How the global economy will impact real estate

Febrile geopolitics and unsettled macroeconomic conditions have changed the dynamics of real estate investment. Here, IQ captures insights from leading economists* at this year’s Investment Intentions roadshows in Amsterdam, Helsinki, London and Munich, who shared their thoughts on what the current outlook means for the industry.

A world of uncertainty?

A quick glance at the headlines in the mainstream media points to a world of uncertainty and dislocation. Most global regions still face inflation, elevated interest rates and relatively tough trading conditions. Serious conflicts in Europe, the Middle East and elsewhere have added a layer of unpredictability and instability to the global economy. On the face of it, there is ample cause for concern.

The four economists presenting to members at the Investment Intentions Road Show acknowledged the challenges ahead. The consensus is that there’s a clear need for bond rates to come down and for further re-pricing to occur in order for deal flow to resume and for the real estate market to get back on track. 

But, it seems, there are also sound reasons for market participants to indulge in a degree of nuanced positivity. 

The underlying fundamentals of real estate remain strong, despite the denominator effect. There is little evidence of forced sales, and investors and managers are starting to discuss opportunities again after a very quiet year. In general, markets are ahead of themselves in terms of rental corrections. By the middle of 2024, it’s expected that capital value correction in most major markets – with the exception of the US – will be completed. Similarly, yields will have stabilised, and banks will be willing to lend again. Overall, global real estate performance recovery is expected in 2025. 

Along the way, there are a couple of important influencing factors to consider. Firstly, it seems like yield compression has been consigned to the history books (at least for now). Instead, the new story is all about income growth. The key dynamic here is the balance between a jobs-driven cycle and a productivity-driven cycle. The latter is what will underpin strong and sustained income growth for real estate market participants. 

Opportunities…

At a more granular level, there is again broad consensus on the potential areas of opportunity – especially in terms of regions, markets and sectors. 

A consistent observation is that geographical diversification is starting to matter – as are city dynamics. It’s not the first time that this has been the case, of course, but in the current environment, spreading investment risk across markets will be an important way for market participants to better realise value. 

Naturally, the different characteristics of distinct markets and regions will be a key consideration. 

For the first time in a long time, European markets have repriced more quickly than those in the US and Asia Pacific. European countries have healthy occupier markets and the strongest rental growth characteristics. This creates potential opportunity, particularly through developer distress and refinancing – as one commentator put it, now could be ‘a great time to be a lender’.

By the same token, markets in the Asia Pacific region, ought not to be thought of as core. 

At a sector level, there are clearly varying degrees of optimism around the different options. Many eyes are trained on the opportunity within residential. In Europe, in particular, where there is a chronic undersupply of decent-quality housing, the PRS market is a prime target. However, the lack of stock means this will need to be a development play, which will leave some investors nervous.   

Following a relatively swift price correction, logistics remains an attractive option. And perhaps surprisingly, retail – which has struggled considerably over the past few years – could be worth a second look given its potential to deliver decent income returns.

The big conversation remains around the shape of the office sector. Again, regional location makes a significant difference to the narrative. There is a strong consensus that the office market in the US will struggle for a little while longer. The jobs market there remains tight, and businesses are struggling with re-occupancy of their offices post-Covid. Additionally, a stack of sublease space is colliding with new speculative supply coming to the market, resulting in high vacancy rates. Consequently, we see some over-leveraged asset owners defaulting on their mortgage repayments and handing back the keys. Clearly, the US office market will be a good place for investors to seek distressed investment opportunities. 

Meanwhile, the office market in Europe presents an altogether different picture, displaying strong fundamentals, albeit with the prospect of strong bifurcation going forward. 

 …And watch-outs 

Based on this overview, the prognosis for real estate looks decidedly brighter than might be assumed from some of the more doom-laden general commentary about the global economy.

But still, there’s no escaping the key contention that inflationary pressure is here to stay for the long run. The drivers of inflation are rooted in a combination of factors that mark the end of what’s been described as the ‘great moderation’. Principally, these are about a move toward deglobalisation, the rise of inward-looking and protectionist economic policies, and a starker contrast between democratic and autocratic political ideologies. 

So, in addition to inflation, real estate market participants will need to watch out for greater ‘within-block’ investment, and higher country risk premiums. 

Investment Intentions roadshow presenters

Amsterdam:      Sabina Reeves, Chief Economist and Head of Insights & Intelligence, CBRE IM
Helsinki:            Jose Pellicer, Global Head of Investment, M&G Real Estate
London:             Peter Hayes, Global Head of Investment Research, PGIM Real Estate
Munich:             Justin Curlow, Global Head of Research & Strategy, AXA IM Alts