Global Real Estate Perspective March 2023

A variety of economic headwinds were evident in the final quarter of 2022, with inflation rising, interest rates climbing, and growth slowing. However, there are now signs that the outlook is improving and the slowdown will be relatively short and shallow. Uncertainty is encouraging caution in occupiers, leading to slower decision-making and more defensive strategies. In the capital markets, investors are facing a challenging climate in which to underwrite and value assets.

Signs of slowing momentum became more evident in the office market during the fourth quarter. Global leasing volumes were 19% lower than in Q4 2021 with demand moderating in all three regions. Additionally, net absorption turned negative during Q4 for the first time in 2022. In the logistics sector demand remains broad-based but has slowed from record levels, with limited available space.

On a positive note, labor markets have held up well and household balance sheets are in good shape, helping to support retail spending and travel demand. With confidence in Asia Pacific rebounding, inflation likely to have peaked and interest rate increases slowing, 2023 is set to be challenging but conditions should improve as we move through the year.

The pressures facing capital markets during 2022 persisted into the fourth quarter as the real estate investment community continued to face a challenging climate in which to underwrite and value assets. Steep interest rate increases led to the re-pricing of transactions across more markets, impacting valuations, liquidity, capital formation and investment activity. Cautious debt markets and volatile currency and hedging markets are further complicating an already complex market.

Risk premiums are elevated given inflation and recession risk, although some easing in risk premium is being seen in the U.S. as inflation starts to moderate. This uncertainty continues to impact investor sentiment, triggering a reluctance to transact and a heightened focus on monetary policy, underwriting and valuations. Capital is expected to remain patient in preparation for the market rebound, and the reset of private market valuations will support improved liquidity during 2023.