Conditions remain attractive for non-core investments, higher interest rates continue to drive an element of market dislocation. The jump in interest rates since 2022 pushed down property values, causing properties to become over-levered, creating the need to fund the gaps between loan payoff levels and refinancing proceeds. Though it’s been welcome and a boost to sentiment, central bank easing mainly affects short rates. It is likely that mid- and longer-term rates will remain higher, with more overall uncertainty amid greater than usual geopolitical risk.
Real estate trading prices and volume have bottomed for this cycle, although appraisal-based carrying values lag. Elevated carrying values continue to depress trading volume because sales force property owners to realize losses. Investors have been slow to commit new capital partly because they are not getting money back from their existing portfolios. Lending is reduced but recovering; the growth of private, non-bank lending creates opportunity for real estate debt investors.
Fund indices, especially non-core, are likely to see further deterioration in returns. Still somewhat overpriced, core/core+ open-ended funds continue to have redemption queues and will have lackluster returns until carrying values are better aligned with today’s capital market realities.
Operating fundamentals continue to reflect cyclic slowing of demand plus secular shifts that add resilience and will aid recovery in favored areas such as industrial and affordable residential housing. Supply has been a key differentiator, with areas of overdevelopment in high growth markets creating slow and negative rent growth as it is absorbed. Demand for office space is low in much of the US and parts of Europe and Australia due to work from home; in these places, office will likely remain challenged for some time.
StepStone Real Estate’s House Views are developed from a top-down and bottom-up approach that combines macro-economic, demographic, and geopolitical factors analyzed by our market research team with the on-the-ground insights of our investment team. Our investment team’s input is largely informed by our experience allocating approximately $15 billion per annum of our clients’ and investors’ capital into real estate funds, secondaries, recapitalizations and co-investments, and through our 970+ meetings with real estate GPs in 2023.
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We are pleased to present our Fall 2024 StepStone Real Estate House Views and extend an invitation to join us on Tuesday, December 3rd at 11 AM ET for a webinar covering our report.
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