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77% of PMs expect up to 3 more quarters of negative returns in 2024

NCREIF and NAREIM Portfolio Management networking dinner

Jan 31, 2023. Key takeaways

Three quarters of portfolio managers expect the NCREIF ODCE index to report negative total returns through H1 and even Q3 of 2024 – with 86% anticipating returns decline another 4% to 8% this year.

The NCREIF ODCE index reported total returns gross of fees  -4.8% in Q4 last year. Members attending the joint NAREIM and NCREIF Portfolio Management networking dinner this week, shared their insights into valuations – with 77% of managers saying they expected another two to three quarters of negative returns in 2024.

A live poll of attendees revealed that 45% of portfolio managers expected two additional quarters of negative total return in 2024, while 32% expected three quarters of decline.

Asked about the scale of negative returns in 2024, almost half of portfolio managers said they expected total returns in 2024 to be between -4% and -6%, while 39% of managers said they expected total returns to be between -6% and -8%.

During the networking session – which was open to portfolio managers at NAREIM and NCREIF member firms – managers also discussed the capital market outlook, expectations on property type performance in 2024, as well as valuation processes in down markets.

Key highlights include:

  • Cap rates will not save you

Over the past 200 years, interest rates have held steady in the 4%-5% range. The 38-year average is 4.7%. As one speaker said: “Cap rates are not going to save us. Beta is a tough trade and it’s all about alpha now.”

  • Foreign investor flows are up, but cautious about 2024

While overseas capital flows into the US were up 5% in the year to Q3 2023 versus 2022, foreign investors are anecdotally cautious about the November presidential election – amid concerns that foreign investor capital may not be welcomed owing to political messaging from both Republicans and Democrats.

  • Overseas investors could also be among the first wave of buyers of US office, not realizing the scale of the impact of remote work and Covid thanks to their own markets returning to the office in significant numbers. Middle East investors are also eager to invest in the US, particularly for debt and data centers. But don’t waste time on airfare unless you can offer a sophisticated debt product or 20%+ returns.

Data centers – will it suck RE capital away?

Despite the fact that supply (in terms of MW of commissioned power) has doubled in the past two years, vacancy rates have had fallen in half as of the end of 2023. Demand for data centers is sizeable and only expected to increase thanks to AI and machine learning.

  • Yet there is the danger that data centers – and other real asset opportunities – could “suck” real estate capital commitments away from CRE. “Real estate capital is going to have to compete. There’s a sucking sound as capital goes from real estate to infrastructure and that’s going to continue.”

Office and seller financing

Offer seller financing straight out of the box. If there are alternative sources of debt, brokers will find it. However a seller shouldn’t withhold the offer of seller financing to a prospective buyer – only to offer it at a later date when capital markets don’t deliver. Buyers will smell blood, especially on deals over $100m.

To download the meeting presentations & attendee list, click below:

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