Real Estate
U.S. Real Estate: Positioned for Recovery
When considering the substantial correction in real estate prices and profound pull back in liquidity to this point, an inflection point in U.S. real estate appears closer than before. The Barings Real Estate team discusses how this backdrop is shaping opportunities across the asset class.
Economy
- The fourth quarter of 2023 marked the sixth consecutive quarter of declining core real estate values, which are down 20.3% from the peak according to the NFI-ODCE.
- While there is still plenty of uncertainty around the near-term path of inflation with repercussions for monetary policy, the stage is set for real estate transaction activity to re-engage positively at some point in 2024.
- The probability of a U.S. recession has declined from 65% in June 2023 to 50% as of December 2023. Macroeconomic fundamentals have continued to be supportive of nominal rent trends across every property sector except for office.
Property Market
- Real estate debt distress is rising. Unsurprisingly, office comprises the largest share of distressed debt but there are signs of strains in segments of the multifamily market.
- Transaction activity totaled $90 billion in the fourth quarter of 2023, a 41% decline year-over-year. This marks the sixth consecutive quarter of falling transaction activity. For comparison, transaction activity fell for a total of seven quarters between 2007 and 2009.
- Since the end of 2021, composite public REIT share prices have fallen by 44% with significant variation by property type.
- The gap between public and private price trends suggests appraisal values have more to fall although the handful of transactions that are taking place are clearing at well below sellers’ book values.
