A clear flight to quality is emerging as Europe’s corporate world increasingly focuses on premium office space, according to Chris Brett, head of capital markets Europe at global advisor CBRE.
‘The leasing market for prime office stock is the strongest it has been in a long time,’ Brett told PropertyEU. ‘We see tenants focusing on prime, green assets aligned with companies’ sustainability targets and providing amenities to improve staff wellbeing. These types of assets are highly sought-after but the offices that do not meet these requirements are having a hard time.’
As such, the gap between prime and secondary offices is expected to increase over the next few months, with investment activity forecast to slow down further for those assets that do not tick all the boxes. ‘The occupational market is changing and that is having an impact on prices for a certain type of offices. But the best offices in any cities will continue to see great tenant demand.’
While investment into commercial real estate was at record levels in the first part of 2022, it became more subdued in H2, with a number of transactions falling through as a result of rapidly increased borrowing costs. With central banks around the globe focused on bringing inflation under control, CBRE believes it is likely that interest rates will keep on ticking up for now. Many investors are currently on the side-lines, carefully analyzing the impact on pricing before committing capital to the market.
‘The first half of 2022 was the strongest we have ever seen, then in late spring we started to see and feel a change in the market initially driven by US banks which held back lending to the real estate sector,’ said Brett. ‘This changed the liquidity and started to have a wider impact on the market, and while deals still happened, they were mostly the ones already in place. We started to see and feel this change first in investors’ appetite and secondly in pricing, and we are still in the phase of price discovery.’
Real estate fundamentals however remain strong, and investors’ appetite is still there, although many are adopting a wait-and-see approach for the moment. Brett: ‘While we see and feel a tough time now, I believe this is only temporary, once there is more price discovery, we will still see plenty of capital coming into the sector.’
Some segments are running at a different pace. Price discovery in the logistics sector has been more accentuated, with the benefit that deals are going through once again although at a slightly different price point than in Q1 or Q2. ‘The success story in the logistics sector continues. We see huge demand from occupiers, which in turn translates into a growth of the capital looking to enter the sector,’ commented Brett.
Retail has also been a net beneficiary after the pandemic, he added. ‘The type of retail that survived Covid has proved to be more resilient. This is a sector that has got the attention of a lot of investors today. And there is enough demand to be confident that it will continue in 2023.’
Brett expects to see some distress in 2023 as a result of difficult market conditions coupled with falling prices and the rising cost of borrowing. ‘Those investors who cannot hold through the cycle will struggle, either because they cannot afford the debt repayment or because they need to refinance their debt at an unforeseen time.'
Large investment managers may also become distressed owners, he added. ‘Many institutional investors over the past years have become overweight in terms of the real estate they hold versus cash or bonds. This in itself is creating a problem, because it is linked to capital redemption. If the institution does not have the capital to match redemptions, it is forced to sell, possibly at a lower price.’
