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Deliveries of new supply (property stock) in the commercial real estate market appear to have peaked in 2018 across all major property sectors (apartment, industrial, office, and retail). Higher construction and labor costs, as well as positive net absorption (demand), particularly in the apartment sector, are keeping supply in check. These supply dynamics give us comfort that the next real estate slowdown will be less severe compared to the last two cycles when oversupply prior to a recession exacerbated the downturn.
Despite further moderation in returns, overall fundamentals (absorption, occupancy, fund flows) remain relatively healthy across the real estate sector. Real estate lenders are more risk aware and showing heightened levels of discipline in this cycle compared to the last cycle. Strong fundamentals coupled with tightened lender behavior and little to no expected interest rate increases in 2019 should lead to stable real estate pricing and cap rate spreads to U.S. Treasury yields. As a result, we expect total returns in the mid-single digits for core real estate with an emphasis on income growth (NOI) over appreciation.
The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
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