2024 Mid-Year Outlook – Focus on the Americas: Squarely in the Post-COVID Era

Sum­ma­ry: Pos­i­tive office usage pat­terns and leas­ing momen­tum for mag­net office may point to an inflec­tion point ahead.

By Ryan McCul­lough, Head of Amer­i­c­as Research at Hines

In recent quar­ters, macro con­di­tions have fall­en into step across the Amer­i­c­as to a degree sel­dom seen with­in the region. Infla­tion has set­tled in the 3 to 4% range in most coun­tries (a high fig­ure for the U.S. and Cana­da, mod­er­ate for Mex­i­co and Brazil) while inter­est rates have remained high rel­a­tive to pre-COVID bench­marks. Both job and eco­nom­ic growth have been impres­sive­ly strong and con­sis­tent (with the excep­tion of Canada’s rel­a­tive­ly slug­gish GDP fig­ures). This macro con­for­mi­ty sug­gests a com­mon out­look across the region, with infla­tion and growth spurring com­mer­cial real estate demand and inter­est rates poten­tial­ly hold­ing back supply. 

With­in the U.S., mar­ket dynam­ics have tran­si­tioned from a COVID-dom­i­nat­ed land­scape to a post-COVID envi­ron­ment in which demo­graph­ic and tech­no­log­i­cal trends have become pre­dom­i­nant. The chaos of pan­dem­ic migra­tion has eased; rather, demand for liv­ing prod­uct has now emerged from the chang­ing needs of aging Mil­len­ni­als. The end of the stim­u­lus-fueled spend­ing binge has like­wise caused ware­house and retail fun­da­men­tals to moderate. 

Going for­ward, we expect man­u­fac­tur­ing to exert more influ­ence in indus­tri­al demand while the ben­e­fits of e‑commerce shop­ping will like­ly be split more even­ly across online and in-store retail formats. 

Mean­while, office has not shak­en off the detri­men­tal impacts of work-from-home, but incre­men­tal­ly pos­i­tive office-usage pat­terns and leas­ing momen­tum for mag­net office (the high­est qual­i­ty class office prod­uct) offer hope that an inflec­tion point may be immi­nent. Alter­na­tive asset class­es, espe­cial­ly those that ben­e­fit from demo­graph­ic shifts and increas­ing use of tech (such as senior hous­ing, med­ical office and data cen­ters) should expe­ri­ence strong tail­winds across the entire region.

The invest­ment out­look is improv­ing as prices become more afford­able. With­in the Hines Research frame­work, we are start­ing to see gen­er­a­tional­ly attrac­tive pric­ing emerge in var­i­ous office and mul­ti­fam­i­ly mar­kets. Cap rate spreads over Trea­suries remained tight, but tighter spreads may prove sus­tain­able in a high­er inter­est-rate envi­ron­ment – the 1980s offer a prece­dent in which attrac­tive returns were gen­er­at­ed through income growth despite invert­ed spreads. 

Exhib­it 1: U.S. Office Cap­i­tal­iza­tion Rates Spreads to the U.S. 10-Year Trea­sury Yield Rel­a­tive to Inflation

U.S. Office Capitalization Rates Spreads to the U.S.
Source: CoStar, NCREIF and Hines Research. As of 1Q 2024. Note: Gate­way here is defined as Chica­go, New York, San Fran­cis­co, Seat­tle and Wash­ing­ton D.C. This analy­sis cov­ers the peri­od from 1981 to the as of date shown. We choose 1981 because that is when data becomes con­sis­tent­ly avail­able across the mar­kets ana­lyzed. Trail­ing annu­al CPI (infla­tion) is cal­cu­lat­ed for every quar­ter since 1981 and scored rel­a­tive to the his­tor­i­cal aver­age and stan­dard devi­a­tion to cre­ate a 0100 score for each quar­ter where a high­er score equates to high­er infla­tion. Then the aver­age cap­i­tal­iza­tion spread to the 10-Year Trea­sury yield was cal­cu­lat­ed for every quar­ter falling into ranges of 20 (020, 2040, 4060, 6080 and 80100) and plot­ted here with the ranges shown as the aver­age of each range.