Global Real Estate Perspective August 2023

The pressures weighing on the global economy persisted through the second quarter of 2023, with further interest rate increases, elevated inflation and a sluggish trade recovery contributing to challenging conditions. Occupiers are maintaining a cautious approach with lengthy decision-making timelines, while the rising cost of capital and conservative underwriting from investors is also subduing transaction markets.

Heightened uncertainty was reflected in office markets during the second quarter. Global leasing volumes increased by 7% from Q1, which is typically the quietest quarter of the year, but were 14% below Q2 2022. Net absorption turned negative during the quarter, as increases in Asia Pacific were offset by occupancy losses in North America and Europe. Activity in the logistics sector also moderated, with the impact of slower economic growth and limited available space evident in Europe and North America.

The full impact of the interest rate tightening cycle is still feeding through to the economy with global growth likely to slow further through the end of year, but labor markets have held up well and consumer confidence is rebounding, supporting retail sales and leisure travel. With inflation falling and interest rates close to peaking, stability is gradually returning.

The fluid economic climate continues to influence central banks, which are now expected to hold rates higher for longer to combat inflation. The rising costs of debt and volatility of indices are influencing lender sentiment and market dynamics globally, and shifts in lending costs have now firmly taken hold in most markets. However, liquidity in the debt markets remains relatively stable, and the availability of credit is solid. A breadth of lenders are deploying into multiple asset classes, although lender conviction is varied and strongest for logistics and living assets. 

Price discovery continues in the real estate capital markets, and there are signs of progress. The bid-ask spread remains but is narrowing, and this has coincided with improvements in bidding activity. The U.S. is furthest along in its price adjustments, and price discovery is fully underway in Europe and Asia Pacific, as yields expanded further in many markets during the second quarter. However, the constrained transaction market, especially for offices, is limiting pricing data points. We expect the bifurcation across property sectors and markets to be pronounced as improvements continue. The pathway to market recovery is anticipated to be uneven, and as we navigate the latter half of the year, a semblance of predictability is re-emerging amid the lingering uncertainty.