Executive Summary

We are pleased to present our 2023 House View for North America. This publication is produced each year and serves two essential purposes. First, it highlights our outlook for the U.S. economy and the commercial real estate (CRE) sector including significant trends and opportunities. Second, it asserts our investment stance and provides a forward-looking framework regarding our investment themes and strategies. The following includes several key points from the report:

1. Against a backdrop of softening economic growth and intense monetary hawkishness by central banks around the world to combat inflation, we maintain our belief that a U.S. economic recession will occur in 2023.
2. Inflation continues to run above average and remains a major economic headwind for the U.S. Therefore, a period of peak interest rates is likely to continue into 2023, with the Federal Funds rate set to rise above 5%.
3. Despite a weakening economic and financial environment, the U.S. labor market remained ostensibly tight even into the latter half of 2022. In 2023, we believe the labor market will moderate towards a healthier equilibrium and employment growth should slow following higher interest rates as well as declining consumer spending in the event of a recession. The unemployment rate will increase, albeit less than during previous recessions given shifting demographics of the labor market.
4. The COVID-19 pandemic had many far-reaching effects, but one of the most profound was the force by which the world so quickly pivoted to a path of “deglobalization,” thus leading to new investment opportunities around onshoring and nearshoring.
5. CRE market fundamentals in the U.S. have been solid over the last two years, following a period of robust leasing activity and strong rent growth in several sectors including multifamily, industrial, data centers and life sciences. However, we do expect rental growth and absorption to slow as the economy cools in the coming months.
6. The capital markets are under intense pressure as the Federal Reserve (Fed) continues its efforts to raise interest rates to fight inflation and, as a result, real estate capital values finally started to decline in Q3 and Q4 of 2022. We expect this to continue through the first half of 2023 and we could see values fall further in the order of 10-20% depending on asset and market. Further, we may see the assets that experienced the greatest run up in value experience the steepest declines, simply because of the very low cap rates that were used to determine their peak values. To note, we are seeing signs of reversal in the 10-Year Treasury, ahead of a decline in the Federal Funds Rate.
7. Historically, hawkish monetary pivots by the Fed usually precede periods of weaker property prices, and this cycle’s price declines will likely be exacerbated given NCREIF ODCE’s recent period of record performance.
8. An impending CRE value correction may create compelling investment opportunities beginning in 2023 and into 2024, potentially resulting in a brief period to acquire assets below replacement cost.