Private Real Estate: From Peak to Trough – Where Are We Now?

June 04, 2024 | 2 Min Read

Executive Summary:

The Current State of Commercial Real Estate

  • Transaction activity has meaningfully slowed, exacerbating uncertainty around asset valuations. 
  • Despite valuation volatility, real estate fundamentals remain healthy across most property types. 
  • Compelling opportunities will emerge in 2024; however, the capital markets environment will be a large determining factor of performance.

 Is Private Real Estate Recovering from 2023’s Lows? 

2023 presented unprecedented challenges for commercial real estate, with higher-than-expected costs of capital, limited transaction activity and widespread uncertainty. Rising interest rates, combined with limited financing sources, put pressure on asset values. As cap rates expanded across property types, investors waited on the sidelines, aiming to predict when valuations were presumably “bottoming out.” And, as many sellers were unwilling to mark down their assets, a wide bid-to-ask spread was observed between buyers and sellers. As a result, many transactions in 2023 fell through, and a significant amount of dry powder remained on the sidelines. As seen in the charts below, 2023 marked the lowest transaction volume observed in commercial real estate across the 10-year period. 

Transaction Volume

Cap Rate Spreads vs. 10-Year Treasury Yield1

Effective Rent Growth
Indexed to $100

Cap rate expansion was widespread across all property types, albeit in different magnitudes, with the office sector experiencing the most negative impact. Rent growth, though dampened, generally remained positive across favorable sectors. We saw this translate to NCREIF Property Index (“NPI”) performance, as appreciation returns were negative every quarter of 2023; however, income returns remained positive during the same periods, proving generally strong real estate fundamentals.  

NPI Quarterly Returns

Finding Opportunity Amidst Challenges in Private Real Estate  

Turning to the million-dollar question we are all contemplating now: Have real estate valuations indeed bottomed out, or should investors continue to be cautious of catching a falling knife? Given healthy property-level fundamentals, we believe that the answer lies in the capital markets arena – namely the U.S. Federal Reserve’s rate moves for the remainder of the year. If the U.S. remains in a higher-for-longer interest rate environment, buyer discipline will be tested. If cap rates continue to expand or begin to stabilize, we will see an attractive entry pricing environment, especially for investors in search of value plays. Now, more than ever, asset quality, market fundamentals, manager selection and expertise matter most.  

We provide further insights and observations across real estate in our 2024 Real Assets Market Overview. Please complete the form below to receive an emailed copy of the report. 

This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.

The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future. 

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed. 

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein. 

Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. 

Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. 

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws. 

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. 

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein. 

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners. 

As of June 5, 2024

Recent Content

Insights | 3 Min Read

Why Are Infrastructure Managers Being Acquired?

Investment firms are looking to diversify their infrastructure offerings and serve as a ‘one stop shop’ for alternative assets.

Read the Blog Post
Insights | 5 Min Read

The Case for Private Infrastructure in the Modern Era

Learn where private infrastructure stands today and where it may be headed through 2024.

Read the Research Article

The Evolving Opportunity Set in Infrastructure Secondaries

Learn why secondary infrastructure transaction volume is primed for growth in 2024 and beyond.

Read the Research Article

We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More