We have made substantial downgrades to our forecasts this quarter. Aside from their direct impact through tighter lending conditions, last month’s regional bank failures appear to be helping crystallise some of the risks to commercial real estate prices. We now expect the sharp rise in interest rates since the start of 2022 will cause a more dramatic re-pricing in commercial property prices, knocking more than 20% off of all-property values on a peak-to-trough basis. The greatest pain will be felt in the office sector, where not only will NOI yields increase by 100 bps, but NOIs will drop substantially on the back of remote-work driven office space reductions. As a result, office capital values will fall by over 30% and, even over a five-year basis, total returns could limp to just 0.5% p.a. On the other hand, the outlook for retail is much more positive, with values set to fall by less than 10% and total returns forecast to average 5.5%-6% p.a. in 2023-27. In comparison, apartment and industrial capital values are both set to fall by 15%-20% over the next two years.
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