Last year was not a good year for investment in commercial real estate. While the full-year figures are not yet available, the picture emerging from those from Q3 2022 is troubling enough.
Compared with the same period a year ago, which itself was hardly a stellar period for commercial property investment, global deal activity was down 30% to $236.2bn, according to MSCI, and that figure actually flatters activity in some parts of the world. While in the Americas, deal volumes dropped by 21% in the third quarter, in Europe, the Middle East and Africa (EMEA), the decline was a whopping 44% and in the Asia-Pacific region, activity fell by 38%.
The question is: did the decline continue in the fourth quarter – and with fears we are teetering on the brink of a global recession, what is likely to happen this year?
Tom Leahy, executive director at MSCI Research, attributes the weak Q3 performance to a combination of factors.
“Higher financing costs driven by rapid rises in interest rates and concerns over economic growth constrained global acquisitions of commercial property in the third quarter,” he says.
Unfortunately, there is no sign of these challenges abating any time soon. More worryingly still, we haven’t seen the worst of the impact yet.
According to Leahy, the “outlook for global property investing deteriorated throughout 2022, but the lag between macro events and the direct property market means the impact of these changes has only more recently started to feed through”.
That would not seem to augur well for 2023, but there are other factors at play that may at least offer a silver lining.
Nobody is pretending that we are in a bull market, but the latest research from multiple property sources indicates that investment volumes are actually better than expected. In its latest update, Savills points out that, as of the end of November, volumes had nudged above the £50bn mark, just 7% below the total achieved in 2019.
“At mid-year, we expected the 2022 total to be around the long-run average of £46bn, so the investment market has surprised on the upside of expectations,” says Clare Bailey, director, commercial research, Savills.
Interestingly, the investment split has changed. Office volumes are as bad as they were in 2020 at the height of the pandemic and made up just 25% of the total at the end of November, a historically low level. Investment in retail remains highly suppressed and industrial fell off a cliff compared with 2021. However, alternatives saw their share rise to 36% of the total investment.
CBRE’s figures on equity targeting London offices are also revealing. According to the firm, equity targeting London offices has fallen below trend levels to £33bn, down £3bn from the level recorded in H1 2022.
“Despite having the capital available, not all investors will transact in the current market – we estimate approximately 30% of equity interested in London would transact in current market conditions,” it says. “Volumes are likely to be more constrained in H1 2023.”
John Knowles, head of national capital markets at Colliers UK, thinks that some commentators are unduly pessimistic, both in terms of property and the wider economy. “It’s not as dire as everybody thought. If you remember, offices were going to be absolutely terrible and nobody was ever going to go to the office again,” he says.
“Actually, what has transpired is that most businesses decided what they should do is upgrade their offices to provide better facilities for staff and become more ESG-compliant. There’s been lots and lots of demand for decent new buildings. If last year was like 2008, this year is definitely not 2009 because there are lots of people with lots of money and lots of liquidity out there, be that debt or equity, that would like to own real estate.”
However, Knowles does agree that investment volumes are likely to remain suppressed in the first half of 2023 due to a fall in capital values and nobody wants to be seen as the fool who calls the bottom of the market only to see values fall further. “No one’s got any idea what the price should be,” he says. “They’re feeling their way around and are a little bit in the dark,” he says.
Walter Boettcher, head of research at Colliers, believes that the situation will change quickly, just as soon as it is clear where interest rates will land, inflation starts coming down and we start getting some less pessimistic statements from the Bank of England. “As soon as we see a significant turn in inflation and as soon as the Bank of England gives us some positive forward guidance, I think the markets will turn far more rapidly than people might expect,” he says.
“That’s probably the main reason that I’m optimistic for 2023. It’s almost going to work out as a mirror image of 2022 in that 2022 started off very strong but then in June the pricing really came off noticeably and sentiment shifted really quite dramatically. The autumn wasn’t really helped by the Truss/Kwarteng episode, which finished off sentiment.”
Looking ahead six months, he adds: “I think that by mid-year, price discovery should be well and truly complete, especially if the economy fares slightly better than people think. Then the second half of the year could mirror image the first half of last year and we’ll get a really strong finish because. The weight of capital is there.”
What everyone will be asking themselves is whether it will be deployed – and on what.
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