Global Real Estate Outlook 2023

Slowdown likely to be relatively short and shallow

The world economy faces numerous headwinds and the economic outlook is exceptionally uncertain. High inflation is set to remain with us for some time, central banks are continuing their tightening cycles, and governments are stretching their budgets further to insulate against unprecedented energy prices.

However, we are entering this slowdown from a position of strength, with labor markets tight and household and corporate balance sheets in good shape. Overall, we expect the market to adjust very rapidly compared to previous downturns and for the slowdown to be relatively short and shallow.

While the short-term outlook remains challenging for real estate investors, there are reasons for optimism

Real estate pricing adjusted considerably in some markets in 2022 and this repricing is likely to continue into early 2023. There is still a significant amount of capital sitting on the sidelines and, as with any period of adjustment, investment opportunities will arise.

The volatility of debt costs will ease, the current phase of price discovery will pass, and more certainty will enter the market as underwriting becomes clearer and the appetite for risk returns. The period of repricing is likely to see some winners and losers, but forced sellers are expected to be limited. 

In the U.S., expiring leases will help boost tenant demand for offices, while relatively low vacancy rates across much of Europe will partially mitigate slowing leasing activity. High-growth sectors, such as Life Sciences and Data Centers, are likely to emerge from the temporary pause to strong demand, while the Living sector is expected to remain relatively resilient throughout the downturn and beyond.

Real estate occupiers should prioritize contract negotiations

As budgets are being stretched by sharp cost increases, owners are now challenging the structure of leases. In Europe, some owners have advocated moving away from explicitly including inflation indexes in leases, but in other parts of the world, such as the U.S., the reverse is true.

Contract negotiations for services or leases should try to reflect the dynamic of what is expected to be relatively high but short-term inflation. The better the industry can match negotiations and outcomes with reasonable if imperfect inflation expectations, the more efficient the outcomes for the commercial real estate industry overall.

Published
24 January 2023