Driven by Surging Interest Rates and Global Economic Instability
The latest data from CBRE reveals a sharp 51% year-over-year decline in global commercial real estate investment, plummeting to $142 billion in the third quarter.
This significant downturn was evident across all regions, with investment sinking by 53% in the Americas, 54% in Europe, and 31% in Asia-Pacific. The surge in interest rates across various countries played a pivotal role in this dramatic reduction in investment activity.
Specifically, investment in multifamily properties nosedived by 59% year-over-year to $37 billion in the third quarter, while industrial investment witnessed a substantial 44% decrease, totaling $32 billion.
Office investment experienced an even steeper decline, plummeting by 63% to $26 billion, reflecting weakened fundamentals and a notable lack of liquidity in this sector. Similarly, retail investment took a considerable hit, dropping by 35% to $25 billion during the same period.
Investment Downturn Hits the Americas Amid Interest Rate Hike
The commercial real estate investment landscape in the Americas witnessed a significant downturn, plummeting by 53% year-on-year to $86 billion in the third quarter, largely attributed to the surge in interest rates, tighter lending conditions, and apprehensions regarding an economic deceleration.
Multifamily properties emerged as the top investment choice, recording $30 billion in investment volume during Q3, marking a substantial 61% decline from the previous year.
Despite this, multifamily investments are anticipated to retain resilience due to the preference for renting over homeownership amidst escalating mortgage rates. However, certain markets face the risk of excessive development, while value-add properties may encounter challenges in refinancing next year.
Industrial sector investment experienced a 43% year-on-year decrease to $21 billion in Q3, despite sustained robust demand for industrial spaces, especially from e-commerce entities, which is expected to sustain investor interest in the short term.
Office sector investment nosedived by 63% year-on-year in Q3 to $12 billion. The sector faced the tightest credit accessibility for property acquisitions, and investors remained wary about future tenant demand.
Sellers, in some markets, are willing to accept lower prices for Class B and C office assets, stimulating some investment activity in the immediate future.
Retail investment saw a 31% year-on-year decline in Q3, amounting to $16 billion. While consumer spending exhibited resilience, the potential weakening of U.S. retail spending due to reduced savings and the resumption of student loan repayments may dampen prospects in the near term.
Nevertheless, the scarcity of new retail space additions is expected to mitigate any downturn in retail real estate fundamentals.
European Commercial Real Estate Investment Slumps for Seventh Successive Quarter
In the third quarter, commercial real estate investment in Europe endured a substantial decline, plummeting by 54% year-over-year to $36 billion, marking the seventh consecutive quarter of contraction. This downturn was primarily driven by escalated interest rates and sluggish economic expansion across the continent.
Office investment in Europe saw a staggering drop of 66% year-over-year in Q3, reaching $9 billion. Despite a comparatively higher rate of employees returning to physical office spaces compared to the U.S., numerous European enterprises are reassessing their spatial needs, resulting in diminished demand for lower-tier office properties. Nevertheless, there persists robust demand for prime office assets across several key markets.
Investment in European industrial properties also took a significant hit, declining by 55% year-over-year to $7 billion in Q3. The overall industrial vacancy rate witnessed a slight increase as expansion plans by e-commerce entities decelerated.
However, the average industrial rent continued its upward trajectory, showcasing resilience amid the broader economic slowdown.
European retail investment experienced a notable downturn of 52% year-over-year in Q3, amounting to $6 billion. Despite the presence of surplus savings among European consumers, persistent inflationary pressures and a deceleration in economic growth are anticipated to dampen consumer sentiment in the forthcoming quarters.
Multifamily investment in Europe mirrored the overall trend, dropping by 49% year-over-year in Q3 to $6 billion, marking the lowest quarterly investment total for the sector since 2013.
Asia-Pacific (APAC) Investment Remains Steady Amid Challenges
Despite global economic headwinds, investment volume in the Asia-Pacific (APAC) region displayed resilience, albeit with a 30% year-over-year decline to $20 billion in the third quarter, according to CBRE. The surge in retail and hotel acquisitions contributed significantly to this performance.
APAC’s office investment saw a sharp downturn of 61% year-over-year in Q3 to $6 billion, marking the lowest quarterly total since 2011. Repricing of office assets is anticipated in the near future, particularly in the Pacific and Hong Kong markets, reflecting ongoing market adjustments.
Industrial investment in APAC experienced a relatively modest decline of 9% year-over-year in Q3, amounting to $4 billion. The region witnessed a shift towards long-term leases over short-term ones, reflecting a strategic adaptation to prevailing market conditions. While Q4 may see subdued industrial investment activity, core funds are poised to focus on markets demonstrating robust rent growth potentials, such as Australia and Singapore.
Retail investment in APAC declined by 15% year-over-year in Q3 to $4 billion. Notably, significant asset acquisitions in Japan, Australia, and Singapore injected momentum into the sector, highlighting pockets of resilience amid broader challenges.
Global Commercial Real Estate Investment Forecast for 2024
Looking ahead to 2024, CBRE anticipates that persistent high interest rates and stringent credit conditions will continue to constrain commercial real estate investment activity, particularly in the initial half of the year.
Projections indicate that the total global commercial real estate investment volume for the upcoming year will likely mirror that of 2023, with a projected 5% decrease in the Americas, a 5% increase in Europe, and a more significant 5% to 10% increase anticipated in the Asia-Pacific region (APAC).
