Searching for green shoots in 2024

Josh Scov­ille, Glob­al Head of Research at Hines, shares a few pos­i­tive signs for real estate in 2024

As we enter the new year, I believe ongo­ing repric­ing appears to have estab­lished an entic­ing invest­ment land­scape rem­i­nis­cent of the ear­ly post-Glob­al Finan­cial Cri­sis (GFC) years. Wean­ing port­fo­lios from zero inter­est rate pol­i­cy to more nor­mal rates can­not help but present chal­lenges, yet Hines remains enthu­si­as­tic and believes we are strate­gi­cal­ly posi­tioned to rec­og­nize and seize oppor­tu­ni­ties as they arise. Based on our research, here are five ​“green shoots” that I believe are sig­nal­ing a turn­around for glob­al real estate markets.

Lower bond market volatility 

As of Octo­ber 31, 2023, the trail­ing annu­al dai­ly volatil­i­ty (as mea­sured by stan­dard devi­a­tion) of U.S. 10-year trea­sury bond rates had actu­al­ly decreased by 45% from its cycli­cal peak in 2022. Sim­i­lar­ly, the trail­ing annu­al dai­ly volatil­i­ty of EU AAA-rat­ed 10-year gov­ern­ment bond yields was 71% below its 2022 peak as Octo­ber 31, 2023. In the Asia Pacif­ic region, Aus­tralian volatil­i­ty was 50% low­er than its cycli­cal high in 2022, although Japan’s 10-year bond rate volatil­i­ty was cur­rent­ly at a sev­en-year high by the same mea­sure (pos­si­bly because its rates began ris­ing lat­er than in most oth­er coun­tries). While dai­ly volatil­i­ty in Aus­tralia and the U.S. has expe­ri­enced a recent uptick, volatil­i­ty remained well below cycli­cal peaks. His­tor­i­cal­ly, low­er bond rate volatil­i­ty has intro­duced more sta­bil­i­ty to the mar­ket and pro­vid­ed greater vis­i­bil­i­ty for under­writ­ing and pric­ing assess­ments (see below); though there is no guar­an­tee this will be the case. 

Stan­dard devi­a­tion mea­sures the aver­age amount by which an invest­ment may swing sharply above or below its his­tor­i­cal aver­age. Trail­ing annu­al dai­ly volatil­i­ty is mea­sured by stan­dard deviation.

Transaction volume nearing a bottom 

Hines Pro­pri­etary Research (Hines Research) has found that prices for prop­er­ty¹ gen­er­al­ly tend to fol­low the wax­ing and wan­ing of trans­ac­tion vol­umes. So, as vol­umes fall (par­tic­u­lar­ly when sharply), prop­er­ty prices should also fall; when trans­ac­tion vol­umes have bot­tomed (and then start to recov­er), prices are like­ly to do so as well. Watch­ing trans­ac­tion vol­umes may offer some insight into the poten­tial future prospects for prop­er­ty price move­ments. There are signs that trans­ac­tion vol­umes, depend­ing on the region and sec­tor, have slowed their decline, or even start­ed to recov­er if look­ing at the data for Q3 2023. Giv­en the gen­er­al cor­re­la­tion of move­ments not­ed above, this may bode well for prop­er­ty prices. When study­ing trans­ac­tion vol­umes, Hines often uses the total vol­ume of prop­er­ties trans­act­ed (either by count or total square footage trad­ed) to address the prob­lems inher­ent in mea­sur­ing glob­al trans­ac­tion vol­ume in local cur­ren­cies. Accord­ing to our analy­sis, the MSCI RCA data for Q3 2023 tells the fol­low­ing story:

• The change in trail­ing annu­al vol­ume trans­act­ed across the office, retail, indus­tri­al, and apart­ment sec­tors revealed the Amer­i­c­as and Asia were still declin­ing, but at a pace less than half that record­ed in 2022.
• Euro­pean vol­umes con­tin­ued to decline at a sim­i­lar pace as 2022, but the declines have not accel­er­at­ed significantly.
• Among prop­er­ty types, total retail square footage trans­act­ed increased by 2.6% quar­ter-over-quar­ter in the Amer­i­c­as, 13.4% in Asia Pacif­ic, and decreased by just 2.3% in Europe, com­pared to an annu­al decline of 18.7% in the first quar­ter 2023.
• In the Asia Pacif­ic apart­ment sec­tor, trail­ing annu­al vol­ume jumped by 26.8%, although it con­tin­ued to decline in the Amer­i­c­as and Europe.

Private capital expands its presence in RE markets 

His­tor­i­cal­ly, pri­vate cap­i­tal (gen­er­al­ly pro­vid­ed by indi­vid­u­als or funds not avail­able on pub­lic mar­kets) has exhib­it­ed greater agili­ty com­pared to insti­tu­tion­al cap­i­tal. As such, pri­vate cap­i­tal has expand­ed its mar­ket share in terms of acqui­si­tion vol­ume over the last four quar­ters, notably in the Amer­i­c­as and Europe (see graph below), and in dis­tressed sec­tors across var­i­ous regions. In pre­vi­ous cycles, notably dur­ing the GFC, such a trend often indi­cat­ed that a mar­ket was approach­ing a bottom. 

As depict­ed, pri­vate cap­i­tal has shown a grad­ual rise in its acqui­si­tion vol­ume share (in Europe and the Amer­i­c­as) over the past 5–10 years. It reached an unprece­dent­ed peak in Europe dur­ing the first three quar­ters of 2023, and late in 2023, the pri­or year’s record high was near­ly breached in the Amer­i­c­as. Although pri­vate cap­i­tal has been less active in Asia Pacif­ic, its share increased across var­i­ous sec­tors in 2023, par­tic­u­lar­ly in retail. Pri­vate cap­i­tal gained mar­ket share (vs. its 10-year aver­age) in the hotel and indus­tri­al sectors. 

High share of single asset sales 

In the U.S., sin­gle-asset sales con­sti­tut­ed 82.6% of the 2023 vol­ume through the third quar­ter (see below). If this per­cent­age holds in Q4, it could sur­pass the pre­vi­ous peaks in 2003 (80.9%) and 2009 (80.8%). This is notable because 2003 and 2009 both coin­cid­ed with the bot­tom of a cycli­cal down­turn, with mar­ket recov­er­ies com­menc­ing with­in 12–24 months. In our view, once sin­gle-asset sales set pric­ing para­me­ters in a mar­ket starved for infor­ma­tion, port­fo­lio sales like­ly will quick­ly follow. 

Across U.S. prop­er­ty sec­tors, the share of indi­vid­ual sales of senior hous­ing prop­er­ties sur­passed its long-run aver­age by 29 points, retail by 16 points, hotel by 13 points, office by six points, and indus­tri­al by four points, with apart­ments equal­ing their long-term aver­age through Q3 2023. The trend was sim­i­lar in Europe, where indi­vid­ual sales as a per­cent­age of the total sur­passed their long-run aver­age by 4.1% in 2023. The apart­ment aver­age was up 18 points, hotels up 16 points, senior hous­ing up 10 points, and office up eight points. Indus­tri­al equaled its long-term aver­age, with retail slight­ly below, sig­nal­ing fur­ther signs of a retail recov­ery. In Asia, the share of sin­gle-asset sales is slight­ly below its long-run aver­age. How­ev­er, senior hous­ing (46 points above), as well as offices and hotels (four points above for each), exhib­it sim­i­lar trends. Sin­gle-asset sales have his­tor­i­cal­ly proven in past cor­rec­tions to be par­tic­u­lar­ly instru­men­tal in estab­lish­ing mar­ket-clear­ing val­u­a­tions, which we believe sets the stage for recov­ery; though there is no guar­an­tee this will be the case. 

Slowing construction starts 

While some U.S. mul­ti­fam­i­ly mar­kets (like the Sun Belt) may be over­built, there has been a sec­u­lar short­age of hous­ing near­ly every­where Hines invests. The indus­tri­al sec­tor might have peaked, but years of robust rent growth have gen­er­at­ed sub­stan­tial embed­ded net oper­at­ing income growth as leas­es roll. After a decade of chal­lenges, includ­ing the COVID-19 pan­dem­ic, retail has had strong-per­form­ing win­ners and lag­ging losers. The office land­scape var­ied dra­mat­i­cal­ly by region and class: sup­ple­men­tal sec­tors like data cen­ters and stu­dent hous­ing have boast­ed strong fun­da­men­tal con­di­tions, and senior hous­ing has recov­ered in var­i­ous loca­tions in response to min­i­mal new con­struc­tion cou­pled with pent-up demand. 

The recov­ery nar­ra­tive is like­ly to hinge sig­nif­i­cant­ly on scarce new con­struc­tion, high financ­ing costs, and gen­er­al risk aver­sion (par­tic­u­lar­ly amongst lenders). The graph above illus­trates trail­ing annu­al starts through Q3 2023 as a per­cent­age of inven­to­ry across coun­tries and sec­tors where data is avail­able. In the U.S., own­er-occu­pied and build-to-suit office starts totaled less than 30 mil­lion square feet dur­ing that peri­od, rep­re­sent­ing just 0.4% of total inven­to­ry. U.S. retail was even low­er at 0.3% of exist­ing inven­to­ry, with a grow­ing trend of repur­pos­ing or rede­vel­op­ing exist­ing retail into oth­er uses. In one of the health­i­est office mar­kets glob­al­ly (Seoul), there was sur­pris­ing­ly min­i­mal space under con­struc­tion, with total starts amount­ing to less than 2% of inven­to­ry. As the econ­o­my gains firmer foot­ing, a short­age of high-qual­i­ty, mod­ern space may be like­ly in many mar­kets. While it might be pre­ma­ture to label this a green shoot, we believe it should con­tribute to stronger future fun­da­men­tals in var­i­ous markets.

In closing 

In 2024 and beyond, Hines plans to focus on iden­ti­fy­ing the nascent signs of sta­bi­liza­tion and recov­ery, while posi­tion­ing our­selves to seize poten­tial oppor­tu­ni­ties for long-term out­per­for­mance. Ear­ly signs of recov­ery may be fleet­ing, but with the wave of refi­nanc­ings and matu­ri­ties expect­ed, own­ers and lenders will like­ly need to tidy up their bal­ance sheets, which may set the stage for attrac­tive valuations.

To illus­trate the diverse mar­ket con­di­tions pre­vail­ing across regions, coun­tries, and prop­er­ty types, please see the adja­cent graph which maps each of the 656 real estate mar­kets Hines mon­i­tors glob­al­ly (with prices on the x‑axis and fun­da­men­tals on the y‑axis).

For those not famil­iar with the Hines Research method­ol­o­gy, the Com­pos­ite Price Score ranges from 0–100 with 50 being equal to the long-term aver­age. The score is derived from the fol­low­ing met­rics: Price to Trend, Cap Rate Spreads, Growth-Adjust­ed Spreads, Trail­ing Price Growth, and Trail­ing Total Returns. It is cal­cu­lat­ed as a per­centile rel­a­tive to each mar­ket’s own his­to­ry. Any­thing under 30 is deemed inex­pen­sive while any­thing over 70 is deemed expen­sive, with val­ues between the two con­sid­ered fair val­ue. The Leas­ing Momen­tum Score uses a com­pos­ite index of three fun­da­men­tal fac­tors: occu­pan­cy rates, trail­ing annu­al demand growth, and trail­ing annu­al rent growth, also on a scale of 0–100, and looks at the change in mar­ket fun­da­men­tals over the past year rel­a­tive to its three-year aver­age. When it is above 50, leas­ing momen­tum is above aver­age, above 70 is con­sid­ered excel­lent and below 30 poor. The take­away is this: mar­kets are all over the place in terms of pric­ing and fun­da­men­tals, but we believe this may trans­late into oppor­tu­ni­ties if one knows where to look.