BlackRock: Now Is the Time to Invest in CRE

A report from BlackRock Real Estate Research says that investments after periods of downturns tend to perform well afterwards. Specifically, the period starting in 2022 where the Federal Reserve tightened interest rates, which led to lower transactions volumes and declining property values may be one of those times.

“Vacancy rates have remained solid, particularly in the living and logistics sectors,” they wrote. “Higher construction costs and interest rates as well as tighter lending conditions will likely keep the number of development projects low, exacerbating the undersupply of prime property. This will only lessen any downside risk for future real estate performance.”

One reason they argue that 2024 will become a good year for investment is that tight credit conditions in 2023 put pressure on debt financing, reducing volumes and forcing pricing adjustments throughout last year. “Even though, we are in a ‘higher for longer’ environment, real estate is in a stronger position today than it have been for the previous 18 months,” they wrote. “Inflation is on a downward trajectory and today we have more macro clarity, which should culminate in improved sentiment and price transparency.”

That is assuming inflation continues downward and that December 2023’s upturn was an anomaly. The January 2024 CPI data is scheduled for a February 13 release and, hopefully, will return to at least the previous trend line. If so, they argue that the coming year will benefit from basic improvements that have happened.

“Following three recent downturns, real estate has generated strong returns fueled by improving fundamentals and capital appreciation,” they wrote. “Investors today have an advantage to acquire assets at below replacement cost and can potentially take advantage of growing distress in the market.”

They do say that investors will have to build portfolios for developing demographics. A growing aging population means more demand for healthcare (including medical office), social services, and age-restricted housing. Older people may move from high-tax areas to lower-tax ones.

“The world’s 1.8 billion Millennials are aging and forming families,” according to the report. “Globally, this will drive demand for the residential sector. In the U.S. we see garden style apartments in desirable suburbs and build-for-rent communities as attractive opportunities over the next few years.”

Millennials are heading into a peak consumption period, supported by logistics hubs. Some niche areas like childcare centers and self-storage answering needs.

Overall, in the U.S., real estate fundamentals should be steady for the medium term. Supply growth in industrial and multifamily should decline by 2025. Existing properties will need retrofitting and modifications for greater energy efficiency and increased weather events. And increased spending in manufacturing will need additional warehousing and logistics.