Pimco - Real Estate Reckoning

The foundations of the global commercial real estate market are shifting. Since 2020, a confluence of factors – a dramatic shift in how buildings are used, the fastest surge in interest rates in more than 40 years, bank failures in the U.S. and Europe, and now a looming recession – could prompt price declines not seen since the global financial crisis 15 years ago.

This upheaval will challenge rules of thumb and require a fresh approach to real estate underwriting. Over the cyclical horizon, commercial real estate dynamics are likely to get worse before they brighten.

For investors, this may seem daunting. But it also could be one of the best periods to deploy capital in decades.

In the near term, we see unprecedented potential in real estate debt. This includes new senior origination opportunities as lenders retreat, as well as distressed public and private debt. We foresee a tsunami of real estate loans maturing through 2025 – including at least $1.5 trillion in the U.S., about 650 billion euros in Europe and $177 billion in Asia-Pacific. In addition to the target-rich opportunity set in debt, we believe in positioning portfolios for select equity investments in sectors with strong secular tailwinds, such as residential real estate, logistics, and data centers.

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