The Federal Reserve’s rate hikes, begun in March 2022 to combat high inflation, led to a historically rapid rise in interest rates. As a result of the high interest rate environment, financing became more expensive  and challenging for commercial real estate markets. Consequently, real estate transaction volumes fell to a 10-year low as demand for assets fell dramatically. Property valuations felt a strong impact. 

However, since the Fed and other global central banks halted interest rate hikes: rates have stabilized and are trending lower. The Fed’s goal had been to bring about a soft landing of the economy: lower inflation without harming growth. The good news is that it has been successful so far. The inflation rate is roughly three times lower than its peak in 2022, while economic growth remains steady.

While rates are still high from a historical standpoint, a more stable interest rate environment is beginning to have an impact on commercial real estate markets. Commercial real estate lending has begun to return, after leveling off in 2023. The first quarter of 2024 saw $108 billion worth of transactions as market participants began to gain comfort that property valuations were at or near a bottom.¹ Debt capital issuance has also seen a strong revival, in the form of CMBS (Commercial Mortgage-Backed Securities) issuance, which has nearly tripled from the same point in 2023.² All of this is a solid foundation for a recovery we believe is underway.

Meanwhile, real estate fundamentals have proved to be resilient across most sectors of real estate. A leading sector continues to be rental housing, particularly single-family rental and student housing, where there are large supply and demand imbalances. The U.S. is simply not building enough homes to keep pace with the demand of new household formations at a time when buying a home is much more unaffordable than it has been in the past. As for student housing, enrollment at top schools has increased rapidly over the past decade but construction of new purpose-built student housing has been constrained by lack of funding from schools and state budget cuts. The lack of supply has contributed to a healthy rate of rental growth, with 30% increases over the past decade, and has created an opportunity for private investment to develop and manage student housing.³

The bottom line: We believe the real estate market outlook is at an inflection point and this is a great time to put capital to work in opportunities to acquire assets at an attractive basis. As shown below, many sectors are showing attractive discounts that have resilient fundamentals, including apartments, a key sector of rental housing, where there are strong discounts to peak pricing at -26%.⁴ Over time, we believe there is potential for strong appreciation in high-quality real estate purchased now, especially once interest rates stabilize further and begin to decline.

Read the Alts Quarterly, where we discuss the infrastructure outlook and themes affecting other key alternative asset classes.

ENDNOTES 
¹ Source: FRED Commercial Real Estate Loans, All Commercial Banks.
² Source: Green Street.
³ Source: CoStar.
⁴ Source: Green Street.

Full disclosures in linked PDF.