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US Commercial Property

US Commercial Property Update

Calling the top for US commercial real estate

Indicators that include a recently released investor sentiment survey and a sharp fall in REIT prices since the start of the year support our updated view that capital values will go into reverse in H2. In total, our latest forecasts call for a 6%-8% correction at the all-property level over the next couple of years, which would be a little less than implied by the falls that we have seen so far in US REITS.

24 June 2022

US Commercial Property Outlook

All-property returns to fall to zero next year as values slide

The dramatic shift in the interest rate environment over the first half of the year means that we have brought forward (and increased) our forecasts for yield rises. Property valuations now look as bad as they did in 2007, and with the 10-Year Treasury yield moving toward 4% by year-end, something has to give. We now expect property yields to climb by a cumulative 40-50 bps over the next few years,. This will hit all sectors, although the elevated level of retail yields at present may spare them the worst, particularly in terms of the impact on capital values. All-property returns are still forecast to be 8% this year, but they will then drop to 0% next year and just 2.5% in 2024. We are still forecasting industrial returns of 18% this year. But beyond that the sector will be a major drag on returns in 2023-24, meaning it would go from hero to zero in the space of a year.

21 June 2022

European Commercial Property Update

Will property resist the effects of deglobalisation?

A recent MSCI article speculated that real estate investment could buck the deglobalisation trend given distinct features of the asset class, though we are not convinced that will bring many benefits. In view of the wider interest, we are also sending this European Commercial Property Update to clients of our UK & US Commercial Property Services.

14 June 2022

Our view

The largest quarterly deterioration in property valuations on record in Q1 has driven a downward revision in our forecasts for the next few years, with property yield rises now likely to occur sooner than before. While we are not forecasting an Armageddon scenario, we now expect all-property returns this year to slow to around 8.5%, before dropping to zero in 2023. There will still be relative winners, where rental growth is strongest and investor demand is growing, but we now expect the next few years to be relatively poor ones for US real estate.

Latest Outlook

US Commercial Property Outlook

All-property returns to fall to zero next year as values slide

The dramatic shift in the interest rate environment over the first half of the year means that we have brought forward (and increased) our forecasts for yield rises. Property valuations now look as bad as they did in 2007, and with the 10-Year Treasury yield moving toward 4% by year-end, something has to give. We now expect property yields to climb by a cumulative 40-50 bps over the next few years,. This will hit all sectors, although the elevated level of retail yields at present may spare them the worst, particularly in terms of the impact on capital values. All-property returns are still forecast to be 8% this year, but they will then drop to 0% next year and just 2.5% in 2024. We are still forecasting industrial returns of 18% this year. But beyond that the sector will be a major drag on returns in 2023-24, meaning it would go from hero to zero in the space of a year.

21 June 2022