U.S. Capital Markets Glide Path to Clearer Skies

This period of dislocation and challenge offers a critical opportunity to proactively shape portfolios and investment strategies for both the present and the future. The path ahead will not be without turbulence; it is therefore just as important to address the near-term challenges as it is to conceptualize the opportunities that lie ahead.

02

03

01

Recession Still on Horizon: The U.S. economy remains resilient despite facing one of the most dramatic rate hiking cycles in modern history. We now expect a recession to take hold later in 2023. Fed pivots as labor markets ease, wage growth cools, and inflation approaches target.

Capital Markets Poised to Thaw: Much of the outlook rests on the shoulders of monetary policy and the path towards a more stable interest rate environment; once that stabilizes, flows will improve.

Inflation Remains Stubborn: Progress has been made on reigning in inflation, but key components remain sticky. The path to the Fed’s Target will take more time to achieve and will continue to strain credit conditions.

Glide Path to Clearer Skies: Key Takeaways

04

05

Crux of Story - Higher for Longer: Interest rates will have both stabilized and normalized higher, which means cap rates will continue to face upward pressure. Property values will decline in the 25% to 50% range peak-to-trough, with significant variation depending on property type, quality and geography.

Implications for Investment Strategy: With historic amounts of debt and equity capital on the sidelines, the next chapter offers ample deployment opportunities across the risk spectrum. As macro and financial market conditions inflect, fundamentals and capital markets for most sectors will rebound swiftly thereafter. The office sector will face protracted weakness unwinding over the next 10 years, particularly in the Lower Quality Tier.

4