Looking ahead to what commercial real estate might do in 2024, which is what PGIM Real Estate just did in a report, requires a baseline starting point.
It’s a complex one. “Real estate is adjusting to elevated interest rates, with expectations of buyers and owners still far apart,” the report said. “We estimate those expectations will not converge until property values fall another 10%. Nevertheless, property incomes remain resilient. U.S. rent growth will decelerate, but generally remain positive, as newly built properties deliver and demand moderates.” The 10% estimate was general. “As usual in a real estate downturn, office will be the most impacted sector. Necessity-based real estate (defensive retail, senior housing and manufactured housing) should emerge comparatively better off.”
The total expected peak-to-trough fall on average will be -24%, if PGIM is right. Break out by property type and you get senior housing at -9%, manufactured housing at -9%, retail of -13%, -17% for industrial, multifamily would have dropped -23%, and office far off at -43%.
Looking at 2024, PGIM points to expected positive revenue growth over all sectors for the next four years. However, that’s an average. Investors will be interested in where the distribution of expected success is highest. “Look for deceleration in industrial, storage and apartments, and improving income growth in the senior housing, retail and office sectors,” they wrote.
Core lending should find itself offering the “most attractive risk-adjusted return in years,” with conservative loan terms further protecting lenders. The difficulty in getting refinancing for buildings, with many lenders like banks lowering the amount of loans they’re willing to hold on their books, makes for higher demand, “even if transaction activity remains muted.”
With more than $1 trillion in CRE loans maturing next year and 2025, PGIM expects a $300 million plus refinancing gap. “New-vintage multifamily properties and older assets in appealing locations will be part of this mix, along with distressed office, retail and lodging collateral.”
A good area for investment is public REITs, the firm says, because their share prices have already taken into account future value losses in their holdings. “Core sector REIT prices largely already incorporate our expected full-cycle, leveraged value corrections, and some are priced for recession already,” they said. “With high-quality real estate portfolios and full liquidity on demand, public REITs offer an attractive entry point today.”
Residential rentals will retain basic strength as an investment because even with a recent spate of multifamily construction, there has still been significant underbuilding of housing over the last decade. A surge of household formation, high costs to buy have created the largest own-to-rent cost ratio in many years. That’s made rental housing more of a must than in recent memory.
Finally, student and senior housing sectors are both set to do well. On the student side, there’s been a post-pandemic rebound in demand that “leaves the sector with healthy occupancy, setting the stage for continued rent growth.” For senior housing, occupancies are near pre-pandemic levels and net absorption is almost double the average over the last ten years. “We expect occupancies to fully recover by 2025.”
Source: “There Are Some Good CRE Opportunities Looking Ahead“
