Slowly but surely, fears of a recession are fading from investors’ minds. Inflation is falling faster than just about everyone expected, and the path to a ‘soft-landing’ seems a lot clearer. Somehow, we even managed to shake off a banking panic earlier this year, thanks to aggressive ring-fencing actions and deposit backstops by policy makers.
Among the biggest risks that remains is in commercial real estate, where mass defaults have the potential to cause shockwaves throughout the economy. The epicenter is in office real estate, where remote work policies and evolving urban populations have pushed vacancy rates higher and property values lower. Those occupancy issues are mostly limited to office, but other issues like higher interest rates and tightening lending policies are more widespread.
As a result, Real Estate has been steadily underperforming the rest of the market since the Fed initiated its monetary policy tightening actions last year. The weakness pushed the sector to multi-decade lows.