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  • Rate Cuts Mean Uncertainty on Real Estate: Cohen & Steers VP

Rate Cuts Mean Uncertainty on Real Estate: Cohen & Steers VP

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Bloomberg Oct 23, 2024 09:20 · 11.6k Views

Cohen & Steers Senior VP and Head of Real Estate Strategy & Research Richard Hill sees an uneven commercial real estate market, but believes that certain factors could lead to big changes in various sectors.

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Transcript

  • 00:00 Let's just start with the environment really quickly here because there are not as many rate cuts baked into the rest of the year as initially expected.
  • 00:07 And you have to expect if you're going into next year with what if 50 to 75, maybe 100 basis points with the rate cuts, how much pain is there left in the system?
  • 00:17 Yeah, sure.
  • 00:18 So look,
  • 00:19 list of reads
  • 00:20 which are leading indicator in both downturns and recoveries
  • 00:23 were sort of left for dead this time last year.
  • 00:26 They've had a remarkable rally
  • 00:29 over the past 12 months, up almost 40%, actually a little bit more than 40%.
  • 00:34 And believe it or not, the third quarter was a huge quarter for for the sector,
  • 00:38 up almost 17%, making it the second best performing sector of the S&P 500.
  • 00:43 You're right though
  • 00:45 that the market was pricing in a lot of interest rate cuts and we think the market probably got a little bit of head of itself.
  • 00:50 And so list of reads have consolidated a little bit, which which happens,
  • 00:54 but
  • 00:55 you know, there has been a huge rally as interest rates have come down.
  • 00:59 Now it's a
  • 00:59 now it's a matter of how fast and how far the Fed cuts.
  • 01:02 So since you and I spoke
  • 01:04 recently, I happen to know that you have a neat way of looking at commercial real estate.
  • 01:08 A lot of people have heard about the five stages of grieving, but you apply it to real estate.
  • 01:11 And the first point that you look for is that bottom and publicly traded real estate, it proceeds private.
  • 01:17 And then what about CMBS?
  • 01:19 Because we've been hearing about this wall 1.5 trillion of CMBS that could clog everything up.
  • 01:24 What is
  • 01:25 your?
  • 01:25 Yeah,
  • 01:26 sure.
  • 01:26 So maybe to_that point list it reach through
  • 01:29 about 12 months later private CRE evaluations through.
  • 01:32 We think they're in the process of troughing if they haven't already.
  • 01:35 But something really interesting happens on the heels of that.
  • 01:39 Siri, debt distress
  • 01:41 delinquencies do not peak for 12 to 24 months after private CRE evaluations through.
  • 01:47 Why is that the case?
  • 01:48 Well, you mentioned the grieving process.
  • 01:50 I believe that that is representative of the acceptance stage of the grieving process.
  • 01:55 Lenders do not want to sell distressed properties into a distressed market.
  • 01:59 They want to sell distressed properties into a stabilized market.
  • 02:03 So it's only when you have more clarity on where valuations are that the stress begins to rise.
  • 02:07 But it is a contrarian late cycle indicator that you can get more constructive on private CR evaluations.
  • 02:13 Well, Shonali was mentioning the rate cuts and even though they may not be as many as we had initially been expecting, could this pull that forward a little bit?
  • 02:20 Could it be closer to the 12 months as opposed to 24 months for the bottom for CNBS?
  • 02:24 Yeah.
  • 02:24 So
  • 02:25 potentially.
  • 02:26 So if you go back and you look at the last cycle,
  • 02:29 CMBS delinquencies peaked 2 years after private valuations throughed.
  • 02:33 But you can pick on the CMBS market for a variety of different reasons.
  • 02:37 It is possible that it's only 12 months
  • 02:39 because if you look at bank balance sheets and life insurance
  • 02:42 balance sheets prior to
  • 02:43 after the GFC,
  • 02:45 those only peaked out about a year after.
  • 02:47 So you could see this work out a lot faster than what you've seen prior cycles.
  • 02:52 So what do you think also about some of the sectors here because this idea of multifamily facing some pain, very curious about what you think that's predicated on.
  • 02:59 Of course, that is a pretty contrarian view.
  • 03:01 Yeah.
  • 03:01 So I grew up in a real estate family.
  • 03:03 The comment I'm going to make, I'm making fun of myself, no one else.
  • 03:07 We tend to be trend followers in the commercial real estate market.
  • 03:10 We believe everything that worked in the past is going to work in the future.
  • 03:13 We're a little bit cautious, at least relative to our peers on industrial and multifamily great asset classes over the past 10 years.
  • 03:20 But we think there's going to be a little bit of mean reversion.
  • 03:22 Let me give you 1 interesting stat.
  • 03:25 Everyone loves industrial, but industrial REITs, publicly traded industrial REITs are the worst performing sector of listed REITs this year, down around 4% when the sector's up more than 10.
  • 03:35 Why is that the case?
  • 03:36 Fundamentals are great, it's a great asset class,
  • 03:39 but we think supply is going to be higher than what the market anticipates and that's going to lead to long term growth mean reverting.
  • 03:47 It still might be best in class, but if you have good growth, not great growth, that has an impact on valuations.
  • 03:53 So, you know,
  • 03:54 you like open air,
  • 03:56 you are less favorable on multi family and industrial.
  • 04:00 But I've got to talk about the big one
  • 04:02 office and in about we have about 20 seconds or so thoughts because I think that you might be a little concerned.
  • 04:06 Yeah, sure.
  • 04:08 I was on the West Coast last week.
  • 04:09 Someone asked me what I think is the best performing sectors.
  • 04:11 I sort of think I want to put office at the top of that.
  • 04:14 I don't know when it bottoms out and it might go lower before it goes higher.
  • 04:18 But gosh, it's starting to become really cheap and I think someone's going to make a lot of money.
  • 04:21 There's a lot of green shoots emerging here.