Green Street has revised upward its net operating income (NOI) forecast for cold storage, mall, and industrial while cutting its single-family rental (SFR) estimates, according to its recently released 2023 Commercial Property Outlook.
Higher cap rates (i.e., lower real estate prices) plus some relief on the interest rate front has improved the valuation picture for commercial real estate, according to its report, although “pricing is still about 10% expensive vs. long-term, investment-grade corporate bonds.”
Peter Rothemund, co-head of Green Street’s Strategic Research team, said that supply growth hasn’t been a concern and that tighter financing and lower property prices will reduce starts.
“Sectors with significant construction have solid demand,” according to the report. “Office demand is weak in aggregate, but healthy for A+ new product. Lower quality buildings will suffer.
Green Street said that manufactured home and single-family rental are projected to have the strongest growth through 2026.
“The manufactured home segment in particular is well positioned—positive demand and virtually nothing new being built,” Green Street said.
The work-from-home trend is weighing on the office sector. And while self-storage rents have had an epic run, there’s little growth expected from that sector from here.
Fundamentals Take Center Stage
Green Street’s CPPI, an index of unlevered private market property pricing, has fallen 13% this year.
“With rates pulling back recently, earnings growth and fundamentals could take center stage in 2023,” according to the report.
REIT prices are off 23% this year and trade at an average discount of 7% to Green Street’s estimates of private pricing.
“Unless rates at the long end of the curve go down some more, property prices are likely to keep slipping, perhaps by 5% in 2023,” according to the report.
In private-market returns, ground lease, manufactured home, net lease, and gaming offer the best value and office, life science, single-family rentals and apartments offer the worst.
First Half to See a ‘Brief Contraction’
For the overall economy, Rothemund said personal consumption has been resilient so far, but the full impact of the Federal Reserve’s tightening is likely to cause a brief contraction in the first half of next year.
Green Street forecasts 0.5% GDP growth for 2023 and average job growth of less than 100,000 per month.