Stark contrast between European recovery and US ‘rolling recession’
The pricing adjustment for US commercial property is expected to accelerate in 2024 before turning the corner in 2025 – several months behind Europe.
Cushman & Wakefield, which issued the forecasts this week, said the US had entered a rolling recession, in which some industries contract while others continue to expand, whereas Europe appears to be heading for measured expansion rather than recession.
Crucially for real estate investors, Europe’s central banks are reaching the end of their rate hike cycle, as inflation cools from its 2022 peaks. By contrast, uncertainty surrounding Fed policy on interest rates remains a central theme across the Atlantic, as markets have witnessed the 10-year Treasury fluctuate from 3.5% at the start of the year to as high as 5% in October.
The pricing adjustment for US commercial property is expected to accelerate in 2024 before turning the corner in 2025 – several months behind Europe.
Cushman & Wakefield, which issued the forecasts this week, said the US had entered a rolling recession, in which some industries contract while others continue to expand, whereas Europe appears to be heading for measured expansion rather than recession.
Crucially for real estate investors, Europe’s central banks are reaching the end of their rate hike cycle, as inflation cools from its 2022 peaks. By contrast, uncertainty surrounding Fed policy on interest rates remains a central theme across the Atlantic, as markets have witnessed the 10-year Treasury fluctuate from 3.5% at the start of the year to as high as 5% in October.
Transaction volumes in the US have fallen sharply since the record-setting second quarter of 2022, and year-to-date CRE sales this year are off 56% from a year ago.
Cushman’s US report says the pricing correction will accelerate in 2024 as needs-based sellers will be incentivised to market properties at prices consistent with higher interest rates. In its baseline forecast, cap rates are forecast to expand significantly as a result.
For Europe, it predicts that as rate hikes end and cuts commence around Q3 2024, there will be a bottoming out for valuations, with markets and sectors moving into a more positive trajectory at different paces behind the headline figures.
Meanwhile, its US report predicts: “Property values are expected to turn the corner in 2025 as diminished uncertainty, lower interest rates and inflecting net operating incomes spur increased buyer and lender conviction, which will help to launch more fluid transaction activity. Dry powder targeting CRE investments continues to accumulate, particularly across opportunistic and value-add strategies.”
“The backdrop for CRE in our baseline forecast is one with many shades of grey. Some sectors that are decelerating will probably surprise onlookers with their resilience – such as what we envision for industrial and multifamily demand. As for retail, limited supply puts a cap on just how high retail vacancy will go,” said Rebecca Rockey, deputy chief economist and principal author of the report. “Although office is complicated, we believe we are well into the hybrid transition, and thus demand destruction will start to taper off. Nuance here matters and underscores the importance of fully understanding the sector to maximise opportunities for both occupiers and investors.”
The US forecast is broken down by sector here.
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