The optimists who want to put the high interest rates and fewer property transactions of 2023 behind them might have to wait a little longer. According to PGIM Real Estate America’s 2024 Real Estate Outlook, things might not change all that much in the coming year.

According to Lee Menifee, the report’s main takeaway is “to adjust our expectations lower in terms of valuation declines.” Menifee, who is PGIM Real Estate’s Head of Americas Investment Research, told Connect CRE that as long-term interest rates held steady during the summer of 2023, it was believed that the property value declines were done.

But that wasn’t the case. “Unfortunately, bond markets had other plans for real estate,” he said.

The report shared the following:

Continued debt scarcity. Not surprisingly, less capital has put pressure on transaction volume, with “the 60% inflation-adjusted volume decline the most severe since the Global Financial Crisis.” PGIM analysts forecast continued declines in debt originations due to increasing lender caution and higher regulatory scrutiny following the spring 2023 bank failures.

Ongoing bid-ask standoff. While real estate is adjusting to higher interest rates, “expectations of buyers and owners (are) still far apart.” The report indicated that these expectations will remain until property values drop by another 10%.

“We are still searching for that spot where buyers’ and owners’ expectations are aligned,” Menifee commented. “The hike in long-term bond yields took us further away from that, rather than closer.”

Resilient revenues. Despite the economic headwinds, property revenues are still positive and will likely remain so over the next four years. “U.S. rent growth will decelerate, but generally remain positive, as newly built properties deliver and demand moderates,” the report noted.

Also positive is a “full-employment economy where wages are now outpacing inflation again, so tenants have the ability to continue to pay higher rents,” Menifee pointed out. This is true of all tenants, residential, retail and logistics tenants, especially those logistics tenants that are close to large population centers.

At some point, office rents should bottom out, Menifee said. “They are already quite low relative to pre-2020 levels, and we also expect office tenants to invest in space as a way to attract workers in this full-employment economy.”

More distress. With more than $1 trillion in commercial real estate loans coming due in 2024 and 2025, the report indicated that new-vintage and older multifamily properties will be impacted. Office, retail and lodging properties also won’t be spared.

But don’t expect a wave of foreclosures or give-backs either. Most lenders don’t have the ability or appetite to own or operate real estate. “We expect to see, and are already beginning to see, recapitalization events such as loan sales to other investors at discounts,” Menifee said. “We expect lenders to waive some loan conditions in exchange for principal paydowns.”

There will likely be additional investment opportunities in the form of “rescue capital.” Menifee commented that this could offer owners the necessary equity to make paydowns.

The crystal ball. Overall, PGIM anticipates a quiet start into early 2024 as investors figure out what’s next. “Later in 2024, we expect an increase in attractive investment opportunities to be available as debt pressures mount and would-be sellers become more motivated than they are today,” Menifee predicted.