Real estate trades now seem to reflect higher interest rates and certain negative factors in general economies. Trading volume is still muted. We expect it to take several years to resolve the pervasive issue of overleverage caused by steep value declines. Similar to the post GFC era, lender forbearance, work-out and loan restructuring negotiations and foreclosures take time. Therefore, we don’t expect distressed investing opportunities to really start ramping up until later in 2024. Conditions are ripe for a potentially extraordinary vintage period for non-core investing via recapitalizations, GP-led secondaries and distress sales.
Debt investors benefit from higher rates, more conservative attachment points and loan terms, and as with recaps and distressed purchases, the ability to be highly selective amid a growing pool of opportunities.
Real estate carrying values are adjusting slowly, as usual. This means open-ended funds remain expensive in the US though select European funds offer better-priced entry points. Existing closed-ended funds are generally over-marked, particularly the recent pre-correction vintages which likely made acquisition at peak pricing with less time to stabilize assets.
Challenges are predominantly coming from higher interest rates, though operating fundamentals are beginning to weaken. Unlike other property types, office is facing severe operational distress due to changing use patterns that is likely to take some years to resolve.
StepStone Real Estate’s House Views are developed from a top-down and bottom-up approach that combines macro-economic, demographic, and geo-political 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.
Note: ~$15 billion average annual private market allocations are for the average of the last three years ended December 31, 2023, and represents StepStone-approved investment commitments on behalf of discretionary and non-discretionary advisory clients. Excludes legacy funds, feeder funds and research-only, non-advisory services. Ultimate client investment commitment figures may vary following completion of final GP acceptance/closing processes.
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