Investors now estimate the downside risks in the commercial real estate market to be higher than at the end of 2021. Recovery is only expected after the first half of 2024.
This is stated by ING Research in its Commercial Real Estate Outlook.
The increase in interest rates in 2022 has rapidly reduced demand for commercial real estate. Investors want to pay less for real estate. Only after the first half of 2024 will real estate prices have been adjusted to the higher interest rates and increased risk perception of real estate investors in such a way that there will be a recovery. The timing and pace of the recovery differ per segment, due to the different structural trends in logistics real estate, shops, homes and offices.
Market hit hard
The significant increase in capital market interest rates in 2022 has reduced the demand for commercial real estate. For example, the investment volume (the total value of all investment transactions) on the real estate market fell by more than 60% in the first half of 2023 compared to the same period in 2022.
‘Investors are currently still reluctant to make purchases in the commercial real estate market. Due to the rise in interest rates and major economic uncertainties, they are no longer prepared to pay the current market prices. So far, the prices of larger transactions in particular have fallen considerably, but the price drop for smaller transactions has been much lower. However, further price declines are also expected to occur in this part of the market before investor demand picks up again,” said Mirjam Bani, Commercial Real Estate Sector Economist at ING Research.
Three developments
ING expects further price declines in the commercial real estate market in the first half of 2024. Although the possibility of slightly lower interest rates may cause upward price pressure, there are three developments that will continue to exert downward pressure in the near future.
Investors are not prepared to pay current prices due to higher interest rates and increased uncertainties: Interest rates and economic uncertainties have increased recently. Cooling down of the economy is more visible: the significant increase in capital market interest rates has a delayed effect on the economy and slows down economic growth. Problems with refinancing are present but limited: real estate investors whose financing expires will look for refinancing. This will not always work, due to the higher financing costs and lower collateral value (as a result of lower real estate prices). This could increase the number of forced sales and thus increase downward pressure on real estate prices.
Structural scarcity
Although the real estate market is expected to cool further in the first half of 2024, the structural scarcity in the market for rental properties and logistics real estate is putting a floor under prices in these segments. And in the office market, easily accessible, sustainable offices remain popular due to the limited supply. We therefore expect relatively smaller price decreases in these segments.
Recovery second half of 2024
In ING Research’s base case, we assume that the commercial real estate market will reach the trough in price levels in the second half of 2024. Important assumptions here are that capital market interest rates will then be slightly lower than now and the Dutch economy will be able to avoid a long-term recession.
However, in addition to the above general developments, the markets for residential real estate, offices, shops and logistics real estate have different structural trends and therefore each have their own dynamics.