Displaying items by tag: risk

Clarion Partners, a leading global real estate investment manager, shared its thoughts on the US economy and outlook for real estate in 2024. It notes that the economy has stayed resilient despite headwinds from inflation, higher interest rates, and geopolitical risks. 

The expansion has been sustained by a robust jobs market, steady consumer spending, and fiscal deficits. There could be some relief with inflation moderating which could lead the Fed to pivot its policy in 2024 and provide relief to rate-sensitive parts of the economy like real estate.

Real estate activity has slowed due to higher interest rates, while sellers have been unwilling to lower prices. In some segments, there is concern about a wave of maturities which will have to be refinanced at higher rates in a more restrictive environment. 

The firm is generally optimistic about commercial real estate except for office, mall, and select retail. Other than these areas, vacancy rates remain low, and rents remain elevated. There has also been a drop in new construction which is also supportive of rents continuing to grow in the coming years. It also believes that private real estate is well-positioned to take advantage of dislocations created by the current market environment. 

Finsum: Clarion Partners, a real estate invesment manager, believes that macro conditions for real estate will improve in 2024 due to a more dovish Fed while underlying fundamentals remain solid. 

REIT stocks have endured a brutal two year period primarily due to the headwind of rising rates. Now, there is some optimism that the Fed could be done hiking and its next major move will be to cut rates in 2024 as inflation declines to its desired level. Yet, the sector does face some real challenges in the coming year especially in areas with weaker fundamentals.

At the Nareit REITworld 2023 annual conference, investors and Wall Street analysts shared their perspective on the sector. Steve Sakwa, the senior managing director and senior equity research analyst at Evercore ISI noted some weakness in apartments and self-storage while noting strength in senior housing, industrials, and healthcare. 

A catalyst for the data center space could be companies spending on artificial intelligence (AI) with this positive catalyst lasting for 3 to 5 years. He expects 3 to 4 rate cuts in 2024, which he believes will push REIT stocks 15 to 20% higher. 

Jeff Horowitz, the global head of real estate, gaming, and lodging at BofA Securities struck an optimistic tone. He sees public companies being in a good place with an average maturity of five-years at below 4% and could see a wave of REIT IPOs in 2024 as well.

Finsum: REIT stocks have underperformed for 2 years. Now, there are some reasons for optimism with many expecting the Fed to cut rates in 2024 and opportunities in some parts of the real estate market.

One of the biggest beneficiaries of the October CPI report was office REIT stocks as the sector saw double-digit gains due to the odds of further hikes diminishing, while expectations for cuts in 2024 increased. It marked the biggest gains for the sector since November 14 when the Covid-19 vaccine was announced.

One of the biggest headwinds for this group has been high levels of debt which is exacerbated by high interest rates. So, the relief rally makes sense given that lower levels of inflation would portend looser monetary policy and a decline in short and long-term rates. Many stocks in the sector have high levels of short interest which also make them more susceptible to big moves higher in the event of a positive catalyst. 

However, there remains considerable uncertainty over whether these gains will last given that the fundamental outlook remains impaired. Companies continue to reduce office space as remote and hybrid work arrangements have remained even after the pandemic. Prior to the pandemic, the office vacancy rate was at 9.4%, while it’s 13.5% currently. 

There’s little indication that this could change as demand for new office space is subdued. According to data provider VTS, the number of new searches for office space in major cities is 47% below pre-pandemic levels. 

Finsum: Office REITs have enjoyed a decent rally following the CPI report. However, the longer-term picture remains challenging with no rebound in sight for office space. 

Equities and bonds moved higher following the October CPI report that came in much softer than expected. As a result, traders increased their bets that the Fed hiking cycle is over, while Fed fund futures showed an increase in the number of rate cuts expected in 2024. Further, odds of a hike at the December meeting went from 21% to 0%, and the market’s consensus for the Fed’s next move is now a 50-basis point cut in July of next year. 

In terms of fixed income, the 2Y Treasury note fell by 20 basis points, while yields on the long end saw similar declines. The data is also supportive that the Fed can successfully achieve a ‘soft landing’ as the economy continues to expand, while it’s managed to make significant progress in terms of battling inflationary pressures. Many market participants didn’t think it would be possible for the Fed to successfully curb inflation without throwing the economy into a recession.

Some of the key takeaways from the report were core CPI hitting a 2-year low, while headline inflation was flat on a monthly basis and up 3.2% on annual basis. Some of the biggest contributors were weakness in energy prices, shelter costs moderating, and small declines in airfare prices and vehicle costs. 

Finsum: Fixed income and equities soared higher following the October CPI report which came in much softer than expected. 

Risk adverse?

Well, perhaps you’ve pulled up to the right window. After all, a big upside of active fixed income management: risk mitigation, according to npifund-com.

Possible problems – before they damage client portfolios – can be traded out of by alert active fixed income managers. What’s more, the site states: “We believe the next problem to address with active management is the leverage bubble in corporate debt. The disproportionately large BBB market, in   particular, “poses a risk to the markets in the event of a wave of downgrades under the right recessionary scenario.”

Meantime, it seems investment strategy and fixed income teams at Vanguard have been burning a little midnight oil.

According to corpaemdisp.essp.c1.vanguard.com, new research from the company’s teams taken a close look into how the growth of a diverse coupon stack in the municipal bond market, followed by, down the line, “aggressive Fed rate hikes put negative convexity front and center in active muni investing.”

Those active managers steering through this environment of souped up rates are gaining leverage. Why? Because they’ve been able to wrap their heads around how to manage negative convexity risk – and they’ve been prudent while they’re at it.