DoubleLine Sees CRE Opportunities in These Areas

DoubleLine in a recent report wrote, “As the broader market has turned to pricing in the ‘when,’ not the ‘if,’ of future cuts to the federal funds rate, investor sentiment has improved with respect to CRE. We expect property transactions to increase, helping to provide clarity on CRE valuations.”

While that read as a general statement about CRE, it wasn’t, exactly. Instead, it was about CRE outside of the “unique convergence of cyclical and secular headwinds confronting part of the office market.” Because generally CRE fundamentals are good.

Start with the good news in multifamily. In some areas, there is enough new inventory hitting markets to affect pricing and occupancy, but nationally the property type “continues to benefit from a positive long-term supply-demand imbalance driven by aggregate undersupply of housing combined with poor single-family home affordability.” Problems with refinancing and loan defaults are mostly an issue of timing, with purchases from 2021 through the first half of 2022, when high prices and low cap rates where possible because of a near-zero interest rate environment. New construction and completions are slowing; surplus supply will be absorbed by 2025 and 2026.

Industrial benefited from a leap in e-commerce during the pandemic. That sudden jump has eased, but only back to what was an ongoing robust growth curve. Next-day delivery expectations continue among consumers. Increased onshoring of manufacturing and an interest in more diversified supply chains support strengths going forward.

Retail has done better than many expected since it took major hits during the pandemic. There’s been a restriction of new supply since the global financial crisis. Even before the pandemic, there were valuation resets. The result has been “the highest rents and lowest vacancy levels in decades. Local presence has become even more important as retailers have combined e-commerce with brick-and-mortar locations that help support distribution. The negative standout are lower-quality malls. They will continue to face decline and bad futures.

Hotels have seen a post-pandemic rebound. Revenue per available room is up 143% since 2020. Even though operating expenses have grown 9.4% year-over-year last October, that is still bearable. “We expect the lodging industry to face headwinds in 2024, as any slowing of the U.S. economy (and with it discretionary and business spending) will counter RevPAR growth.”

And then there is office. Leasing activity is still 30% off from pre-pandemic levels. “We expect the normalization of hybrid working to continue to limit the growth of office demand.” Higher-quality properties will continue to do well as buildings constructed since 2010 see positive net absorption. Older buildings feel the pain.