The European commercial real estate investment market is in a slowdown, with no sector or market escaping the trend by the end of the first nine months of 2023.
According to the latest Europe Capital Trends report from MSCI Real Assets, the volume of completed transactions in Q3 fell 57% from a year earlier to €32.8 bn, the weakest activity since 2010.
Overall investment in 9M 2023 was only €119 bn, less than half the level of the same period in 2022. Transactions pending at the start of October, which are typically a good indicator of sales in the final quarter of the year, were at their lowest level since 2011.
Paris remained the year's top European investment destination, despite a slowdown in the market, with large deals helping to keep investment volumes down by only 21%.
Some commercial real estate sectors fared better, with sales of warehouses and senior housing remaining at pre-pandemic levels, while hotels were the least affected sector, with sales down only 11% from the previous year.
The office sector was the worst affected, with a record low number of properties sold in Q3, as investors are concerned about the obsolescence of buildings that are not best-in-class.
The office sector is seeing the biggest mismatch between buyer and seller pric expectations in Europe's largest markets (-36% in Germany’s A Cities, -28% for Central London and -22% for Paris), with sellers needing to cut their prices even further. This is due to the specific uncertainties facing the sector, such as the shift to hybrid working.
The transaction yield was at a five-year high in major German cities and Paris at the end of September, but had fallen back to 2012-2013 levels in Central London.
According to the MSCI Price Expectations Gap model, office prices in the UK and Germany, Europe's two largest markets, would need to fall by another 13-15% before buyers and sellers are willing to transact freely.
Rising borrowing costs and falling real estate prices in Europe have forced some property owners to sell assets, but distress is not yet widespread.
UK
Investment in UK commercial real estate fell sharply in Q3 2023, with volumes down 45% to €8.9 bn from a year earlier and the second-lowest number of properties sold on record.
For the first nine months of the year, deal activity was down 49% to €32.5 bn, and London ranked second after Paris as Europe's top investment destination, despite the number of buildings transacted falling to an all-time low.
One of the few bright spots in the UK market was industrial property, where investment volumes were above the pre-COVID five-year average. Transaction prices for warehouses in the Greater London region were 8% below their post-pandemic peak.
Germany
Commercial real estate investment in Germany slowed sharply, with deal volumes down 62% from a year earlier to €6.4 bn and the weakest activity in that period since 2010.
Germany remained Europe's second-largest market after the UK through the end of September, but the total value of transactions in the first nine months of the year was down 55% year-on-year to €20.8 bn.
Office prices in Germany's top cities have fallen by 10% since their peak at the end of 2021.
France
In France, commercial real estate investment in France slowed significantly, with deal volumes down 56% from a year earlier to €4.3 bn.
France remained the third-largest commercial real estate market in Europe, behind Germany and the UK, with investment activity of €19.8 bn, down 36% from a year earlier.
French institutional investors slowed their acquisitions in Q3 to the lowest level since 2014.
Four of the five largest single property transactions in Europe were in Paris, cementing its position as the top investment destination.
Nordics
Commercial real estate investment in the Nordic markets slowed sharply, with all four countries registering declines in investment volumes of at least 64%.
Sweden, the region's largest market, was ranked fifth in Europe at the end of September, but property sales fell by 56% to €6.2 bn.
Swedish institutional investors invested only €5.5 bn across the four countries in the first nine months of the year, down from an average of €13.0 bn invested annually in the previous five years.
Despite the slowdown, Stockholm remained Europe's fifth biggest investment market, even as transactions dropped 54% to €2.7 bn.
Netherlands
Commercial real estate investments in the Netherlands fell 63% from a year earlier to €5.5 bn, a slowdown particularly pronounced in Q3, with completed deals totalling just €1.6 bn (-67%).
As a result, Amsterdam dropped to 14th place in the ranking of Europe's top investment destinations, with volumes declining 68% to €1.2 bn.
The Netherlands also had the widest price expectations gaps for the office, retail and industrial sectors compared with the markets of France, Germany, Sweden and the UK.
