- The US Federal Market Operating Committee (FOMC) agreed to hold interest rates steady for the second consecutive time in November at a target range of 5.25-5.50%.
- Financial conditions have tightened with the 10-year Treasury rising in October to the highest level since 2007.1 This, coupled with tensions in the Middle East, continues to put pressure on the global economy. As a result, many economists surveyed by the Blue Chip Economic Indicators believe the fed-funds rate has peaked and the first rate cut to occur in the second half of 2024.2
- Inflation continued to slow its slimmest year-over-year gain at 3.5% as measured by the core personal consumption expenditure, that was slightly above the 2% Fed target.3
- Within commercial real estate debt, lenders are beginning to deploy 2024 allocations, and spreads are compressing slightly and are in the 180-210 range as of early December. However, corporate bond spreads continue to tighten, maintaining the commercial mortgage loans to corporates spread gap.
- Property transaction volume was down 53% during the third quarter of 2023 and 55% year-to-date compared to the same period a year ago.4
- Property value declined by 0.6% on an annualized basis from August to September, and 9% compared to last year.4
- NCREIF National Property Index (NPI) returned -8.4% for the year ending September 30, 2023, compared to 16.1% a year ago. Capital appreciation was reported as -12.1%, with income return at 4.1%.5
- While we are cautious on the retail sector, performance is outpacing other sectors with grocery-anchored and necessity-based retail remaining the most preferred subsector.
Property sector outlook
| 3Q 2023 TOTAL RETURN | UNDER CONSTRUCTION AS % OF INVENTORY | 3Q 2023 VACANCY RATE | 3Q 2022 VACANCY RATE | 3Q 2023 YOY RENT GROWTH | 3Q 2022 YOY RENT GROWTH | AEGON AM REAL ASSETS SECTOR OUTLOOK |
| Apartment | -7.6% | 5.1% | 7.1% | 5.9% | 1.1% | 5.6% | Neutral |
| Industrial | -5.3% | 2.8% | 5.1% | 3.9% | 7.4% | 11.6% | Neutral |
| Office | -17.1% | 1.4% | 13.3% | 12.2% | 0.6% | 1.4% | Most Cautious |
| Retail | -1.4% | 0.5% | 4.1% | 4.3% | 3.7% | 4.4% | Cautious |
Sources: National Council of Real Estate Investment Fiduciaries, CoStar Realty Information Inc., and Aegon Real Assets US. As of September 30, 2023.
Apartment
The apartment sector continues to face cyclical supply headwinds, while demand fundamentals remain healthy. Currently, the sector is at the peak of the supply cycle, but tightening monetary policy and construction challenges are expected to reduce supply in the coming years.
Industrial
The industrial sector saw a notable increase in construction completions in 3Q 2023, leading to a trend of escalating vacancy rates and cooling rent growth. Escalating construction costs and high interest rates continue to leave investors hesitant to start new projects, which will likely reduce new supply by late next year. Despite these challenges, fundamentals for the sector remain well-positioned against near-term supply headwinds, and we expect the sector to continue to normalize towards pre-pandemic levels in 2024.
Office
Office sector fundamentals continue to face structural challenges led by changing post-pandemic work arrangements. Anecdotal evidence suggests that only a third of office leases have come up for renewal since the pandemic so far. Further deterioration in office fundamentals is likely as those leases expire and tenants negotiate for lower rates or downsize to smaller square footage if the overall sentiment on office use does not improve.
Retail
The retail sector remains resilient with vacancy rates reaching a new low in the third quarter. Demand for retail space continued to rise, with availability in desirable locations tightening even further. Despite high demand, new construction remains very challenging due to high construction costs and stringent lending conditions. The retail sector is expected to remain well-positioned to endure a potential recession.
1 Board of Governors of the Federal Reserve System. October 31, 2023
2 Wolters Kluwer. Blue Chip Economic Indicators. November 10, 2023
3 US Bureau of Economic Analysis. Personal Income and Outlays. October 31, 2023
4 MSCI Real Capital Analytics. September 30, 2023
5 National Council of Real Estate Investment Fiduciaries. September 30, 2023
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