Commercial Real Estate in 2023 and The Outlook for 2024

Posted by Knight Frank Newcastle on 16th January 2024 -

Global commercial real estate investment in 2024

Global commercial real estate investment is down -54% year on year in 2023 at $430bn YTD. This compares to a 50% contraction in global cross-border investment over the same period.

This is a global phenomenon linked to a combination of four key factors: elevated financing costs, uncertainty over occupational demand due to structural shifts, concerns over the economic outlook, and geopolitical tensions.

Next year, we hope to see more stability in one or more of these factors; for example, interest rates and inflation look set to decrease in 2024. We expect the environment for real estate investment to become more favourable. Private capital is already taking advantage of reduced competition from debt-backed purchasers. In the most liquid UK markets, asset prices have likely reached the bottom.

What are the top real estate sectors for investment?

Industrial is the top sector for cross-border investment in 2023 YTD, both globally and in the UK. This is the first time on record that the industrial sector has been the most globally invested sector. Growing rents and increased liquidity, along with consumer demand for faster product delivery, near-shoring, and increased competition with China and other eastern markets, have led to the sector’s growth. We expect this trend to continue as logistics and industrial are seen as a long-term value play, diversifying investor real estate portfolios away from the office sector.

Top markets for cross-border investment

The US, UK and Canada are the top destinations for cross-border capital in 2023. London is the most invested cross-border city in 2023, followed by Paris, Toronto and New York. Strong rule of law, clear long-term value trajectory, liquidity and investor familiarity make the English-speaking markets attractive. These markets become more appealing as they’re perceived safe havens in times of geopolitical instability and uncertainty.

Workplace needs continue to evolve

According to our latest (Y)OUR SPACE research, workstyles are becoming more complex and office-centric. 56% of global corporates expect to embrace ‘hybrid’ in the next 3 years, while 23% expect to maintain an office-first approach. Only 3% favour remote first.

Richard Proctor, Head of UK Occupier Strategy & Solutions and London Tenant Representation at Knight Frank, commented, “The flight to quality continued in 2023, which was no surprise because business leaders look at real estate through a people lens. Their focus is on the real needle movers like absenteeism, attrition and productivity. They are seeking office space that will positively shift these areas. An office solution that will aid retention and recruitment and increase productivity will deliver financial performance, and this will come from high amenity, ESG-certified buildings.”

More mandating of workers returning to the office in urban centres is driving up occupancy levels, although this differs across cities. It’s important not to view all cities in the same light, as each has its own dynamics. Factors influencing occupation include the flight to quality for workspaces. The demand for newly built and refurbished office space that meets best-in-class amenities, energy efficiency, and ESG-certified standards has been well-documented. Occupiers are increasingly looking for offices which meet their own corporate ESG objectives and positively reflect their corporate brand. We’ve found that more than 40% of London office leases in 2023 (YTD) have been for EPC-rated A or B buildings. This is leading to upward pressure on rents as competition for the best spaces intensifies.

Richard commented, “The rise of sustainability will continue in 2024. Occupiers have been slower to react in this area than developers and investors; however, internal and external pressures are increasing. This is so important; with real estate contributing to 40% of global carbon emissions, offices will play a huge part in meeting ESG goals. In our 2020 (Y)OUR SPACE survey, ESG was 10th on the list of strategic criteria real estate delivers on, behind things like brand and image, employee wellbeing and talent attraction/retention; however, this year, in our survey of real estate leaders managing property accommodating over 13 million people, ESG was up to 6th. What is more, 72% of respondents feel a corporate commitment to ESG has a great or moderate influence on real estate decisions, up from 50% in 2020. We fully anticipate that it will be a top three criteria in the next survey, by which time 2030 will be looming large on the horizon for many companies.”

Richard added, “Giles Kavanagh, Senior Partner at HFW, summed its importance up well when discussing their new London office: ‘We increasingly see that people want to be part of a firm that takes sustainability seriously, and our new offices reflect the strength of our commitment.’”

Growth of the UK’s second cities

According to the latest research publication, Ending Stagnation, by the Resolution Foundation, there must be a much greater focus on the UK’s second cities, such as Birmingham and Manchester, specifically in relation to their productivity. To match equivalent second cities in Europe would require major increases in business investment, over 160,000 additional highly skilled workers in each city, more development and billions worth of investment into transport infrastructure.

This highlights a focus on the need for more residential development, fewer planning restrictions, and essentially greater self-determination by devolving real fiscal powers from the UK government to UK cities.

What impact would a new government have on real estate?

Although there is a natural interest in changing leadership, history shows that political parties have little impact on property returns. Any new government will inherit systems that do not allow for much in the way of additional spending or significant policy changes. The industry anticipates change, and financial markets have broadly priced this in, so we do not perceive any dramatic shift in dynamics in the short-to-medium term. Labour policies need to be made more explicit before we can really tell; however, we may see some positivity as changes to the status quo may lead to more optimism in the future.

Looking ahead to 2024, there is much to be optimistic about as interest rates and inflation are expected to decrease, creating a more favourable environment for real estate investment. Overall, the commercial real estate landscape remains dynamic, responding to global shifts and local needs, with the hope for increased stability in the coming year.

Source article

---

The Landsite - The online destination for property developers and investors