PERE’s punchiest takes on 2023

Four of our most memorable commentaries this year tracked the trajectory of the private real estate industry from its rocky start to a more stable finish.

After a tumultuous 12 months, the first half of the year – punctuated by high-profile defaults, the US regional banking crisis and negative headlines about commercial real estate – already feels like the distant past. As the year winds down, the troubles afflicting the private real estate industry are far from over, but the outlook for fundraising and transaction activity has begun to improve – albeit with echoes of 2022’s end-of-year narrative.

Below, four of this year’s Friday Letters illustrate one of the most challenging years for the industry in recent memory.

The real estate downturn stands to get worse

During the first quarter, real estate transaction activity had already hit the skids because of escalating rate hikes beginning in H2 2022. Then came the US regional banking crisis triggered by the collapse of Silicon Valley Bank and Signature Bank. The resulting market shocks spilled over into Europe, leading to an emergency deal in which Swiss banking giant UBS acquired troubled rival Credit Suisse. The transatlantic banking turmoil further exacerbated the property market downturn, impacting everything from borrowing costs to pricing and the availability of financing – making the prospects of a mid-year recovery even dimmer. Indeed, hopes for a 2023 rebound have now come and gone.

Real estate goes from banking victim to villain

The spotlight on commercial real estate woes intensified as high-profile business leaders and economists alike raised concerns that the industry, facing a $2.5 billion wave of loan maturities, could worsen a banking crisis. Twice during the same week in March, PERE heard references to a negative ‘feedback loop’ where a pullback in lending activity leads to an uptick in loan defaults. Paul Ashworth, chief US economist at Capital Economics, warned more defaults would further depress capital values, increase loan-to-value ratios and force lenders to increase their loan loss provisions. Meanwhile, at PERE’s Real Estate Debt Funds roundtable, managers agreed that declining values were causing debt providers to become even more conservative in their lending activities.

Private real estate looks bleak today, but opportunities are around the corner

By late 2023, the negative sentiment surrounding real estate for much of the year had begun to shift. At the PERE America Forum in New York, multiple investors talked about an eagerness to put capital to work despite facing liquidity constraints. Julie Donegan, head of real estate at the California State Teachers Retirement System, said: “2024 will probably be a good vintage year,” and talked about selling assets amid expectations that the pension’s annual real estate investment activity would drop by half next year. Meanwhile, Sajith Ranasinghe, head of real estate at the Church Pension Group, said a distribution today was worth more than it was two years ago. Capital that does come back to the investor has a good chance of being redeployed into private REITs, which have lost significant value since rates first spiked, he added.

Brown-to-green funds offer a much-needed narrative for adding value

Despite Q1-Q3 2023 representing one of the worst fundraising periods spanning the first three quarters of a year, one area of fundraising momentum had emerged with brown-to-green funds. Such products offered real estate investors a new variation on value-add investing, while also tapping into the growing interest in improving energy efficiency and lowering carbon emissions in assets that otherwise would be subject to a so-called brown discount. As of late November, PERE counted six dedicated brown-to-green vehicles launched in 2023 – five of which are focused on Europe, one on Asia-Pacific.

Has private real estate turned a corner, or are we simply hearing a repeat of 2022’s end-of-year narrative around an imminent recovery? We do not expect it will take many months into 2024 to find out.

And that’s a wrap for our 2023 commentaries. Look out for PERE’s next Friday Letter on January 5.