After almost three years of severe dislocation, real estate markets are beginning to show signs of recovery, presenting significant opportunities for institutional investors. However, as the market stabilizes, selective buying strategies remain crucial for success. Key indicators of recovery are emerging, ranging from improved liquidity in the capital markets to strengthening supply-demand dynamics and broad economic trends supporting growth in certain real estate segments.
Recovery Signals in Capital Markets
Jim Garman, Global Head of Real Estate at Goldman Sachs Asset Management, notes a marked resurgence in investor interest following 30 months of turbulence. “Valuations are starting to bottom out in several sectors, and many investors are recognizing this as an ideal time to re-enter the market,” Garman shared. Key indicators of this recovery include:
Liquidity return: Commercial mortgage-backed securities (CMBS) issuance has surged by over 180% this year, while real estate transaction volumes rose by 14% in Q3, although still below peak levels.
Stabilization of real estate indices: The NCREIF Fund Index (NFI-ODCE), which tracks institutional core private real estate returns, is beginning to stabilize, signaling a return to more stable market conditions.
Public REIT performance: Public real estate investment trust (REIT) stocks have shown substantial improvement, and core buyers are starting to re-enter the private market.
Positive Supply-Demand Fundamentals
Despite the market challenges, certain sectors are seeing a strong recovery in demand. Notably:
Resilient rental housing demand: The U.S. multifamily housing market experienced one of its strongest absorption rates in years during the first half of 2024, driven by a strong job market.
Construction slowdowns: New construction starts in key sectors, such as logistics and housing, have significantly decreased, with some areas seeing drops of over 50% from their peak, creating a more favorable supply-demand balance moving forward.
“Overall, the market is in much better condition today than it was a year or two ago,” Garman said. “The prospects for strong income growth in our target segments are looking attractive.”
Key Challenges to Monitor
Despite positive signs, several factors warrant careful attention as the market recovers:
Capital markets dislocation: Recovery is expected to be gradual, not a V-shaped bounce. There is still over $3 trillion of debt maturing in the U.S. and Europe over the next four to five years, creating potential investment opportunities, but also maintaining some uncertainty in the market.
Performance dispersion: Garman predicts that there will be wide variations in asset performance across different sectors. “There will be a stark contrast between well-positioned assets in key sectors versus those that are less attractive,” he said. The office sector, in particular, has faced significant challenges, while industrial real estate, driven by e-commerce and logistics, has fared much better.
Operational excellence: To succeed in this environment, investors must focus on operational efficiency. In an era of higher inflation and interest rates, income growth will be a more significant driver of returns than cap rate compression. Investors must excel at navigating capital markets dislocation while capitalizing on emerging real-world trends.
Underlying Drivers of Future Real Estate Growth
To identify attractive investment opportunities, Goldman Sachs Asset Management focuses on mega-trends that are reshaping the real economy:
Technology: The rise of e-commerce, automation, and cloud computing is fueling demand for logistics, industrial spaces, and data centers. Technology’s influence on remote work, and its impact on the office market, also continues to drive change.
Demographics: As the U.S. population ages, the demand for healthcare and senior housing will increase. Conversely, younger generations, particularly Gen Z and Millennials, are driving demand for rental properties, including both multifamily and student housing.
Sustainability: There is growing demand for energy-efficient, sustainable buildings. In Europe, for example, next-generation sustainable buildings are commanding premium rents and benefiting from lower capital costs.
Bridging the Gap with Real Estate Credit
Garman also highlighted the long-term structural shift away from traditional bank lending to private real estate credit markets. With more than $3 trillion in real estate debt needing refinancing over the next few years, private credit funds are well-positioned to take advantage of these opportunities. Goldman Sachs has been managing private real estate credit funds for over 15 years, and continues to explore high-quality, tailored lending opportunities.
Real Estate as a Portfolio Essential
For institutional investors, real estate remains a must-own asset class in diversified portfolios. It offers current income, enhanced returns through opportunistic strategies, diversification, and inflation protection. Garman emphasized that Goldman Sachs Asset Management tailors its approach to each client’s specific needs, focusing on delivering strong performance and a partnership-driven experience.
In conclusion, the real estate market is showing clear signs of stabilization after a prolonged period of dislocation. By focusing on the right assets in key sectors and leveraging operational expertise, institutional investors can unlock value in the coming years. Understanding emerging trends and navigating the capital markets with precision will be critical to capitalizing on these opportunities.
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