The commercial real estate market began showing signs of recovery in the latter half of 2024, with investors increasingly shifting their focus away from office buildings and toward residential properties, hotels, and warehouses. According to Morgan Stanley Capital International (MSCI), the total value of real estate deals in Europe rose by 4% to €189 billion (approximately $313 billion AUD) last year, rebounding from a sharp 45% decline in 2023. In the US, investment grew by 9%.
The trend away from office properties has been particularly evident, with investments in the sector dropping by 10%, marking the worst year for office real estate since 2009. Factors like the rise of hybrid work models, higher costs for office upgrades, and uncertainty surrounding future demand have caused hesitation among buyers.
Meanwhile, capital has flowed more freely into residential properties, hotels, and warehouses, fueled by sustained demand in housing markets and the continued expansion of e-commerce. Chris Brett, head of capital markets for Europe at CBRE, emphasized the dominance of the residential sector: “Living is going to dominate [and] that isn’t going to change. There is more intent to invest going into 2025 than there was going into 2024.”
Recovery Amid Interest Rate Concerns
Since the peak of the market in 2021, real estate values across Europe have fallen by 23%, with office property values plummeting by 38%, according to Green Street analysts. While the market has shown signs of recovery, this rebound is tempered by concerns over higher-than-expected interest rates, which could hinder growth.
Tom Leahy, head of EMEA real assets research at MSCI, noted that while the market mood remains cautiously optimistic, recent volatility in the bond market suggests that interest rates could stay elevated for longer than anticipated.
Notable Players and High-Profile Transactions
Major US private equity firms, including Blackstone, TPG, Starwood, KKR, Ares, and Greystar, have played a dominant role in commercial property acquisitions in 2024. Some of the largest transactions include:
- Blackstone’s sale of a luxury Milan retail block to Kering
- The sale of stakes in the UK’s Liverpool One and Meadowhall shopping centers
- Elliott Management and Oval Real Estate’s acquisition of Langham Estate assets in London
The UK market saw a 26% increase in real estate investment, with notable deals such as Abu Dhabi’s Modon Holding purchasing a 50% stake in GIC and British Land’s Broadgate skyscraper, signaling renewed interest in prime office spaces.
Banks Avoiding Distressed Sales, But Risks Remain
Despite initial warnings of a potential wave of distressed sales, banks have largely opted to restructure loans rather than pursue forced sell-offs. However, a report from the New York Federal Reserve cautioned that this “extend and pretend” strategy could delay much-needed capital reallocation and expose financial institutions to future risks if market conditions do not stabilize fully.
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