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CONTRIBUTORS

Tim Wang, Ph.D.

Head of Research,
Clarion Partners

Positive macro outlook

Heading into 2024, the US economy remains resilient despite tightening monetary conditions and heightened geopolitical uncertainties. Strong consumer spending and job growth have been a bright spot along with significant federal stimulus. As of Q3 2023, inflation had fallen considerably from its peak in mid-2022. If the current trends continue, the Fed may pivot in 2024, which would moderate interest rates and stabilize the capital markets.

Higher financing costs have been a significant hurdle in real estate underwriting. The large pricing expectations gap between buyers and sellers persists. Furthermore, the wave of maturing real estate loans poses significant refinancing risk. Still, there is a near-record amount of uncommitted dry powder.1 Clarion Partners believes that 2024 may see greater stability in asset pricing. If investor sentiment improves in 2024, more real estate deals should be transacted.

Healthy commercial real estate fundamentals

Overall, we believe US property supply and demand fundamentals are generally healthy except for office, mall, and high-street retail. Most sectors have experienced near-record high rent and low vacancy levels. More conservative lending conditions have led to a sharp decline in new construction starts, which should moderate new supply and strengthen rent growth from 2025 to 2026.2

Looking ahead, we expect industrial rent growth to outperform given robust ongoing demand for Class A warehouse space and vacancy near historical lows. Demand for multifamily has strengthened amidst worsening for-sale housing affordability, and we expect new supply deliveries to abate after 2024 and strengthen rent growth thereafter. After several years of muted new supply, the availability rate of open-air shopping centers has hit a two-decade low, which also bodes well for the sector’s future rent growth. At the same time, more capital is being allocated to alternative property types. Self-storage, life sciences, and single-family rentals have exhibited core-like characteristics, such as durable cash flows and lower volatility.

Clarion Partners continues to focus on several investment themes in 2024, including the flight to quality assets, housing shortage, affordability crisis, net migration to the Sun Belt, e-commerce boom, aging population, innovation economy, and sustainability.

Looking forward

Private real estate has offered attractive risk-adjusted total returns over the long term. Clarion Partners is cautiously optimistic about 2024 and believes that the current market dislocations may create attractive buying opportunities over the next 12 to 18 months. Potential investment risks, include elevated inflation, higher-for-longer interest rates, and a potential recession. As such, it is prudent for investors to monitor macro developments closely, underwrite new investments conservatively, and deploy capital selectively.

Endnotes:

  1. Preqin. November 2023.
  2. CBRE, U.S. Census Bureau. November 2023.

 

WHAT ARE THE RISKS

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