Capital values to fall through 2024 - retail to outperform

With the economy showing signs of slowing and transaction volumes likely to stay low in H2 2023, a tough 6-12 months lies in store for commercial real estate. We still expect cap rates to rise on the back of higher Treasury yields, but the full extent of this is likely to take time to come through in valuations. As a result, while we think capital values will fall by more than 10% this year, we also expect a further drop of around 5% in 2024 before values stabilise in 2025. That means total returns of just 2% p.a. for 2023-27, though that climbs to around 4.5% p.a. if 2023 is excluded. There will be sector differentiation though, with offices unsurprisingly seeing the worst performance and retail outperforming, with values in the latter actually growing a little next year. The higher yield environment will drag on industrial and apartment valuations, which currently look particularly stretched, but for multi-family at least, we think values will grow again in 2025.

CRE Drop-In (28th September):We're holding a commercial property drop-in to discuss our updated forecasts and the potential downside risks at 16:30 BST/11:30 EDT on Thursday 28th September. Click here to register to join.