S&P Global – Real Estate Credit Outlook, 2024

The S&P Global Real Estate Credit Outlook for 2024 highlights several changes and key assumptions in the industry. One major change is the increasing negative rating bias globally, with the EMEA region having the highest proportion of ratings on a negative outlook at 31%. This is compared to 21% in the U.S. and 20% in APAC. As a result, downgrades are expected to outpace upgrades in 2024 due to rising borrowing costs and refinancing risks. Another change is the tighter access to capital, as higher borrowing costs and declines in equity prices make it more difficult for companies to secure funding. This has led to issuers seeking alternative sources of funding due to more restrictive bank lending. Slower economic growth is also putting pressure on the real estate industry, as cost-of-living pressures and lower consumer spending and confidence can impact the demand for real estate. Key assumptions for 2024 include a significant increase in borrowing costs, with higher interest rates expected until at least mid-2024. This will result in higher borrowing costs for real estate companies. Additionally, slowing demand is anticipated due to subpar economic growth, higher unemployment, and weaker job growth. This will lead to lower occupancy and slower rental growth. The risks around these assumptions include refinancing risk for office REITs, as options for refinancing become more challenging. Asset valuation is also a risk, as refinancing struggles may lead to asset sales at wider price discounts. Furthermore, if operating fundamentals weaken beyond expectations, downgrades could accelerate, particularly for REITs with exposure to office assets or significant near-term maturities.