In a recent interview with Juniper Square, Sabina Reeves, Chief Economist at CBRE Investment Management, shared the three generational changes transforming real estate in familiar and unexpected ways. She noted that monetary policy appears to be trending in the right direction, with the miraculous “soft landing” within view. And technology is already making global real estate more efficient and profitable globally, with tremendous potential still untapped in operations and investment. Get more of her expert insights, well-informed predictions, and an in-depth look at the interplay of forces at work on the CRE market today.
The generational changes shaping real estate
Reeves outlined three once-in-a-generation shifts that are transforming the global real estate market right now. The first is geopolitical conflicts, including wars in the Middle East and Ukraine, which have impeded the flow of global capital and boosted volatility, impacting inflation, commodity and energy prices, and interest rate policies.
The second generational shift is monetary policy—quantitative easing shifted to quantitative tightening with remarkable speed. “We think the Fed, having arguably raised [interest rates] too slowly and too late, is going to be reluctant to cut too early,” Reeves told Juniper Square. “They will want to see that the last mile in the inflation battle is truly won.”
However, with the Consumer Price Index (CPI) being relatively flat in October, CBRE does not expect the Federal Reserve to raise interest rates again this year. They recently predicted that the Fed could cut rates as early as March 2024, which could drive investment activity recovery by mid-2024.
The third shift is the impact of technology on real estate. Reeves says it will revolutionize real estate from “top to bottom,” but this transformation rides on data, specifically clean data. Reeves acknowledges an open secret of CRE: “We’re in real assets, right? So we have the worst data.” However, that situation must change fast if CRE wants to compete effectively with other private equity asset classes with superior data like equities and fixed income. CBRE has invested substantially in its data governance in recent years and urges others to do the same. As Reeves noted: “The time you have to spend on data cleaning is not the fashionable bit, but it’s the bit that’s so necessary.” And she’s impressed with the results her own investment managers are seeing. “I’ve seen more progress in the last 18 months [on data governance and digitization] in real assets than I have in the last 18 years of my career.”
The productivity gains promised by AI—another trend that Reeves believes will offset the economic impacts of an aging global population—depend entirely on good data governance. As Reeves succinctly put it: “Data is the new currency. The ability to analyze and make decisions off of the data is truly what will set the best investors apart going forward.”
No longer a recession but a slowdown
The long-heralded U.S. recession has somehow failed to materialize–and CBRE has altered their forecast to a slowdown, not a full recession. Reeves cited several factors informing this call, including the “underlying strength of the labor markets” and a “pent-up desire for experiential spending” persisting after COVID.
She described CBRE's position on inflationary policy as “higher for longer.” “In this geopolitical environment, it's going to just be that much harder to get that last mile from 3.5% inflation to 2.5%.”
Reeves also cited a factor not usually seen in economic forecasts: the power of pop stars. When asked when she expects the economy to slow, Reeves quips: “I think it will be the weighted average date of whenever Taylor Swift, Beyoncé and Madonna finish their world tours. It sounds like a joke, but these powerful creative artists and businesswomen are injecting such economic growth into the U.S. and global economy.”
She also praised the U.S. economy’s comparative resilience: “I'm seeing probably the best demographic picture of any major market globally” in the United States, says Reeves. “I’m seeing distance from some of the geopolitical tensions brewing. I’m seeing incredibly tight labor markets, consumers that are by and large robust,” as well as “the capacity for the Fed to cut [rates] and stay responsive.” While she has her team closely watching the U.S. banks and their substantial exposure to CRE debt, Reeves believes the Fed is well aware of the systemic banking risks after the global financial crisis and will make every attempt to contain any fallouts so they don’t infiltrate the U.S. banking system. “Everything I saw in the wake of Silicon Valley Bank convinces me that’s the approach [the Fed] is taking, and thank goodness, frankly.”
Welcome to the new normal, which is actually the old normal
Market conditions may feel familiar to you personally, but that doesn’t make them historically “normal.” Many do not appreciate how abnormally low (and for how long) interest rates have been until the recent hikes. Reeves offers some historical perspective: “I remember the '80s when interest rates were in the teens, inflation [rates] were in the teens. In that period, property yields used to be lower than bond yields because people preferred to hold corporate credit [versus] government credit. You'd rather have the lease to a major tenant on an office [building] than hold government credit.”
Reeves believes we’ve existed in an exceptional period for CRE and are starting to regress to a historical mean typified by the early 2000s real estate market.
“Everything changes every 10 to 15 years, so hold onto your hats,” she said. “The early 2000s are probably what many people’s assumptions about the role of real estate and real assets in a portfolio are based on.” Those assumptions include considering real estate as sitting between bonds and equity, and property returns “had to be attractive and creative relative to fixed income. Otherwise, why would you do it?”
What is happening across sectors?
Real estate may return to a semi-familiar (historically accurate) normal, but the U.S. market will still need to change significantly. While Reeves is an overall fan of U.S.-based CRE, she noted that the American office market lags globally in both sustainability and the office-WFH adjustment. She elaborated: Europe has “had more onerous sustainability regulations, buildings tend to be newer-built with better air quality, so the wellness factors that go into smart amenitized office are more present in [European] stock.” While return-to-office efforts in Asia and Europe have been smooth, the U.S. transition is still out-of-joint. “The U.S. market feels at the extreme, particularly those gateway coastal markets…have the biggest adjustment to go through,” she said.
Reeves does see an opportunity in building the offices of the future. In her estimation, the current supply of office meeting future requirements is so slim that there is a “phenomenal opportunity for brave value add-on or hearts-return people to either build it or profitably do those conversions.”
In the near term, Reeves is bullish on U.S.-based CRE across other sectors. She cited highly targeted portfolios like student housing and single-family rental (SFR), which enables her team to execute pinpointed strategies unavailable in the rest of the globe. She noted that retail, having survived the worst of the pandemic, has proven its resilience and might finally be trending towards fair value. “We really love U.S. residential,” she said, citing “the demographic tailwinds, the affordability issues, the need for professionally managed stock.” Digital transformation of residential only sweetens the pot in Reeves’ view. With the right technology, “you can take a portfolio of SFR...and you can manage it and lease it, the costs of operating it have come down. That's a beautiful position to be in.”
Reeves and her team also love logistics, with a specific long-range forecast in mind. “This is also a sector where technological disruption will hit both positively and negatively. Some people will be left holding assets that are maybe only 10 years old, have some obsolescence, or aren't quite keeping up with the tenant demand that's out there. Just as you would want to be in the best of the best office, you should want the same for logistics.” She offered specifics: “I'm talking about stuff like the ability to have the pallets pulled out by robots rather than people” in an Amazon warehouse. “You don't need to have the little narrow corridor for the forklift to go down, which means you can put 20% more goods in your warehouse. Well, does the floor thickness cope with that extra density? Does the roof cope with solar? Can you provide EV energy for your new EV fleet of trucks? There's a lot of technological change coming. What used to be pejoratively known as just sheds or boxes—simple industrial—is becoming more complex and needs a sophisticated manager to run it.”
Survive until 2025
The old saying, “May you live in interesting times”—a curse disguised as a blessing—certainly applies to today’s CRE global markets. Reeves said, “I think everyone’s waiting for price discovery and appraisals to move to get some liquidity back into the market.” Until that process starts, “survive until 2025” will broadly apply.