Insight

Off the Floor in '24: Why we expect 2024 to be an attractive entry point for new real estate investments

Off the Floor in '24
Key takeaways
A drop in policy interest rates should start a chain reaction
1

Confidence in inflation reduction is solidifying, monetary tightening is nearing an end, and the fed funds rate is guided to be cut three times in 2024.

Lower policy rates give scope to lower real estate debt costs
2

When policy rates escalate and the spread to real estate debt costs narrows, that narrowing eventually compels real estate debt costs to rise to maintain a premium over base policy rates.

Lower real estate debt costs should relieve pressure on cap rates
3

Because commercial real estate investing often involves the use of financing, real estate debt costs historically have been closely related to real estate cap rates.

Because commercial real estate investing often involves the use of financing, real estate debt costs historically have been closely related to real estate cap rates.

We believe that the US real estate market is poised to start its price recovery sometime in the second half of 2024. This paper looks at two drivers for this recovery, the capital markets and real estate fundamentals.

  1. In capital markets, we expect projected reductions of the fed funds rate to flow to real estate debt costs. We believe lower borrowing costs should in turn reduce upward pressure on cap rates, and an eventual lift in cap rates should drive higher real estate prices.
  2. In real estate leasing markets, we anticipate that a strengthening of tenant confidence, supported by lower borrowing costs and ongoing economic growth, will eventually coincide with a sharp reduction of new supply deliveries, caused by the recently sharp pullback of construction financing. We expect the timing of these trends to eventually converge and drive rent growth.

This paper summarises the historic relationships between these factors, and why we remain confident that similar patterns will apply in the near term.

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