The year 2023 was an especially tough one for real estate. Declines in asset valuations, which had begun in the second half of 2022 in many markets, proliferated across a broader range of markets through the rest of 2023. Transaction volume also continued to fall through the year, with dealmaking often paralyzed by the standoff between potential buyers and sellers on pricing.
Investors will be hoping for a better 2024, where we find a floor in pricing that will return the market to more-normal levels of activity. When and how that happens remain to be seen. It may be through increased distress forcing sellers onto the market. Or we might eventually see interest rates start to fall, returning confidence to potential buyers. Whatever the details of exactly when and how we reach that point, the sudden market movements we’ve seen over the last 12 to 18 months have shifted the playing field. Investors are reassessing their real-estate allocations and strategies to mitigate significant risks but also exploit opportunities posed by this market dislocation.
The heady mix of various structural and cyclical trends buffeting the market creates an investment landscape characterized by great diversity in risk exposures and hence expected returns. In this blog post we present some of the trends that we see, to help investors navigate this challenging environment through 2024.
1/ Distress starts to bite as loans mature
Distressed sales have represented just a small fraction of the U.S. market in 2023, at a 1.7% share of investment, despite steady growth in distress levels since 2022. Still, there is reason to believe that more forced capital events, including sales of distressed assets, could be on the way.
The wave of loans facing maturity, and the timing of when these loans come due, could lead to additional forced selling. The most problematic loans are those originated at record-high property prices and record-low mortgage rates, which is the case for many of the loans originated in 2021 and 2022. Many of the loans from these vintages had shorter-term durations: For instance, of the 2021 loans that remained outstanding at the start of Q4 2023, 67% are slated to come due by 2027. As these loans mature, some investors will struggle to rebalance their capital structures in an environment of higher interest rates and lower valuations.
