Real Estate
Quality and Earnings Growth Key as Real Estate Rebounds
Article
Feb 03, 2025
While some uncertainties remain, we believe commercial real estate appears to have entered the recovery phase of the cycle.
Data suggest that commercial real estate values have bottomed. Green Street’s Commercial Property Price Index®, which tracks prices at which institutional-quality assets are being negotiated or transacted, increased nearly 5% in 2024. Appraisal-based indexes are beginning to show signs of bottoming as well. In the third quarter of 2024, the NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE) posted its first quarterly positive return in two years.
As asset values begin to trend higher, many market observers are calling this the start of a new real estate cycle. The correction in real estate values that began in 2021 was somewhat unique in that operating fundamentals remained robust across most property types. The reset in valuations was primarily driven by an uptick in interest rates and cap rates.
While we are not in the business of predicting the direction of interest rate movements, we believe it’s unlikely that 10-Year U.S. Treasury yields will return to record low levels witnessed over the last 10 years. In our view, to be successful in the current environment, it is more important than ever that companies can drive net operating income (NOI) and earnings growth and successfully manage elevated costs of capital. We believe investing in high-quality assets across property types with robust demand and favorable supply dynamics is most likely to drive success.
There may be fits and starts in the real estate recovery—as shown by fourth-quarter returns for real estate investment trusts (REITs) when rates ticked higher. However, our view is that investors in real estate equities who focus on quality and earnings growth are well positioned to be nimble and capitalize on opportunities as the expansion period unfolds.
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