A decline in commercial real estate prices is on the horizon, PIMPCO warns.

The real estate industry is facing global challenges and the rules of the game are changing due to a number of factors that could lead to an unprecedented drop in prices since the global financial crisis. Participants at PIMCO's first Global Real Estate Investment Forum in Newport Beach, California, are warning of this. The forum brought together hundreds of investment professionals from around the world to discuss the prospects, risks and opportunities of commercial real estate.

The major risks accumulating since the COVID-19 pandemic began in 2020 include a dramatic change in building utilization, rapidly rising interest rates, high inflation, banking crises in the U.S. and Europe, and now an imminent recession, notes Funds People. "This turbulence will put the rules of the game to the test and require a new approach to real estate investing. The commercial real estate sector is likely to deteriorate to an improvement in the cyclical outlook," warn François Trausch, CEO and chief investment officer of PIMCO Prime Real Estate, and John Murray, manager and director of the residential real estate team at that company.

Economic and market turbulence are creating opportunities for real estate investment. While this scenario may seem disappointing for investors, according to these managers, it could also be one of the best periods in decades for investing. They explain why. First, they believe there is the potential for a precedentless real estate industry, especially in the short term. "This includes new opportunities in high-yield debt as lenders exit, as well as in general and non-public distressed debt. We forecast a tsunami of loans to be repaid through 2025 - totaling about $1.5 trillion in the U.S., about 6,500 billion euros in Europe, and $1,770 billion in the Asia-Pacific region.

Trausch and Murray caution that all of this context requires a long-term view of the global economy and a detailed understanding of local market dynamics and caution against the risk of a global economic slowdown "Overall, we see a better outlook for high-yield debt and are cautious on equities." Keep up with all real estate information and the latest reports in our daily and weekly newsletters.

The world is moving in different directions: pay attention to the global economy and global markets when investing in real estate. One thing is certain, as Funds People notes: the pandemic has changed the way we rent homes, offices, commercial real estate and other sectors, and market trends will develop differently in different parts of the world. "For example, office buildings in commercial areas of cities like San Francisco are struggling because of remote work trends. However, enthusiasm for working from home was less pronounced in markets such as London, Singapore and other Asian capitals. There is also a difference in the U.S. between real estate funds (REITs), which have lost about a quarter of their value in 2022, and private market prices," say François Trausch and John Murray. They agree that these intertwining trends will create volatility and opportunities for the relative value of investments in four quadrants - public and private debt and public and private equities. "Patience will also be important as supply and demand will ultimately determine the long-term value of real estate. Land use regulation and high construction costs will reduce supply more than in any previous cycle, supporting long-term real estate securities," conclude participants quoted in the same Funds People article.