Real estate: recovery in progress

Q&A with Carly Tripp

With macroeconomic trends continuing to impact real estate, Carly Tripp, Global Chief Investment Officer of Nuveen Real Estate, sheds light on the recovery process and how real estate is performing across regions.

The real estate market is picking up, but where exactly are we in the recovery period?

We’re reaching the latter stages of the recovery period overall; however, we continue to see a divergence in performance among sectors and countries globally. Fundamentals have remained resilient and strong within housing, industrial and alternative sectors and, in many cases, net operating income growth has outpaced inflation.

On the other hand, capital market constraints and the rate cycle have resulted in overall value depreciation across regions, and we’re starting to see the resulting value pressures moderate quarter-by-quarter. And looking further to individual sector performance across regions that variance becomes more pronounced. Not all real estate is made the same.

Office has contributed most significantly to negative returns in the U.S., while retail has surprisingly been the best performer over the last 12 months. In Europe the biggest correction has been in residential and logistics, where cap rates were the lowest.

Many investors are standing on the sidelines concerned about contagion in the office sector. However, while office is distressed in the U.S. we’re seeing a completely different picture elsewhere, especially in Asia-Pacific. The office sector has not only been resilient, it has thrived in places like Singapore, where we’re seeing hotels being converted to office space to keep up with demand, which is driving strong rent growth.

Despite the recovery, recession concerns still loom across many global markets. Is this justified?

The trajectory of inflation and ongoing rate hikes is at different stages across the globe and the risk of a global recessionary environment akin to the financial crisis is waning. In the U.S., the probability of a soft landing is increasing and our internal house view is that a risk of mild recession will remain for several quarters, though the timing keeps being pushed out.

If we can resolve core inflation while maintaining strong labor markets and consumer balance sheets, much of the pain will be behind us. Based on the operational performance of the 70,000 rental units we manage, we believe that core inflation is resolving and shelter costs in the U.S. will normalize early next year. Signs are emerging that the European Central Bank’s interest rates have peaked in autumn 2023 with nominal rental growth predicted to be higher than market fundamentals suggest, at least into 2024.