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Nuveen real estate outlook

Real estate outlook 2024

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Private real estate came back down to earth in 2023, hampered primarily by elevated interest rates which weighed on values. Global investment volumes continued to fall throughout the year, with less capital coming into the sector and with buyers and sellers generally unable to agree on price. As a result of this slowing market, we have identified key themes and opportunities for compelling investments across global markets and sectors for 2024, focusing on a mix of long-term structural tailwinds and bottom-up analysis.

Click the themes below for highlights from the report:

1
VARIATION
1
VARIATION

Great variations amongst global markets 

As we look across the global landscape, there are some common themes: inflation is moderating but sticky, interest rates remain elevated, value losses are subsiding, investment volumes are near 10-year lows and transactions arising from distress have remained muted despite pressures. However, we also see a lot of variation:

  1. Valuations: Values in Asia Pacific are holding up better than Europe or the U.S.
  2. Office markets: The office market is not the same everywhere, and we expect the factors behind this divergence to continue. There’s also great variation within markets
  3. Climate risk and ESG: The significance of climate risk and environmental, social and governance (ESG) factors in investment decision making varies by region, with European and Asia Pacific investors more unified in their approach to this than their U.S. counterparts

 

Value losses are generally moderating
Value losses are generally moderating
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2
DISRUPTION
2
DISRUPTION

What’s cyclical and what’s structural?

We believe several trends are driving structural and cyclical changes for real estate in the long term. These include:

  1. Generative artificial intelligence (AI)
  2. Battery/chip manufacturing
  3. Alternative property-types
  4. Transition to the low carbon economy
  5. Aging populations

 

Many aging economies are in Asia Pacific and Europe
Many aging economies are in Asia Pacific and Europe

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3
REFINANCING
3
REFINANCING

Refinancing creates challenges, also opportunity

Interest rate increases since 2021 are raising the risk of upcoming refinancings for maturing commercial real estate (CRE) loans leading to loan impairments, collateral enforcement and distressed sales. But there are mitigating factors that will limit the downside:

  1. The industrial and apartment sectors in the U.S. and U.K. are likely to have seen valuation growth over the course of the loan, so LTV ratios at maturity should be lower than at origination
  2. The lower LTVs in the recent cycle mean the amount of debt due for expiry is a lower share of the market than we saw during the global financial crisis (GFC)
  3. Lower leverage meant that the equity cushions that are built into the lending process were larger than in the GFC, so the risk of distress was lower

Because of this, we can expect to see a rise in distressed sales due to refinancing problems, but not a tsunami. Further, this could provide opportunities for alternative lenders to lend at relatively modest LTVs but at much greater returns.

Upcoming CRE loan maturities will be a wave, rather than a wall
Refinancings create challenges, also opportunity
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4
RETAIL
4
RETAIL

Retail could be a quiet outperformer

While nuances exist across regions, we maintain high conviction around necessity retail. We believe this segment will outperform in the face of a fragile global economy. As consumers continue to require essential items, trade down, and stay local due to hybrid work, we continue to focus on the retail formats which benefit from these trends.

  1. U.S. retail: Grocery-anchored and necessity-based retail is seeing all-time low vacancies in the U.S.
  2. European retail: Retail parks (grocery-anchored and convenience retail assets) located outside of the urban core have generally healthy fundamentals today and offer attractive investment opportunities
  3. Asia Pacific retail: Grocery-anchored, sub-regional malls and convenience retail are interesting propositions in this current macro climate, especially if pricing adjustments allow for an attractive entry point

 

U.S. vacancy rates for neighborhood retail is at a historic low
U.S. vacancy rates for neighborhood retail is at a historic low
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5
AFFORDABLE HOUSING
5
AFFORDABLE HOUSING

Continued need for affordable housing

While the lack of affordable provision has been growing for decades, most recently inflation, rising interest rates, a pause on housing developments and increased demand has exacerbated the problem and the need for affordable housing is more pressing than ever. The problem is a global issue, but the solutions will vary country to country.

To solve for the problem, there is a requirement for stronger private and public partnerships (especially outside the U.S.) with viewed increased opportunities for investors within the sector.

 

Global investment activity % of subsidized residential transactions versus all residential
Global investment activity % of subsidized residential transactions versus all residential
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6
MARKET CONDITIONS
6
MARKET CONDITIONS

Setting up for a good vintage

Values have come a long way to adjust to the new financial market environment and we expect that, save for additional unexpected negative macro shocks, most investment markets will have bottomed out by end of 2023.

There is too much uncertainty to expect interest rates to improve markedly in the short run, but over the medium term, more accommodative conditions should support property values again.

However, even with a more pessimistic outlook on interest rates, 2024 is setting up to be a good vintage for real estate. Market dislocation, not least caused by debt workouts, will unlock opportunities for well-capitalized investors.

 

Back to the future – markets close to restoring balance
Back to the future – markets close to restoring balance
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This material, along with the views and opinions expressed within, are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market, economic or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty (express or implied) as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with their financial advisors. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. This material should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. This material does not constitute a solicitation of any securities in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement.

Important information on risk

Past performance is no guarantee of future results. All investments carry a certain degree of risk including, the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved.


Real estate investments are subject to various risks associated with ownership of real estate-related assets, including fluctuations in property values, higher expenses or lower income than expected, potential environmental problems and liability, and risks related to leasing of properties.

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