Global Real Estate Perspective November 2023
Market conditions stabilizing but set to remain challenging into 2024
Explore property sectors and the outlook for global real estate markets
The challenges facing the global economy continue as we approach the end of 2023, from a still high but falling rate of inflation, to monetary tightening by many of the major central banks, to signs of slowing in labor markets. Cyclical and structural uncertainty are weighing on occupier demand as companies review their portfolios and take longer to make decisions, while the high cost of capital and conservative underwriting from investors are slowing capital flows.
The effects of heightened uncertainty are reflected in the office sector, particularly in markets where the cumulative economic impact of significant policy rate increases is still building. Global leasing volumes in the third quarter were on a par with the levels seen in the previous three months, but 6% lower than a year ago and 24% below the pre-pandemic third quarter average. Vacancy rates increased as positive net absorption in Asia Pacific was offset by declines in North America and Europe. Activity in the logistics sector also cooled in North America and Europe, with longer decision-making as occupiers reassessed portfolios.
Despite slowing economic growth, a recovery in international travel and resilient consumer spending have supported retailer sentiment and hospitality. Challenging conditions will persist into 2024, but we are anticipating greater stability to emerge through the next year with expectations for lower inflation and the start of the interest rate cutting cycle.
Global Real Estate Health Monitor
Higher rates and recession risk will shape investment through next year
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The fluid economic climate continues to influence central banks, and consensus expectations are that rates will remain higher for longer to combat inflation. The rising costs of debt and volatility in indices are influencing lender sentiment and market dynamics globally, and shifts in lending costs have now firmly taken hold in most markets. However, debt markets are still liquid and the availability of credit is solid, albeit at an elevated cost of capital. Loan originations continue to be balanced and diversified across lender types, and alternative lenders are emerging and seeking to provide financing solutions throughout the capital stack.
Price discovery continues in the real estate capital markets. Asset prices have undergone significant adjustments as a result of shifts in the economy, rates and lending markets. However, amid elevated rates, gains in bidding dynamics this year have levelled off in recent months, and the bid-ask spread is holding steady. The U.S. is furthest along in its price adjustments and valuations are now shifting across most sectors and markets in Europe and Asia. The constrained transaction market, especially for offices, is limiting pricing data points. We expect the bifurcation across property sectors and markets to be pronounced as improvements continue.
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