Heading into a new year, the U.S. commercial real estate industry finds itself in choppy waters amid fears of a recession, rising inflation, and interest rate hikes as market participants await a course correction. Challenges during 2022 including continued supply chain constraints, increasing labor costs and struggles in attracting talent are anticipated to endure through 2023. Combined with international and domestic geopolitical issues and market volatility, many believe during the near term, the U.S will experience a mild to moderate economic recession. Although inflation appears to have recently stabilized, it remains above seven percent, and the Federal Reserve has made clear its intent to continue raising rates until it sees a marked reduction in inflation nearer to its two percent target. Weakening fundamentals and higher cost of capital are anticipated to generally lower asset values. The good news is that for the most part, corporate finances are in good shape and having learned a lesson during the pandemic, employers will avoid extreme layoffs to avoid losing employees in a tight labor market. While consumer confidence is highly subdued, average household debt is low compared with the onset of prior recessions. Many anticipate that inflation will be significantly lower by the second half of 2023, setting the stage for falling interest rates and the beginning of a new cycle.

Recently the U.S. commercial property sector was spooked as two of the nation’s largest nontraded real estate investment trusts, namely the $69 billion Blackstone Real Estate Income Trust (BREIT) and the nearly $15 billion Starwood Real Estate Income Trust (SREIT), separately announced a limitation on withdrawals due to a surge in investor redemption requests that breached each REITs quarterly repurchase limit.  Although hospitality investments represent a small portion of each vehicle’s portfolio, many perceive the rush of investors seeking to liquefy assets as an ominous sign of developing economic headwinds.

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