Donald Hall, Global Head of Research, Real Estate at Nuveen joined Keith Black, Managing Director at RIA Channel, to discuss three positive developments in the global real estate markets.
Hall sees a number of positive signs for the real estate market in 2025. First, the market is experiencing a stabilization of transaction prices. Second, investors are starting to earn positive total returns. Third, a pullback in construction means less competition for future tenant growth.
The MSCI Global Property Index covers 21 countries. Markets were relatively balanced in the third quarter of 2024, with 11 countries showing price appreciation, while all 21 countries earned positive returns. That is, investors were able to earn more than enough property income to offset the losses in the ten countries with price declines. Since 1978, US core real estate earned an annualized return of 7.7%, 91% of which has been income.
Hall notes that new construction starts haven’t been this low for over a decade, with apartment and industrial construction at only 25% of peak levels. Because construction takes years to be completed, investors have great visibility into the level and timing of new supply. These declining supply pressures bode well for medium-term occupancy and rent growth.
The US office market is likely to continue to struggle. Of the 51 property type/country combinations, 45 showed positive returns in Q3 2024. The US office sector was one of the six markets earning negative returns over the same time period. The office sector had challenges even before COVID changed the way we work. The US healthcare market has been an attractive sub-segment fueled by the megatrend of an aging population. With fourteen consecutive quarters where demand exceeded supply for senior living and medical offices, with medical offices now at all-time high occupancy levels. For the last decade, most investors generally ignored the retail sector which gave it time to heal. Today, the neighborhood and community segments are very healthy with all-time low vacancies, but most malls are still out of favor.
Volumes are still slow, with transactions increasing 4% in Q3 2024 from the year earlier period. Hall is encouraged, as he is seeing an increasing number of buyers interested in properties Nuveen is selling, while the competition among buyers is increasing. This could lead to increasing transaction volumes in coming quarters, which are reported with a lag.
Due to declining real estate values and increasing stock prices, 74% of global institutional investors are below their target allocation to real estate, which can bring capital back into the market. Nuveen analyzes 40 data sources to identify risk and opportunities. Investors should not blindly increase their allocation to real estate, as not all properties will be a good investment. Rather than quickly purchasing a property, investors should carefully complete a thorough process to ensure the investment thesis is sound.
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