Displaying items by tag: real estate

Friday, 09 February 2024 05:39

Powell Warns of Commercial Real Estate Risks

The crisis in commercial real estate (CRE) is starting to have knock-on effects on banks according to Federal Reserve Chair Jerome Powell. In an interview with 60 Minutes, he remarked, “It feels like a problem we’ll be working on for years… it’s a sizable problem.” He added that most of the negative impact would be concentrated on smaller or regional banks who have greater exposure to CRE.

 

Already, the Fed stepped in following the collapse of Silicon Valley Bank in June of last year to prevent further damage that could impact the broader economy. In addition to this stress, banks are dealing with an inverted yield curve which has made lending less profitable, and it has led to the uncomfortable position of paying out high rates on deposits while holding loans made at much lower rates in the past. 

 

Ultimately, the crux of the problem is that demand for office space has declined due to more companies adopting remote work or hybrid arrangements. According to estimates, there could be 1 billion square feet of unused office space by the next decade. Another cause for concern is that over the next few years, loans will mature and need to be refinanced in a much more difficult environment. Given these bleak fundamentals, it’s inevitable that lenders will take losses.


Finsum: In a 60 Minutes interview, Fed Chair Jerome Powell warned that weakness in commercial real estate was starting to impact the banking sector. Already, the Fed intervened last year to prevent contagion following the collapse of Silicon Valley Bank. 

Published in Eq: Real Estate
Friday, 02 February 2024 07:07

The Upside Case for Private Real Estate in 2024

Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.


Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term. 

 

Published in Eq: Real Estate

Hazelview Investments shared its bullish outlook for real estate investment trusts (REITs) in 2024. The firm sees gains in the fourth quarter of last year continuing due to earnings strength and relatively low amounts of real estate supply which should support prices. It also sees upside due to attractive valuations, 

 

It does see the economy slowing in the coming year but this should be offset by easing interest rates and the sector’s strong, underlying fundamentals. In addition, Hazelview points out that historically REITs have delivered their strongest performance during the interim period in between the Fed changing course on monetary policy from hikes to cuts. 

 

According to Corrado Russo, managing partner and head of Global Securities at Hazelview Investments, "The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024." 

 

In terms of earnings, the firm sees a 10% increase next year on a cumulative basis. It also anticipates a decline in available supply given that construction has slowed to a crawl over the last 2 years given higher construction and financing costs. At the same time, demand has seen little indication of slowing. 


Finsum: Hazelview Investments is bullish on REITs for 2024 due to attractive valuations, strong underlying fundamentals, double-digit earnings growth, and improving monetary and economic conditions.

 

Published in Eq: Real Estate

A recent report on real estate holdings of institutional investors revealed that while their allocation to the asset class remained level from 2022 to 2023, the allocation in the preceding decade increased by 190 basis points, a jump of 20%.

 

Historical data underscores the potential benefits of private real estate. A whitepaper from TIAA—a respected organization established by Andrew Carnegie in 1918 to support teacher retirements—highlights the performance of private real estate over a two-decade span. From 2000 to 2020, private real estate exhibited a very low correlation with stocks, bonds, and listed REITs. This suggests that incorporating private real estate into a portfolio could enhance diversification, which is crucial for managing risk.

 

Moreover, private real estate has traditionally been an effective hedge against inflation. As inflation erodes the purchasing power of money, the tangible asset class of real estate often sees its value and the income it generates keep pace with or exceed inflation rates, thereby preserving the real value of an investor's income.

 

For financial advisors, the strategic inclusion of private real estate in client portfolios can provide a twofold advantage: diversification benefits and protection against inflation. This can be especially valuable during periods of market volatility and rising prices, helping clients to achieve a more stable and resilient investment outcome.


Finsum: Real estate’s diversification and inflation hedging benefits are among the reasons why institutional investors continue to maintain their increased allocation to the asset class.

 

Published in Eq: Real Estate

Institutional investors and money managers came together at the annual PERE America Forum and shared some thoughts on the private real estate market. The overall sentiment is that conditions will remain challenging until 2025 due to a large amount of commercial real estate debt that needs to be rolled over or refinanced at much higher rates.

 

According to John Murray, the head of PIMCO’s global private commercial real estate team, the situation is as bad as the Great Financial Crisis in terms of dislocations in capital markets. He notes that Fed policy is the major headwind, and its ‘crushing’ sentiment and liquidity. 

 

Sajith Ranasinghe, head of real estate at Church Pension Group, remarked that price discovery has been limited so investors are focusing more on income. He also expressed interest in private REITs which are down over 30% since rates began moving higher in 2022. 

 

Saul Lubetski, the vice-chairman of Harbor Group International recommends a ‘scalpel approach’ as $1.5 trillion of maturities are set to expire by 2025. He notes that the refinancing has already begun, albeit at a smaller and slower pace which should accelerate this year. However, it’s increasingly evident that borrowers are finally making peace with higher rates. 


Finsum: At the annual PERE conference, institutional investors and money managers gathered to share some thoughts on the private real estate market.

 

Published in Eq: Real Estate
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