Emerging opportunities among cautious recovery – AEW

While the commercial real estate investment market's recovery has been gradual, there are signs of improvement on the occupier side. 

Hans Vrensen

Demand for space in most core sectors is increasing, leading to a decrease in vacancy rates. This is further supported by a limited supply of new buildings, particularly in the office sector. The retail sector has been affected by e-commerce for a much longer time, resulting in significantly lower capital values, Hans Vrensen, head of research & strategy in Europe at AEW told CRE Media Europe at Expo Real.
“Offices, especially in prime locations, are becoming attractive investment opportunities due to the rebalancing of work-from-home trends. More workers are returning more often to the office as the social benefits remain. At the same time, developers have been facing challenges in securing financing for speculative development projects. As demand rises and supply decreases, vacancy rates in prime markets like central London and Paris are already declining, with prime rents for high-quality offices increasing. Although other non-CBD sub-markets may still be struggling, the recovery is expected to broaden due to the scarcity in prime markets,” he explained.
However, investor sentiment remains cautious due to recent valuation write-downs. In addition, many investors who used debt to invest in the past now face higher loan-to-value ratios at loan maturity due to capital value reductions during the loan term. Banks are hesitant to refinance existing loans under these circumstances, potentially requiring investors to increase equity. While sentiment has been slow to recover in the office sector, logistics and residential properties have seen earlier improvements.
According to Vrensen, residential properties benefit from a fundamental shortage of housing across Europe. Despite rent controls and limited new supply, building new residential properties can still generate good returns. However, the high demand for stabilized investments results in low yields.
“Logistics is also at an inflection point, with vacancy rates rising after a surge in demand during the COVID-19 pandemic. Overall, the vacancy rate in European logistics is around 6%, with some markets experiencing higher rates,” he added. The supply of new buildings is also declining due to factors such as power supply limitations. While good momentum is still expected for logistics, it may not be as strong as in recent years when Covid triggered a boom in logistics space demand from e-commerce platforms and retailers.
Despite a cautiously optimistic sentiment at Expo Real, Vrensen warned that it might be somewhat reserved as reported transaction volumes have not yet increased significantly. 
Looking ahead, he expects that a sustained recovery could be confirmed by evidence of more portfolios being traded and shorter deal closing times. However, the interest rate environment is not expected to change drastically. “Macroeconomic factors, such as rising bond yields. This needs to be closely monitored in markets like France due to on-going political issues.  While GDP growth is expected to continue and a recession is not anticipated, global geopolitical issues have triggered an elevated level of uncertainty. This increased uncertainty makes investors more cautious, potentially leading to a prolonged, slow recovery”, he concluded. However, like in past cycles, when sentiment improves the market recovery can speed up sooner and quicker than many expect now.