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Glide Path Report

Our Report provides a synthesized view of the key themes and questions permeating the U.S. capital markets landscape.

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What we know is that the commercial real estate (CRE) sector, like many sectors, faces significant near-term headwinds. Elevated recession risks, stubbornly high inflation, interest rate uncertainty, tighter lending conditions, financial sector stress—to name a few. But we also know that the CRE sector will invariably recover. In fact, historically, the strongest vintage years in terms of CRE returns are the ones that follow periods of dislocation and financial stress.  

This report provides a glide path from here to there. That path will not be without challenge; it is therefore just as important to address the near-term challenges as it is to conceptualize the path to clear(er) skies. We seek to do both—address points of concern and risk head-on, all while maintaining a balanced outlook on the many opportunities for CRE investors in the next chapter.  

Cushman & Wakefield’s Glide Path Report provides a synthesized view of the key themes and questions permeating the U.S. capital markets landscape. Many of the questions build upon an interrelated foundation—one that rests on the shoulders of inflation, monetary policy, banking and certainly on CRE price discovery, lender and investor sentiment.  

Glide Path Timeline for Key Indicators




We've classified the key themes facing CRE capital markets within the following categories:

 

Macroeconomy

Are we headed towards recession? If so, how long and how bad will it be? What about the banking sector and its relation to CRE? When will the Fed pivot? Where will the 10-year treasury yield settle?  

Our view: 

  • We’re not quite “there yet” on inflation; underlying pressure remains for some of the stickier portions of inflation.  
  • Fed will remain cautious and data-dependent before prematurely cutting. Expect the Fed to pivot in early 2024.  
  • Economy remains resilient due to the ongoing strength of the consumer and labor markets. Recession timing keeps getting pushed back, now expect a year-end start.   
  • Economic recession will run its course through Q3 2024.  
  • The correction in CRE started mid-2022; this is not the first inning. Recovery speeds will vary based on property type, quality and geography, but a rebound is not far off. 
  • Historically, the best time to buy property is when the Fed starts to cut rates (this tends to coincide with a bottoming and inflection in property values). 

>> Learn more about Macroeconomy

CRE Credit & Debt Markets

What does all this mean for CRE yields? What needs to happen to allow the debt markets to free up? 

Our view: 

  • Credit liquidity among banks will remain tight through the downturn until downside risks moderate (pencil in gradual thawing in H1 2024). 
  • Banks are an important lender for CRE, and their absence in CRE lending space will lead to a gap that other sources will seek to partially fill (will be tough for these sources to fully offset the liquidity collectively provided by Banks and CMBS).  
  • Lending conditions and terms are increasingly onerous; more liquidity is available for smaller loan sizes, best-in-class assets and preferred sectors.  
  • Maturing debt is facing a particularly difficult environment. There will be more distress in upcoming quarters and years, particularly in the office sector. We quantify this in the report. 
  • This is not the Great Financial Crisis all over again. Banks are well-capitalized as evidenced by the Fed’s latest Stress Test results. Office/CRE poses minimal risk to the banking system outside of a few local/community banks.   

>> Learn more about CRE Credit & Debt Markets

 

Glide Path to CRE Credit Flows and the Outlook on Property Values

When will deal volume pick up? How far will property values fall?  

Our view: 

  • Our framework for the capital markets recovery is as follows:  
    • Phase 1: Recession – needed to bring inflation down 
    • Phase 2: The Fed pivots and starts cutting rates (but not going back to zero-bound)   
    • Phase 3: Price discovery – the market reprices to the higher rate environment    
  • The crux of the value story continues to be linked to comparative yields and spreads. Interest rates will remain higher for longer, meaning that cap rates must adjust upward to maintain a spread relative to risk-free and other risk-adjacent yields. Accordingly, we forecast cap rate expansion through 2024.  
  • Property values will decline in the 25% to 50% range peak to trough, with significant variation depending on property type, quality and geography.  

>> Learn more about CRE Credit Flows & Outlook

Strategic & Tactical Considerations

How should I think about the buy/sell/hold prospects right now? How do CRE returns perform historically through a downturn? What higher-level strategies are most appealing right now? What about more defensive strategies?  

Our view: 

  • CRE stacks up well against other asset classes on a cumulative-forward looking basis.  
  • Periods following times of dislocation are typically great vintage years for investment. 
  • Income resilience remains key to the next chapter; NOI growth will remain resilient for most property types. 
  • Income resilience is being redefined across each CRE property type, as well as against the context of tenants, even down to tenants’ industry characteristics. 
  • Defensive/core, value add/opportunistic and debt market strategies span a wide spectrum of sectors and profiles—outlined further within the report.  

>> Learn more about Strategic & Tactical Considerations

Recommendations

  • Monetize high-quality, mature multifamily or industrial assets that have already achieved their business plans and accumulated strong returns.  
  • Target grocery-anchored and experiential retail acquisitions in attractive locations.  
  • Acquire stabilized, transit-oriented multifamily product in prime locations.  
  • Identify residential-oriented acquisition strategies such as senior housing or student housing that provide secular demand drivers that run independently from the macro cycle.  
  • Target high-quality office acquisitions at low basis with long-term, high-credit WALT offering best-in-class amenities in vibrant locations.  
  • Acquire high-quality assets that offer counter-cyclical, downcycle protection (medical office, data centers, affordable housing).   
  • Develop Class-A industrial in robust corridors proximate to strong population growth.   
  • Acquire distressed assets with optionality for either repositioning or adaptive reuse into multifamily, life science, or mixed-use.  
  • Acquire low-quality, highly vacant malls that offer opportunity to bank land in highly accessible locations, scrape and build logistics product. 
  • Develop high-quality, trophy office in supply-constrained, proven and resilient locations with targeted completion post-recovery (2025+).  
  • Buy high-quality office buildings with high vacancy and/or required strategic capital investment to lease up, stabilize and sell.  
  • Develop grocery-anchored and other retail strip and power centers in undersupplied micro-markets.  
  • Develop a vertically-integrated specialty in growth niche/alternative sectors gaining private capital and institutional interest (self storage, life sciences, cold storage).  
  • Acquire individual assets that can be aggregated into a portfolio as their sectors mature (e.g., industrial outdoor storage).  
  • Buy unleveraged today, acquire at an attractive basis, especially for short-term MTM/WALT profile deals where negative leverage puts a drag on returns; refinance later.  
  • As the Fed pivots and rates move down, shorter and floating-rate product will improve (even as spreads may remain wide due to uncertainty and recession).  
  • Rather than financing floating today, swap over the 3- or 5-year, while negotiating a 1- to 3-year open period on the back end to offer some flexibility. Allows for a lower all-in coupon today with opportunity to refinance without being locked in for a longer duration.   
  • Shorter-term durations, and smaller loan sizes are more likely to have liquidity and are more appealing to fixed-rate lenders today (LifeCos and Pension Funds remain selective and recently indicating their 5-year buckets starting to fill up).   
  • Focus on some more esoteric assets in the market (niche assets) such as self storage, manufactured housing, cold storage, etc.  
  • Provide bridge loan financing to high-quality assets and development projects in preferred sectors such as multifamily and industrial.  
  • Private credit opportunity of a lifetime: given more constrained liquidity for conventional senior mortgage financing, provide subordinate capital in the form of preferred equity or mezzanine debt for maturing loans that need infusions of capital.  
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