American Realty Advisors


Research Insights, January 23, 2024

House View H1 2024

A winding round at the top of a mountain

2024 stands to mark a critical transition for the real estate sector. We share our view on key drivers of the economy and capital markets and outline where we see opportunities in the coming recovery in our H1 2024 House View.

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The U.S. economy showed considerable resilience in 2023 given what had been expected to be a year of weak growth. Fed policymakers continued their tightening agenda, raising rates an additional 100 basis points atop the 425 basis points of rate hikes that occurred in 2022. Despite avoiding a macro recession, many sectors faced rolling periods of volatility and weakening amid elevated uncertainty. 

In our view, 2024 is poised to offer only a modest improvement in stability. While the Fed’s forward guidance in December signaled the end to the rate hike cycle for many (including bond market participants), that doesn’t mean the outlook is assured. 

There is the potential for elements of one or more of the following scenarios to impact the economy in the coming year:

  1. Inflation Upside: Inflationary pressures could resume (likely due to domestic factors as well as geopolitical uncertainty), prompting unexpected rate hikes that could reintroduce instability to the economy.
  2. Inflation Downside: Policy may have already gone too far spurring deflation as corporate profits get squeezed, unemployment increases, and consumers batten down the hatches.
  3. Soft Landing: A soft landing is still possible, especially considering the progressive economic slowdown that has occurred to date with minimal damage to the labor market, but the more markets become convinced of this outcome, the greater the resulting fallout could be if it doesn’t.

In our view, 2024 is poised to offer only a modest improvement in stability. While the Fed’s forward guidance in December signaled the end to the rate hike cycle for many (including bond market participants), that doesn’t mean the outlook is assured. 

Macroeconomic Perspective

Disinflation pressures have been shaping up over the last several quarters, driven by moderations that we expect to continue in the near term.

Labor force factors:

  1. Tightened Lending Conditions: Material changes in access to borrowing (such as what we have seen since mid-2022) have historically led employment growth by about 6 months. Less-available liquidity to businesses hampers their ability to grow and hire.
  2. Contraction in Temporary Employment: Often the first area companies tend to cut from at the hint of a downturn, temporary employment, has been contracting on a year-over-year basis since December 2022.
  3. Bottoming of Unemployment Rate: Historically, unemployment troughs have signified starting points for recessions – unemployment bottomed in April 2023 and has since been gradually ticking up.

A softening job market is likely to weigh on a consumer segment that is already facing its own near-term headwinds.

Consumer factors:

  1. Drawdown of Pandemic-era Excess Savings: U.S. households built up substantial savings early in the pandemic, but higher prices and robust spending have begun to rapidly deplete that stockpile. It is expected that 2024 will be the first year where stimulus savings won’t play a part in propping up consumer spending.
  2. Rising Credit Card Balances and Delinquencies: More Americans are running up unsustainable credit card debt – credit card balances reached a new high of $1.08 trillion in Q3, up $154 billion year over year. The rate of households becoming delinquent was the highest since the end of 2011.
  3. Resumption of Student Loan Payments: Roughly 20 million borrowers recently transitioned from forbearance to repayment. The Federal Reserve Bank of New York estimates that the student loan break created roughly $7.5 billion in monthly savings to households, which suggests the potential for a comparable vacuum to hit spending in the coming months.

We expect disinflation to give way to deflation, supporting the first Fed rate cut in the latter half of 2024.

While the immediate period is likely to see inflation come down by virtue of lesser spending, weaker aggregate demand, and base-year effects, we anticipate structural factors presenting key risks to inflation over the medium term.

The four “Ds” of higher mid-cycle inflation are:

  1. De-globalization and reshoring;
  2. Decarbonization and the green transition;
  3. (Government) debt and deficits; and
  4. Demographics and labor.

Each of these has the potential to drive up costs, and it is likely that their convergence will serve to set the base level of inflation and interest rates higher. Given U.S. GDP growth has been consistently downshifting over the last several decades, we believe the Fed will be dialing policy rates up and down more frequently to balance price and economic growth. This is expected to contribute to greater variability in the macroeconomy and capital markets than what we saw during much of the last three decades.

Line chart showing two lines, one demonstrating volatility of GDP growth and one outlining volatility of inflation from 1949 through 2023.

Investment Implications

From a capital markets perspective, a clearer timeline to Fed rate cuts is broadly a positive for real estate performance. Lower interest rates serve to restore real estate yield’s risk premium for investors above what is expected from government bonds, loosen lending conditions, improve liquidity, and has historically led to recoveries in value. Core fund total returns were positive one year after peak rates in 15 of the last 18 cycles, with the likelihood of positive returns increasing to 89% of the time in the two years following.

Bar chart showing 1- and 2-year annualized private core real estate returns in periods following peak rates.

While that’s not to say that all investments will emerge from this period unscathed, neither does it mean that all will be challenged to the same degree. Virtually every property type is undergoing a traditional late cycling of fundamentals, where supply is exceeding tepid demand and adding downward pressure on occupancies and rents. This is expected to create market-sector concentrations of distress, as not all markets’ fundamentals are deteriorating to the same degree, and not all maturing loan structures are exposed to the same degree of refinancing risk. Where there is the greatest overlap of worst fundamental declines, value declines, and riskiest capital stack is where the biggest pockets of distress are likely to emerge (think: Los Angeles office, not Dallas industrial).

In our view, this is setting up the coming 12-24 months as a prime window to resume investing in sectors where the outlook for their long-term demand drivers is firmer, such as industrial, residential, and select specialty sectors. Given an expectation of a more fragile policy and GDP growth cycle, we are less optimistic on cap rate compression being a leading driver of appreciation and total returns and are more focused on operating strength and driving NOI growth.

  • Industrial
    • Some oversupply, but impact depends on preleasing levels and starting vacancy rates.
    • Smaller buildings may provide better opportunity to achieve outperformance.
  • Residential
    • Supply glut weighing on rent growth in the near term (24 months), but today’s permitting decline setting up recovery in H2 2025-2026.
    • Homeowners with low-rate mortgages are “locked in,” reducing potential supply and driving higher single-family rental demand.
  • Office
    • Office fundamentals may bottom as more managers push for a 5-day return to office.
    • Weak job growth and a potential recession mean overall occupancies have a long road to recovery; newer, higher-quality buildings should continue to capture a larger share of demand.
  • Retail
    • High construction costs are hindering new development, insulating existing asset occupancy and rents.
    • Drop in consumer pandemic savings and a possible recession could further dampen spending.
  • Specialty Sectors
    • Hybrid/work-from-home should prop up self-storage occupancy as residents offload goods to make space.
    • Healthcare advances expected to drive demand for cold storage facilities to store temperature-sensitive treatments.

Print Charts and Figures PDF


More to Explore:

Change Agents: Single Family Rental Communities Are Giving Millennials a Way to Come Home

In Conversation: Future of Industrial Demand



The information in this newsletter is as of January 1, 2024, and is for your informational and educational purposes only, is not intended to be relied on to make any investment decisions, and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments in any jurisdiction. This newsletter expresses the views of the author as of the date indicated and such views are subject to change without notice. The information in this newsletter has been obtained or derived from sources believed by ARA to be reliable but ARA does not represent that this information is accurate or complete and has not independently verified the accuracy or completeness of such information or assumptions on which such information is based. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce. Past performance of any kind referenced in the information above in connection with any particular strategy should not be taken as an indicator of future results of such strategies. It is important to understand that investments of the type referenced in the information above pose the potential for loss of capital over any time period. This newsletter is proprietary to ARA and may not be copied, reproduced, republished, or posted in whole or in part, in any form and may not be circulated or redelivered to any person without the prior written consent of ARA.

Forward-Looking Statements

This newsletter contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements are statements that do not represent historical facts and are based on our beliefs, assumptions made by us, and information currently available to us. Forward-looking statements in this newsletter are based on our current expectations as of the date of this newsletter, which could change or not materialize as expected. Actual results may differ materially due to a variety of uncertainties and risk factors. Except as required by law, ARA assumes no obligation to update any such forward-looking statements.

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