Global Real Estate Perspective November 2022
Signs of caution evident in occupier and capital markets
Economic headwinds strengthened in the third quarter with several major economies expected to tip into recession over the coming months. However, some countries such as commodity exporters are faring significantly better, reflecting an uneven slowdown. Globally, inflation has continued to climb. Central banks continue to act aggressively to combat this with more rate increases anticipated into 2023. This is filtering through to heightened uncertainty and is weighing on sentiment. Occupiers are now starting to have a more cautious approach with lengthening decision-making processes and in some cases reduced requirements. In the capital markets, investor sentiment and transaction volumes have weakened as these headwinds filter through to activity.
A slowing of momentum is becoming evident in the office market. Global office leasing declined by 5% from the previous quarter during Q3, although activity remains above Q3 2021. Additionally, net absorption was still positive but 31% lower over the year. In the logistics sector demand stayed resilient but is down from peak levels across all three regions, with take-up restrained by a lack of available space in many markets. Global retail sales growth softened in Q3 as the squeeze on real incomes impacts consumer activity, and this is likely to filter through to more constrained retailer activity.
Global Real Estate Health Monitor
Diminishing operational uncertainty, robust demand and abundant liquidity spurred a flurry of activity and allowed Q1 2022 to be the most active first quarter on record – at US$292 billion. All three regions posted healthy gains in transaction activity. The composition of capital is diverse and evolving, supporting strong liquidity and healthy bidder pools. Cross-border acquisitions held to historic norms at the start of 2022. And, private investors represented more than 43% of volumes – a record share of activity. Despite the robust investment market conditions during Q1, the markets face renewed headwinds as a result of elevated inflation, geopolitics and rising interest rates.
The recovery of physical office occupancy and leasing, robust consumer spending and rebounding leisure and business travel has broadened the appetite of investors across sectors. Investors remain focused on portfolio diversification and are aligning investment strategies to longer-term economic and demographic shifts, benefitting logistics, living and healthcare assets.
Volatility measures elevated and weighing on investor sentiment
The protracted challenges posed by the current economy, monetary policy and geopolitics are impacting investor sentiment and underwriting. Volatility has extended into currency and hedging, which are playing a greater role in the global economy and in shaping market activity. These factors are supporting an outlook which is more uncertain, triggering more cautious, delayed decision-making and introducing capital constraints for more market participants. As a result, liquidity in the markets weakened further during Q3, and price discovery is impacting investment market conditions. In the current environment, there is an elevated focus on portfolio strategy as assets are tested by market volatility, and opportunistic managers and some of their investors are anticipating dislocation to result in investment opportunities.
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