European commercial real estate market stumbles in 2024

Dreams of a swift recovery in Europe’s commercial real estate market have been dashed as the first quarter of 2024 witnessed a continued slump, marking the seventh consecutive quarter of decline. That is according to data released by MSCI Real Assets which paints a concerning picture, with completed commercial property transactions reaching a mere €34.5 billion in the first three months – a 26 percent drop compared to the same period in 2023. This translates to the lowest transaction volume since the third quarter of 2010, with the number of companies buying and selling properties also hitting a 12-year low.

The reasons behind this slowdown are multifaceted. The historically low-interest-rate environment that fueled a commercial real estate boom following the global financial crisis is a distant memory. Rising interest rates, a consequence of central banks battling inflation, have significantly impacted debt financing, a cornerstone of commercial property deals. This, coupled with the pandemic’s lasting impact on work patterns and a gloomy economic outlook, has dampened investor confidence.

John O’Driscoll, global co-head of real estate for Axa IM Alts, emphasizes the crucial role of interest rates: “The direction on rates is a huge influencing force for our sector.” While inflation appears to be cooling, and a potential interest rate cut looms in the latter half of 2024, the market remains hesitant. Mr. O’Driscoll acknowledges that “early 2024 is an interesting re-entry point” for investment, but a “backlog of sellers” has emerged due to low volumes in the past two years, further complicating the situation.

The pain extends beyond domestic investors. Cross-border real estate acquisition volumes also plunged to their lowest level since 2010, representing less than 35% of total investment. US investors, previously a major source of cross-border capital, have scaled back significantly, according to MSCI.

A significant hurdle to deal completion is the stark discrepancy between buyer and seller expectations. A 20% gap between asking prices for London office properties and actual sale prices highlights this issue. This uncertainty has led to a worrying trend: a spike in terminated deals and properties being withdrawn from the market. Shockingly, data reveals 110 busted deals across Europe in Q1 2024, the highest level since the global financial crisis.

The situation is further aggravated by an increase in distressed sales, where property owners are forced to sell at a discount due to financial difficulties. Germany appears particularly vulnerable, with several large sales emerging from the July 2023 collapse of developer Centrum Group.

Experts warn that a swift recovery for the European commercial real estate market is unlikely. While a backlog of sellers exists due to recent low investment volumes, the current economic climate creates a challenging environment for transactions. The path forward remains unclear, with market participants anxiously awaiting a shift in interest rates and a more stable economic picture.