Hi All - Happy Sunday. It’s the last day of the month (and year!), which means it’s time for the Last Cast Letter.

I hope everyone had a wonderful Christmas, Hanukkah, or whatever else you celebrate. Outside of the religious holidays, I hope you were simply able to take a minute to relax. It’s always nice to unplug even just a little bit towards the end of the year, eat too much, and spend valuable time with family and friends.

Speaking of friends, one of my buddies sent me this in a group chat:

List of market outlooks for 2024

• BlackRock

• Goldman Sachs

• J.P. Morgan

• Morgan Stanley

• HSBC

• Barclays

• PNB Paribas

• UBS

• ING

• Invesco

• Fidelity

• Wells Fargo

• Lazard

• RBC

• Allianz 

• Colliers

• JLL

• Deloitte

• PWC

I was like thanks, but no thanks because there’s no way I’m going to be able to read all of those reports.

So instead, what I decided to do is have one of my writers at Walk-On Holdings scan through and aggregate everything in the reports above related to real estate. Feel free to dive into the full links above, but I hope the aggregated version below is a helpful present to end the year. Looking forward to 2024!

2024 Outlooks, Aggregated

In the wake of the pandemic and the aggressive rise of interest rates globally, the real estate market is experiencing significant fluctuations. Some analysts emphasize the importance of real estate in investment portfolios due to structurally higher inflation and its impact on property prices and rental income. However, challenges remain, particularly in the office space sector, which faces pressures from declining property values and higher borrowing costs, further exacerbated by the shift toward remote work.

In Europe, the use of pandemic savings to pay down debt and the higher proportion of mortgage-free households provide a distinct contrast to the U.S. However, the U.K. faces challenges with refinancing at higher mortgage rates. In the U.S., developers have been offering discounted rates to sustain activity, but these could be unsustainable, indicating a potential downturn in construction and housing-related spending.

The downturn in China's real estate market is also a point of concern, with potential wide-ranging effects on property sales, investments, and infrastructure projects. Despite these challenges, there are emerging opportunities, especially in distressed real estate debt, which are viewed as attractive investment options in the current environment. Some analysts suggest that a mild recession could be advantageous for property investments, particularly if interest rates have peaked.

Investment volumes in real estate have seen a decline, yet the sector continues to offer diversification benefits for portfolios. Expectations of moderating mortgage rates and a housing unit shortage suggest a slight rise in home sales, with new construction steady. However, there may be a decline in multifamily starts in 2024 due to subdued rent growth. The reduction in leasing volumes and the difficulties in capital deployment due to stricter lending standards and higher costs are additional factors influencing the market.

Despite these challenges, there are emerging opportunities, particularly in distressed debt and commercial real estate debt, driven by a lack of new liquidity from banks. In terms of investment, a shift toward partnerships and joint ventures is anticipated, with stable markets like Japan and Australia becoming increasingly attractive. The overall sentiment suggests cautious optimism, with a focus on sectors like logistics, multifamily residential housing, and necessity-based retail property while adapting to evolving market conditions, especially around the path of inflation and interest rates.

Snippets From Each

BlackRock

“We think inflation will be structurally higher and see real estate and infrastructure playing a key role in strategic portfolios as a result. Why? Some real asset values or cash flows are linked to measures that correlate with inflation – think property prices or rental income.”

Goldman Sachs

“[W]e still think that US rate volatility is too high along the curve relative to our central case. In part because of that, the carry on mortgage-backed securities also continues to look very attractive.”

J.P. Morgan

“In Europe, households also made use of pandemic savings to pay down debt. A higher proportion of households in Europe are mortgage-free relative to the US, and rates started rising from a much lower base. However, there are some regions where refinancing onto higher mortgage rates will still be a significant drag heading into 2024, notably in the UK…

…US developers have been relatively successful in keeping activity going by offering their own discounted rates, but these incentives seem unsustainable. Construction and housing-related spending is likely to remain lackluster…Many US households took advantage of the low interest rates on offer in the pandemic and the typical mortgage is locked for 30 years. Unless those households choose, or are forced, to move they are immune to what is going on at the Federal Reserve.”

Morgan Stanley

“Morgan Stanley predicts that China will avoid the worst-case scenario, and that U.S. and European policymakers will begin cutting rates in June 2024, improving the macroeconomic outlook for the second half of the year…Overweight core fixed income, including government debt, agency mortgage-backed debt and investment-grade debt. It is likely to be a good year for income investing as high-quality debt continues to provide attractive yields, especially when compared against the risk/reward tradeoffs of other assets.

HSBC

“We worry that lower real estate values, higher borrowing costs and refinancing requirements will continue to put pressure on real estate and therefore also on US regional banks… Rental growth may be moderating from recent highs, but incomes are continuing to grow as rents paid by tenants gradually mark to market. Moreover, where leases are indexed to inflation, cash flows and capital values benefit from a degree of protection…The office sector has the most challenging backdrop as the cyclical economic pressures have come at a time when vacancy rates were already elevated. Looking ahead, the majority of any further price correction is expected to be due to rising property yields as the spread between borrowing costs and property yields may not be sufficient to restore liquidity.”

BNP Paribas

“The factors that drove the US economy in 2023 will likely dissipate in 2024. Excess consumer savings are waning and higher interest rates are having the inevitable effect on demand, both for goods and services, and particularly housing…

… Looking ahead, the contracted revenues, strong regulation and inflation pass-through characteristics of infrastructure debt mean that, in our view, the asset class is well-placed to weather continued uncertainty in 2024…

… Higher interest rates mean infrastructure debt can now provide attractive absolute returns”

ING

“[I]n China, the lack of new fiscal stimulus suggests we'll see a further loss of growth momentum; the correction of the real estate and construction sector looks likely to continue…Weak property sales, weak property prices, weak real estate investment, and by extension, weak fixed asset investment and weak infrastructure spending…The [United States] commercial real estate sector is also an area of vulnerability with the scope for significant loan losses potentially leading to a reignition of the problems seen in the small bank sector in early 2023.”

Invesco

“We are anticipating an improved opportunity set with distressed and special situations debt as the $6 trillion market across leveraged credit is quite sizable on an absolute basis. Commercial real estate debt is anticipated to remain highly attractive, especially for those with favorable sources of financing…While asset values continue to reprice, banks are focused on existing loan books and so offer limited new liquidity, thereby impacting the volume of real estate transactions in all key markets. For real estate occupational markets, while the combination of weak growth and cautious sentiment is likely to dampen some tenant demand, fundamentals should remain healthy for markets without excess supply”

Fidelity

“In many ways, a cyclical recession would be the ‘Goldilocks-zone’ for property investment because a small amount of inflation is positive for real estate. Furthermore, given that property prices have already adjusted (particularly in Europe and especially in the UK), and if interest rates have peaked, then there would only be upside to come…Previously, in a world of near-zero interest rates, property was invested in chiefly for its yield (especially compared with other asset classes such as bonds). Now, we expect it to return to its traditional role of a ‘hybrid’ asset class combining sustainable income with equity-like capital growth…With growth returning to major economies and interest rates coming down to historic levels, this would be the perfect opportunity to lean into the property sector. In particular, we would anticipate a stronger outlook for logistics, given how tightly this market is currently supplied in Europe.”

Wells Fargo

“Commercial real estate, especially the office sector, has experienced stormy conditions this year, and the outlook remains unsettled in 2024 due, at least in part, to the elevated interest rate environment. The rise of remote work has led many firms to recalibrate their office space needs, which likely will keep pressure on the office market for some time.”

Lazard

“Access to credit could become increasingly constrained. Ongoing challenges in the commercial real estate market and the increased cost of funding for banks are likely to feed into tighter underwriting standards and higher-cost financing for consumers and companies who can still obtain credit…I believe sentiment regarding China has gotten too negative, given the array of recent stimulative measures and the sharpness of the decline in new housing construction, which has already occurred and will likely lead to stabilization in building activity in 2024.”

RBC

“After a strong start to 2023, the Canadian housing market also appears to be stagnating, with the psychological impact of a lower net worth adding further pressure on Canadian households…Evidence continues to build that inflation risks are easing as the economic backdrop softens. RBC Economics does not expect additional interest rate hikes from the Bank of Canada if that continues. This would bring a sigh of relief to Canadians with variable rate mortgages, as each rate hike has resulted in either higher payments or a lower proportion of principal paid…The state of the [Chinese] property market is still a significant concern for investors, as housing transactions remain soft despite recent policy easing measures. We concur that the housing market slowdown continues to pose challenges to China’s economy, but in our view, it’s important to note that its negative impact will likely be less in 2024 compared to the past few years.”

Allianz

“China’s economy is soft but possibly at an important crossroads. We see a need to resolve outstanding issues in the property sector, which represents about 20% of its GDP…Property market challenges have weighed on China and may limit the immediate growth prospects. But we expect a turnaround in sentiment in 2024 and remain convinced about long-term investment opportunities in China as it pivots to an innovation-driven economy…Another big potential opportunity is in infrastructure, which beyond its inflationresistant qualities can also help to provide diversified returns and stable cashflows. The huge demand for infrastructure investment today is being driven by a seismic shift in the energy industry, among other factors.”

Colliers

“Though investment volumes have significantly declined, real estate continues to offer investors portfolio diversification benefits. Pricing will continue to adjust to a more realistic equilibrium in the first half of 2024, before returning to inflation-adjusted real returns…The relative shortage of capital in the market will encourage more investors to explore partnerships and alliances to pool resources and mobilise funds. The lack of supply and relative complexity of accessing some specialised assets and sub-sectors, such as student housing or data centres, will also foster platforms and joint ventures that bring together investors and developers…Amid a backdrop of global volatility, investors will flock to markets seen as relatively stable and secure, especially close to home. Favoured markets include Japan, which has been one of the best performing markets globally and will continue to provide value given its low-rate environment, large population and diversity of assets; and Australia, which has highly sought-after logistics and build-to-rent (BTR) sectors…Logistics was the top pick of our investor survey and the weight of capital looking to deploy into the sector points to a favourable rental outlook.”

JLL

“Leasing volumes are expected to continue compressing into 2024 as occupiers weigh all viable options for their operations. As demand slows, vacancy rates across all three global regions will increase, with the U.S. experiencing a noticeable uptick due to deliveries slated for the duration of 2024.”

Deloitte

“Expense mitigation is a top priority for most respondents; revenue expectations dropped to their lowest level since we began our survey in 2018…Respondents point to cost of capital and capital availability as the weakest among real estate fundamentals…Regardless of what economic forecasts might come to fruition, Deloitte’s 2024 Real Estate Outlook survey reveals that concerns about the state of the economy will likely continue to be a primary factor in global real estate leaders’ decision-making through 2024 and beyond…Facing tightening loan standards, fewer lenders, and higher borrowing costs, commercial real estate buyers could have more difficulty deploying capital for purchases in 2024…Real estate office owners and investors should acknowledge that hybrid work is here to stay. It is shifting how offices are used and valued, so valuation strategies should change as well.” 

PWC

“Through the interviews and survey of industry participants, three key opportunities were identified: industrial real estate, multifamily residential housing, and necessity-based retail property”

Fannie Mae

“Given an expectation of further moderation in mortgage rates, we expect sales to start drifting upward…We have long anticipated that new home construction would hold up better than what is typical in a downturn due to the fundamental shortage of housing units…Additionally, homebuilders who have been aided by lower materials costs and healing supply chain disruptions have been willing and able to offer concessions, including rate buydowns, to help drive sales. This trend continues into our 2024 forecast, in which we expect new home sales to decline from current levels only slightly due to a modest economic contraction…We continue to expect that the lack of existing homes available for sale will continue to boost new home construction in the medium term…but multifamily starts likely will decline in 2024 as national rent growth has been muted and more multifamily units near completion.”

So, there you have it, that’s all for today. I hope everyone has a wonderful holiday season. Feel free to reply with any thoughts good or bad. As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks