This is your guide to the global property market as we enter 2024 — and what's coming next

The world has been in the grasp of an economic hurricane. It began in March of 2020 as the world shut down, and these Cat-5 winds blew open the weak spots in the global economy, from supply chains and geopolitics to institutional trust. Then came the eye of the storm: inflation.

Today, more than 20 months since the US Federal Reserve first launched its fight against inflation, the inflation malaise is (arguably) on the run. It appears the storm is finally receding.

As we begin the new year against this backdrop of disruption, it is crucial to assess the state of the private real estate market. The 2024 Global Investment Outlook from Hines has examined the data on the previous year of challenges and the opportunities that lie ahead, including a number of promising signs derived from past cycles. Here's what they found.

Before predicting what’s next, we must first understand what is now and how we got here. Consider the post-pandemic surge of real estate demand. Capital was cheap and available, and even the low (and heading lower) capitalization rates looked attractive in the absence of alternatives. According to MSCI Real Capital Analytics, over $3.1 trillion (in $25+ million sales) was transacted from the fourth quarter of 2020 through mid-year 2022. Hines was a net seller during this frothy period. Also, during these seven quarters, MSCI documented over $840 billion in refinancings in the US alone.

The transparency of US collateralized mortgage-backed securities markets provides insight. A substantial portion of the debt utilized after pandemic lockdowns ended was aggressive two-year floating-rate instruments, often featuring three one-year extensions. Coupons rose from 3-4% to 6-7% and higher, and one strongly suspects the earlier surge in activity was accompanied by aggressive underwriting. Falling property values, combined with slowing rent growth, cannot help but cause problems for some owners.

The bid-ask gap, despite narrowing in certain segments, has remained notably wide. Transaction volumes over the last few quarters have remained relatively low, even when compared to pre-pandemic standards.

Compared to the 2015-2019 average, trailing annual volumes have experienced a decline of 28% in the Americas, 50% in Europe and 10% in Asia Pacific. Without concrete transactional data, some appraisers have been conservative in marking down assets, a prominent trend in the US. Historically, this creates a problematic cycle where the disparity between book value and potential market value perpetuates, leading to low transaction volumes and restrained markdowns.

In the US, most properties in the NCREIF Property Index (NPI) were added before the Fed began hiking and transaction volume began falling. Of the $481.8 billion of leveraged properties in the NPI, $402.8 billion were dated prior to Q2 2022.

The third quarter saw an average interest rate of 5.24% on all leveraged properties, but the average rate for properties entering the database that quarter was 7.58%. It's worth noting that this data is skewed, as only the more favoured apartment and industrial sector properties were added in Q3 2023. When including all properties across various NPI sectors, the average rate for Q3 additions jumped to 8.7%.

While we don’t place much credence in macro forecasts, we do closely monitor macro trends:

Global Inflation rates have fallen.

Among a selection of 22 developed countries, the equal-weighted average annual inflation rate has dropped to 3.7%, in contrast to 12.7% at the close of 2022.

Supply chain pressures have eased considerably.

The Fed's Global Supply Chain Pressure Index turned negative in late 2022 and has remained there since, demonstrating this source of inflation has largely diminished.

Markets expect higher long-term rates.

Higher long-term rates exert a more pronounced impact on cap rates as real estate competes for capital with other income-producing assets, namely bonds.

Vulnerabilities in the US labour market.

We consider the temporary employment sector a bellwether, and it has been negative for about a year. This has been a signal of possible recession in the past.

Decrease in global money supply.

Changes in overnight deposits generally impact bank lending trends. As long as bank deposits are decreasing, lending is likely to remain constrained.

Despite the mixed signals, there are some positive signs that markets are emerging from the reset.

Lower bond market volatility.

The trailing annual daily standard deviation of US 10-year treasury rates has decreased by 45% from its cyclical peak in 2022. Similarly, the trailing annual daily volatility of EU AAA-rated 10-year government bond yields is 71% below its 2022 peak. In the Asia Pacific region, Australian volatility was 50% lower than its cyclical high in 2022. Historically, lower rate volatility has led to more market stability, helping to provide greater certainty in the execution of underwriting and pricing potential investments.

Transaction volume nearing a bottom.

Analyzing the change in trailing annual volume by total square footage transacted across the office, retail, industrial, and apartment sectors revealed, according to MSCI RCA's third-quarter 2023 data, the decline in the Americas and Asia appears to be ongoing, but the rate of decline was less than half of what it was at the end of 2022. In Europe, volume continued to decline at a similar pace as last year, but the declines were not accelerating significantly.

The rise of private capital.

Less constrained and exhibiting greater agility, private capital has expanded its market share over the last year, most notably in the Americas and Europe, and in distressed sectors across various regions. In previous cycles (like the Global Financial Crisis), such a trend often indicated that a market was approaching a bottom.

High share of single-asset sales.

In the US, these sales equaled 82.6% of the volume in the first three quarters of 2023. If this percentage holds for Q4, it will set a record, surpassing 2003 (80.9%) and 2009 (80.8%). Notably, these years coincided with the bottom of their respective cyclical downturns and led to recoveries within the following 12-24 months.

Slowing construction starts.

The recovery will likely hinge significantly on the slim pipeline of new construction, likely due to high construction and financing costs, and general risk aversion, particularly among lenders.

Exhibit 5 illustrates trailing annual starts through Q3 2023 as a percentage of inventory where data is available. For example, owner-occupied and build-to-suit project starts in the US market totaled less than 30 million square feet during that period, representing just 0.4% of the total office inventory. US retail was even lower at 0.3% of existing inventory, with a growing trend of repurposing or redevelopment of existing retail into other uses.

As we approach 2024, Hines will focus on identifying signs of stabilization and eventual recovery.

Early signs of recovery may be fleeting, susceptible to the chilling impact of a potential recession, but we see owners and lenders are still coming to grips with valuations and “shaking the transaction tree” in response to the onset of loan maturities and the effort to tidy up balance sheets.