We have made substantial downgrades to our metro-level forecasts this quarter. The outlook for office-based employment growth has been hit by tech sector struggles, weighing on demand in many western markets. We have also pushed through bigger falls in occupied inventory in the worst-hit major markets. In addition, Austin, Seattle and NYC face high levels of completions in the next few years. The net result is that rent growth will be weak across the board, but markets such as San Francisco, San Jose and Seattle will all see outright falls in quoted asking rents. Nevertheless, the biggest impact in all markets will come from a huge increase in yields, which we expect to increase by 110-150 bps in the next two years. This will hit capital values hard. And the combination of large yield rises and falling NOIs means that capital values in San Francisco, Seattle and San Diego will be 25% lower than their end-2022 levels even by 2027. But a better outlook for demand in Atlanta and Dallas should mean the net falls in capital values there are much smaller. Total returns will reflect a similar pattern, with western metros and the six major markets generally underperforming those in the South.
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