Market prices have dropped about 20% from their Spring 2022 peak. We believe that appraisal values will converge to market levels by year-end.
- Fundamentals are healthy (outside of the office sector), with vacancies near an all-time low (since 1988) and net operating income (NOI) growing briskly. A recent slowdown in the apartment and industrial sectors can be attributed to a post-COVID reset that we believe is largely complete.
- In our view, long-term interest rates are close to their peak and banking tremors will be relatively benign for core real estate financing. By extension, we believe that market cap rates have also essentially peaked, relieving pressure on valuations.
- We believe that fundamentals will soften modestly over the next year amid a mild recession and a wave of apartment and industrial construction, but then retighten in the second half of 2024 as the economy recovers and supply retreats. We believe investors looking through this dip will find opportunities to buy into strong long-term fundamentals at attractive yields.
- COVID and its aftershocks have distorted sector and market dynamics. We believe that structural trends continue to favor industrial and residential property in the Sun Belt and Mountain West.
