U.S. Macro Outlook: Mild Recession ≠ Pleasant

CUSHMAN & WAKEFIELD RESEARCH U.S. Macro Outlook

RETAIL

as tenant demand recoils amid tougher economic conditions. For context, the vacancy rate during the Great Recession rose more than 250 bps to a peak of 10.2% in 2009, so this downturn is expected to be much less disruptive than past cycles.

Many investors in this space can contribute to expanding and upgrading the housing stock in undersupplied markets while securing income streams that are relatively less volatile; even in downturns, people need to live somewhere. 2. Aging demographics and the continued advancement of medicine are growing the pharmaceutical, biological sciences and R&D fields. Novel scientific discovery requires collaborative in-person work, supporting a growing need for space among life sciences firms. This space includes high-tech industrial and office-like lab-space assets. Many firms co-locate to capitalize on a shared, skilled labor pool and thus have well-established clusters across select U.S. cities. 6 We see these markets—as well as newcomers like Atlanta, Austin, Detroit-Ann Arbor, Houston, Phoenix and Salt Lake City—as having tailwinds amid a broader economic softening. 3. Commercial and consumer usage of data and cloud services has grown at a rapid rate, doubling global data traffic from 2018 to 2022. The growing demand for digital storage is a direct driver for the construction of data centers. Whether it be Fintech or Insurtech or Healthtech, all industries are becoming more technology-centric and require ever greater data capacity for operations. Well-established markets (like Northern Virginia, Atlanta, Chicago, Silicon Valley, Dallas and Phoenix) have thrived to the point of record-low vacancies in 2022. However, limited available land and power in these established markets are driving interest in secondary and emerging markets like Portland, Austin, Columbus, Denver, Las Vegas, and greater Los Angeles. 4. Healthcare spending has been on a continual upward trend in the U.S., with Center for Medicare & Medicaid Services projecting that spending could exceed $6 trillion by 2028. Per capita spending has similarly grown, with latest estimates suggesting an average of $12,500 spent per year, driven by many of the same demographic trends as life science. The growth of Medical Office Buildings (MOBs) are a direct beneficiary of this, as patients seek more accessible points of care for a variety of specialties. As large healthcare systems have struggled in the post-pandemic against labor shortages, supply chain issues and rising costs, growing opportunities for off-campus and more nimble specialized clinics have opened CRE opportunities across the U.S. Other medical real estate offshoots, like Medtail, are growing in response to the same dynamics. 6 Such as Boston, Chicago, Denver, Greater Los Angeles, New Jersey, New York, Philadelphia, Raleigh/Durham, San Diego, the Bay Area, Seattle and Suburban Maryland.

NICHE/ALTERNATIVES

Resilience Attracts Diversification In the past few years, investors have increasingly flocked to CRE as it becomes more institutionalized globally. Niche assets have likewise become more favored as they show resilience from cyclical movements and offer relatively compelling risk adjusted returns. These sectors have also seen relatively less institutional investment activity over their maturation cycles, so their investment space allows for other investors to capture some market share. In the last few years, this class collectively overtook retail and hotel in terms of annual dollars invested, commanding more than $264 billion of investment sales in 2021 and 2022 combined. Even this understates the degree of investor interest, as life sciences, data center and single-family 5 figures are under-represented in traditional go-to datasets.

NICHE ASSETS DRAW INCREASED INTEREST FROM INVESTORS INVESTMENT VOLUMES IN NICHE PROPERTY TYPES

$100 $120 $140 $160

25%

20%

15%

$0 $20 $40 $60 $80

10%

5%

0%

Niche Asset Volumes (Billions)

% of Total Sales

Some of the attractive fundamentals these asset types provide fall into several categories: 1. Structural imbalances in the housing market, delayed rates of homeownership, and more recently, higher mortgage costs are pushing aging Millennials into single-family rental and built-for-rent (SFR/BFR). As single-family renters are unlikely to revert to apartment-living, there is likely to be resilient demand for this growing asset class, even in the face of a mild recession. Source: MSCI Real Capital Analytics, Cushman & Wakefield calculations. *Note: Data centers, life sciences and single-family related subsectors are are likely under-represented in the above chart.

5 Such as single-family rental (SFR) and built-for-rent (BFR).

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