Report: Sharp Decline in CRE Investment Globally Signals Challenging Times Ahead

CalSTRS, California State Teachers’ Retirement System
Photo by Sean Pollock on Unsplash

Global commercial real estate investment faced a significant setback in Q1 2023, with a staggering 55 percent year-over-year drop, amounting to a mere $147 billion. The Americas, Europe, and Asia-Pacific all experienced substantial declines of 56 percent, 64 percent, and 20 percent, respectively, according to a recent study by global services firm CBRE. This downturn can be attributed to a combination of high interest rates, stringent credit conditions, and a looming moderate recession in the United States. Despite these challenges, experts anticipate a gradual recovery later in the year as inflation subsides and economic uncertainties ease.

During Q1, investment totals for all property sectors witnessed a year-over-year decline. Among these, the multifamily and office sectors were hit the hardest, experiencing a plummet of 64 percent, while the retail sector fared slightly better with a 32 percent decrease.

The Americas, as a region, encountered a 56 percent year-over-year decline in investment volume, amounting to $86 billion in Q1. The primary culprits behind this decline were high interest rates, strict lending conditions, and an overall uncertain economic outlook. Within the Americas, the multifamily sector attracted the most investment, albeit with a 64 percent decline to $25 billion compared to the previous year. Although the multifamily fundamentals remained robust despite slower rent growth and increased vacancy rates, rising debt service costs may lead to distress in certain value-add properties throughout the year.

Industrial investment in the Americas witnessed a 49 percent year-over-year decline, amounting to $23 billion. However, the sector continues to attract strong investor interest due to favorable secular trends, such as the growth of e-commerce and the re-shoring of manufacturing operations. Additionally, a decrease in new construction projects is expected to bolster industrial fundamentals in the coming years.

The office sector in the Americas experienced a staggering 71 percent year-over-year decline in Q1, reaching a mere $11 billion. This decline can be attributed to uncertainties surrounding future occupier demand and tight credit conditions. While investors still exhibit interest in high-quality office assets, Class B and C properties are likely to face challenges in the medium term.

Retail investment in the Americas saw a 32 percent year-over-year decrease in Q1, amounting to $18 billion. However, almost half of this total stemmed from a single transaction: the private takeover of Store Capital REIT’s portfolio for $8.5 billion. Excluding such entity-level transactions, retail investment volume fell by 53 percent year-over-year. Despite relatively strong retail fundamentals, the sector may face headwinds as consumer spending weakens throughout the year.

In Europe, commercial real estate investment experienced a 64 percent year-over-year decline in Q1, reaching a total of $37 billion. Rising interest rates and economic uncertainties played a significant role in this downturn. The office sector in Europe faced a 74 percent year-over-year decline, amounting to $9 billion in Q1. Although the return to office has been relatively strong, Europe has witnessed a divergence in the office market, with investors primarily targeting higher-quality assets.

Industrial investment in Europe declined by 70 percent year-over-year, reaching a total of $6 billion in Q1. Despite a slowdown in leasing activity, investor demand for industrial properties is expected to persist due to the overall strong fundamentals in the sector.

European retail investment experienced a 46 percent year-over-year decline in Q1, amounting to $7 billion. While high inflation continues to burden consumers, an increase in international tourism may provide a boost to the sector.

Multifamily investment in Europe experienced a significant decline of 63 percent year-over-year in Q1, reaching a total of US$8 billion. This decrease can be attributed to the impact of rising debt costs, which dampened demand in the sector. Despite this setback, CBRE remains optimistic about the resilience of the multifamily market, citing strong underlying fundamentals that are expected to support its recovery.

Meanwhile, the Asia-Pacific (APAC) region saw a more modest decline in investment volume, with a 20 percent year-over-year decrease to US$24 billion in Q1. The presence of robust investment activity in Japan and mainland China helped mitigate the decline, positioning APAC as the region with the smallest drop in Q1 investment volume among the three global regions.

In terms of the office sector in APAC, Q1 witnessed an 18 percent year-over-year decline in investment, reaching US$11 billion. Notably, Japan and mainland China accounted for the majority of office investment in Q1, with investors showing a preference for Tier 1 cities in these countries. Given the relatively high rate of return to office work in the region, investor interest in APAC office assets is expected to remain strong.

Industrial investment in APAC faced a more significant decline of 43 percent year-over-year in Q1, amounting to US$3 billion. This decline can be attributed to the limited availability of prime assets and a slowdown in e-commerce growth. However, markets with low vacancy rates, such as Japan and Australia, are likely to continue attracting investor interest throughout the year.

On a positive note, APAC retail investment experienced a 12 percent year-over-year increase in Q1, reaching US$5 billion. This growth was primarily driven by deals in Singapore and Hong Kong. The anticipated increase in regional tourism is expected to further boost prime retail assets in major cities, capturing the attention of investors.

Looking ahead, CBRE predicts that a deteriorating macroeconomic outlook, tight credit conditions, and financial market volatility will continue to weaken real estate fundamentals and investment activity in Q2 and Q3. The full-year forecast indicates a 26 percent reduction in global investment volume, with the Americas expected to see a 27 percent decrease, Europe a 30 percent decrease, and APAC a decline ranging from 5 percent to 10 percent.

However, as economic conditions stabilize and a clearer outlook emerges for central bank policies, CBRE anticipates a gradual improvement in commercial real estate investment volume starting in Q4.

All graphics courtesy of CBRE