Real Estate Outlook – US, Edition September 2022

We continue to focus our strategies on defensive positioning while economic uncertainties persist. This typically includes marginal movements around strategy targets; less leverage, lower amount of value-add activities, and a focus on increasing occupancy over rent growth in retail and office.

Kurt Edwards, Head of Real Estate Research & Strategy – US

Private real estate finished the second quarter of 2022 with record-setting NFI-ODCE total annual returns at 29.5%. Robust second quarter returns did not fully capture the most recent activity of re-trades and value declines that are now pervasive in bidding pools. Transaction volume increased by 17% YoY, but examining the underlying data shows a decline in volume among deals sized below USD 50 million.

Financing a real estate asset has become more difficult and expensive. Rates on conventional secured loans jumped from 3.9% in March 2022 to 5.1% in June 2022, creating a negative gearing situation where the cost of debt is above the income yield. Investors in liquid markets have reacted, pushing public REIT share prices lower, which partially implies cap rate expansion at the property level.