Real estate: tough markets reveal opportunities
Q&A with Carly Tripp

In recent quarters, we have watched real estate valuations fall. How can investors navigate these tough markets? We sat down with Carly Tripp, Global Chief Investment Officer of Nuveen Real Estate, to find out.

Given recent volatility in the real estate market, do you see a light at the end of the tunnel?

Volatility is unsettling but it does end. I think we’re heading towards the tail end of it with much of it priced in.

Capital markets, rather than specific real estate factors, have been the source of volatility. Real estate investors, just like those in other asset classes, are challenged by higher interest rates in the U.S. and globally, as well as lower liquidity in the market. This combination of higher rates and liquidity constraints leads to a stagnant real estate market in terms of transaction volumes and capital flows.

In commercial real estate, we’ve seen a bifurcation in financial performance. The sectors in which we have high conviction have strong fundamental performance. At our industrial properties, for example, we continue to see leased occupancy close to 99% as of March 2023. It’s a similar story in housing, where we see strong demand and rental growth for multifamily housing. Many of these sectors and markets are outperforming historical norms, while the office sector is the laggard.

What are the biggest challenges facing global real estate investors today?

The macroeconomic environment is incredibly challenging. It’s difficult to forecast central bank activity, the effect of the banking crisis and other economic concerns. And we’re still grappling with strong inflationary pressure in Europe, although it is subsiding in the U.S.

The office sector continues to struggle, but I would separate U.S. office and office elsewhere. Historically, the U.S. tended to overbuild in certain sectors including office. Since the pandemic, there’s been an outmigration trend away from gateway cities to areas across the sunbelt and west that offer similar access to employment alongside a lower cost of living. Along with adoption of work-from-home practices, the return to the office in the U.S. has been slow. The result is that the U.S. office market has too much stock in gateway cities and a lot of old stock that would be extremely expensive to transition from an energy and climate risk perspective. These properties are just not attractive to landlords and tenants.

But it’s not all bad for office. Our analysis has shown a distinct division in office stock built from 2015 onwards compared with earlier stock. These newer buildings don’t pose the same transition risk; they’re up to date in terms of technology compared with the older legacy stock. They are also more aligned with what tenants and employees want from their workspaces.

Other regions are also a very bright spot for office. For example, in Paris CBD and Singapore, office demand is strong, as is investor demand and pricing.

This really highlights the diversity of opportunity and challenges within specific cities and regions globally. Nuveen Real Estate’s approach of overlaying local insight with a global view helps understand those challenges and uncover suitable investments for our clients.