New Year Begins with Tempered Optimism

摘要

As the economy settles in for a soft landing, the real estate market should remain attractive. While capitalization rates are at a historical low, and spreads on mortgages remain tight, plentiful supplies of debt and equity are expected to continue. Despite some recent slowing in the economic recovery that may lead to short-term blips in market fundamentals, the real estate market should continue to improve. However, this rather sanguine outlook is not without risks that could be triggered by external or internal forces. In terms of external forces, improving fundamentals depend on a renewal of the economic expansion and increasing employment that leads to the demand for more space. In terms of internal forces, the near-term fate of the real estate market depends on the ability to maintain a sense of discipline on the supply side, with the market as a whole avoiding a tendency to overreact to the promise of good times. The housing market remains one of the wild cards in the equation and will receive close monitoring. Returns are expected to level off and decline, especially as appreciation rates fall back into line with longer-term averages. In some cases, this adjustment will reflect a pause in appreciation, while in others, prices will be adjusted downward. This adjustment will be particularly pronounced for some of the commodity space and weaker product that rose with the flood of capital to U.S. shores. While creating challenges and disappointments for some investors late to the dance or those without an eye toward drivers of value, the process should be manageable and should create some opportunities for value-add and opportunistic investors.