Amidst the global real estate industry’s most significant downturn in over a decade, the MIPIM property conference in Cannes reveals a landscape of falling commercial real estate (CRE) prices and uncertainty regarding the fate of offices vacated due to the pandemic.
Delegates at MIPIM, attended by around 20,000 investors, developers, and agents, engage in discussions around potential recovery strategies.
Major players such as LaSalle, Greystar, Hines, Federated Hermes, AEW, and Patrizia report tentative signs of rebounding deal activity, though caution remains prevalent.
Philip La Pierre of LaSalle warns of “hot air” circulating through discussions, urging careful navigation amid uncertainties.
Market Challenges and Disparities:
Rising borrowing costs and empty offices have adversely impacted property investments, resulting in a 13.9% year-on-year decline in European commercial capital values in Q4 2023.
Data centres and logistics, however, have displayed resilience. U.S. cities, including San Francisco and Los Angeles, witness sharp price declines and soaring vacancy rates nearing 30%. La Pierre suggests that 30% of European office space may be deemed obsolete.
In 2023, commercial property deal volumes in Europe plummeted by half to 166 billion euros ($181 billion), marking the worst year for office sales on record. Investors are currently hesitant to realize losses, contributing to the market standstill.
Despite these challenges, some foresee a potential turnaround if central banks reduce interest rates, alleviating corporate debt burdens.
Cautious Optimism Amid Challenges:
James Seppala, head of real estate in Europe for Blackstone, expresses a renewed sense of confidence and enthusiasm for the upcoming year, citing recent activity.
However, the market’s resilience faces a significant test at MIPIM itself, which traditionally celebrates successful deals. Jose Pellicer of M&G Real Estate notes that the worst-performing properties are now deemed “unsellable.”
While Europe has seen fewer visible signs of property distress compared to the U.S. and China, sharp sell-offs in Germany and Sweden hint at underlying issues.
Also, collapses such as Signa Group’s in November, contribute to a global real estate crisis that may take time to fully unfold.
Lenders and Potential Risks:
Major banks have navigated the crisis relatively unscathed so far, with European banks reducing CRE lending.
However, alternative lenders, including more leveraged entities like asset managers and insurers, may face increasing exposure to losses.
These alternative lenders currently constitute 20-30% of Europe’s CRE loans, heightening concerns about potential financial repercussions.
Some lenders adopt an “extend and pretend” approach reminiscent of the 2007-09 financial crisis, delaying foreclosure on properties to avoid crystallizing losses in the current market conditions.
The trajectory of office prices hinges on whether banks and developers can withstand the downturn until borrowing costs decrease or demand returns.
While property prices in markets like Britain may be closer to bottoming out, German office prices are anticipated to decline further.
Selena Ohlsson of Federated Hermes notes that despite the challenges faced in 2023, investor interest is showing signs of returning, particularly from the Middle East and Asia Pacific.
