EUROPEAN OUTLOOK 2024

Commercial real estate - investment

Given the context of sluggish and measured growth, coupled with elevated interest rates and stricter credit conditions, we anticipate that investment will continue to show restraint in the latter part of 2023. 

Slower price discovery: the diminished level of transactions in numerous markets has led to a slower phase of price determination, particularly for the office sector. In contrast, there are clear indications of swifter price adjustments taking place in the more liquid markets, such as in the UK and the Netherlands. 

Ongoing price adjustment: Yields in all sectors are expected to expand further as the increased costs of debt persist throughout the year. Projections indicate that office yields will now witness the largest outward movement with yields moving out by +166 basis points (bps), logistics yields by +145bps, and retail yields will move out by approximately +87bps by 2023. 

Quarterly market shifts hidden behind year-end numbers: yields are expected to peak in Hl 2024. With the expectation that Central Banks will reduce rates in the third quarter of 2024, we can expect to observe yield compression in certain markets, returning yields to levels akin to those observed at the close of 2023. 

Property values to inflect in Q3 2024: aligns with the timing of the economic rebound and the effects of reaching peak interest rates, followed closely by the commencement of rate cuts permeating the economy. 

Occupier activity dynamics

European logistics occupier activity, after peaking in mid-2022, has decelerated in 2023, aligning with pre-pandemic levels. While economic factors contribute to the slowdown, operational cost emphasis prompts businesses to upgrade to new logistics spaces. Anticipated stabilisation in business confidence signals a positive turn, with 2024 take­up volumes expected to reach pre-pandemic levels. 

Shifts in supply and development

Vacancy rates have started increasing as demand slows, and new development supply enters the market. Speculative development is expected to slow due to cautious approaches by developers, aiming to prevent market oversupply. Redevelopment and refurbishment options gain traction, addressing demand where existing stock is older or limited speculative development is available. The pace of rental growth is slowing, tenant incentives become more common in lease negotiations, as landlords seek to secure income amid a slowdown in occupier demand. This trend may begin to affect headline rental growth. 

Investors patiently awaiting pricing stabilisation

Quarter-on-quarter uplift in investment volumes is noted in certain markets like the UK and Germany in 03 2023. Expectations of a more meaningful recovery in investment activity are tied to sustained confidence in the logistics and industrial sector, with different capital strategies emerging based on value-add or opportunistic approaches.