Today’s higher interest rates and slowing growth have been elevating the need for property income stability in a real estate portfolio. That’s likely to change when growth eventually improves, interest rates are lower, and the next phase of the economic cycle begins. That’s when we believe the need will shift to property income growth.
The real estate sectors in favorable positions to sustain income stability during the current economic slowdown may not be the same sectors that deliver stronger growth when the economy strengthens. Structural shifts, like e-commerce and hybrid work, for example, must be considered too. The Invesco Real Estate team gauges sector income growth potential throughout cycles using a three-C's approach:
The graphic below summarizes our conclusions for current and expected conditions.
Through at least mid-2024, we expect a continuation of higher interest rates and slowing economic growth. As we noted, these conditions elevate the need for property income stability. We believe, two types of property sectors are poised to meet this need. Those with:
Sometime after mid-2024, we expect a transition to improved financing conditions and tenant demand when interest rates moderate. It’ll likely shift investor preferences toward property income growth. Sectors that may meet this need consider those with moderate to high performance correlations to the economy and reduced levels of new supply in combination with either:
It’s important for investors considering real estate to look at a portfolio’s current sector allocation. But also important is the vision for allocation for the next stage of the economic cycle and the shifts in structural utilization.
Get our analysis behind our sector choices in: Real estate fundamentals and cycle behavior.
US and global commercial real estate outlook — looking beyond 2024
A US and global real estate recovery with transaction activity re-accelerating and the start of a new real estate value cycle is close in our view.
Why we expect a price recovery in commercial real estate
Lower interest rates could start a chain reaction in commercial real estate (CRE) as lower borrowing costs reduce cap rates, which would drive higher prices for new investments.
Real estate pricing: Short-term view needs long-term perspective
To determine what current pricing, expected fundamentals, and capital spending mean for future returns, the long view on real estate cap rates provides perspective.
Get the latest information and insights from our portfolio managers, market strategists, and investment experts.
Important information
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The opinions expressed are those of the Micael Sobolik which are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Investments in real estate and real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid. Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
Correlation: a mutual relationship or connection between two or more things.
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