Bottom lineįinancial cracks have fed concerns over commercial real estate’s outlook. Construction spending on the latter rose to about $147 billion annualized this March vs. Some may aim to widen their web of warehouses to cut transportation costs and to support new manufacturing plants. Companies have already been storing more goods locally to prevent renewed supply chain snarls, U.S. We also think geopolitical fragmentation will likely shift supply chains and prompt companies to re-shore operations – bringing manufacturing closer to home. The expansion of e-commerce looks set to keep on driving demand as it has for decades, in our view. We like industrial assets that could see structural trends feeding demand in the long term, like distribution and last-mile logistics centers. This differentiation is why we get granular. Industrial assets have a vacancy rate around 2% as of March and their share of the commercial real estate market has doubled since 2016 to take up roughly a third of the market now, according to NCREIF data. Industrial assets – referring to warehouses used for distribution, manufacturing and research and development – have fared better than office. Yet REITs’ near-term correlation with stocks means they diversify portfolios less and may see more volatility when stocks fully price in economic damage. Public REIT values tend to lead private markets by a few quarters. Exchange-listed real estate valuations are largely lower across the U.S., UK and Europe as real estate investment trusts (REITs) sold off with stocks in 2022, indexes show. That combo will likely bite into commercial real estate income growth. We’re cautious on private commercial real estate valuations: We think they need to fall more as rate hikes raise financing costs and cool inflation. assets: Private European valuations are cheaper than U.S. We see the gap as a bigger concern for U.S. That dynamic may create a funding gap but also chances to scoop up discounted assets – with risks. properties will struggle to refinance debt, causing some to hit the market at cheaper valuations or default. That has raised fears high-vacancy or highly-levered U.S. Banks held 40% of outstanding real estate debt as of 2022’s third quarter, the Mortgage Bankers Association found. Banks’ exposure to real estate added to market jitters. offices, based on a high vacancy rate of about 13% in March, National Council of Real Estate Investment Fiduciaries (NCREIF) data show. Shifting work habits have cut demand for U.S. The impact of the pandemic and bank turmoil on commercial real estate sectors has varied, too. Private markets overall are complex, with high risk and volatility, and aren’t suitable for all investors. Private assets can play a sizeable role in long-term portfolios, with potential to diversify returns, in our view. We expect industrial cap rates (dark orange line) to stay low relative to peers as we see higher earnings growth for the sector. Investors are requiring higher cap rates for offices given rising interest rates and higher vacancy rates due to remote work. Office cap rates (yellow line) are likely to rise too as they have since 2022. We expect retail cap rates to keep rising (green line in chart) due to pressure from e-commerce growth. Case in point: Capitalization rates – a yield metric that rises when valuations fall – have diverged. Yet we know commercial real estate is not a monolith. That includes broad commercial real estate – a sector we’ve projected negative returns for since June 2022. We went underweight private growth assets from a view of five years and over in 2022’s first quarter. We see structural trends, like the expansion ofĮ-commerce and geopolitical fragmentation, feeding long-term demand for industrial assets. We favor other property types like industrial real estate. That has raised fears over the ability of these properties to refinance maturing debt. offices as seen by higher vacancy rates.īank real estate lending concerns have added to market jitters. The shift in work has cut into demand for U.S. We believe private assets have the potential to diversify returns but are not suitable for all investors. ![]() The differentiation in real estate is also evident in ways to invest in the sector. ![]() We think valuations need to fall further due to the economic backdrop. This view is based on the fundamentals of real estate investments made by private open-ended funds. We’re underweight real estate on a horizon of five years and beyond. We get granular as part of our new investment playbook. There has been increasing differentiation between real estate sectors post-Covid. commercial real estate due to the sectors reliance on bank loans. The fastest rate hike campaign since the 1980s is causing financial cracks seen in bank turmoil. Opening frame: What’s driving markets? Market take
0 Comments
Leave a Reply. |