Global commercial real estate investment in Q1 2023 saw a steep decline, pulled down by high-interest rates, tight credit conditions and a deteriorating economic outlook, according to a recent report by CBRE.
Globally, commercial real estate investment slipped 55% YOY to $147 billion. The volume fell 56% in the Americas, 64% in Europe and 20% in Asia Pacific.
The multifamily sector saw the highest investment in Q1 with $34 billion but was down 64% from last year. Industrial investment dipped 55% YOY to $33 billion, while office investment fell by 64% to $31 billion. Retail investment dropped 32% to $29 billion.
INVESTMENT IN AMERICAS
Investment volume in the Americas dropped 56% YOY to $86 billion, burdened by high-interest rates, uncertain economic outlook and tight lending conditions.
The multifamily sector has the most investment, with $25 million, falling by 64% YOY. Multifamily fundamentals historically stayed strong despite slowing rent growth and rising vacancy. Certain value-add properties are expected to become distressed through the year due to increasing debt service costs, although CBRE said it doesn’t expect a major downturn in the sector.
Despite industrial investment falling 49% YOY to $23 billion, there was robust investor interest in industrial assets due to some secular trends, including growth in e-commerce and the reshoring of manufacturing operations. Additionally, a slip in new construction projects is expected to strengthen industrial fundamentals in the future.
Office investment fell 32% YOY to $18 billion. Roughly half of the total came from a single transaction — the private takeover of Store Capital REIT’s portfolio for $8.5 billion. Barring entity-level deals, retail investment volume decreased 53% YOY. Relatively strong retail fundamentals are projected to face headwinds as consumer spending weakens through the year.
BIGGEST DECLINE IN EUROPE
Rising interest rates and economic uncertainty caused European investment to fall 64% YOY to $37 billion.
Office investment plummeted 74% YOY to $9 billion. Despite a relatively robust return to the office, Europe is witnessing a bifurcation in the office market, with investors mainly targeting higher-quality assets.
Industrial investment decreased 70% YOY to $6 billion. Despite a slowdown in leasing activity, CBRE expected continuing investor demand for industrial properties due to relatively overall fundamentals.
Retail investment in Europe was down by 46% YOY to stand at $7 billion. While high inflation continues to weigh on consumers, a rise in international tourism is likely to drive the sector.
Multifamily investment fell 63% YOY to stand at $8 billion. While rising debt costs softened demand, CBRE said it expected the sector to stay strong due to robust fundamentals.
JAPAN, CHINA DRIVE ASIA PAC INVESTMENT VOLUME
Investment volume in Asia Pacific dropped 20% YOY to $24 billion. Strong investment activity in Japan and mainland China helped the region register the least decline in Q1 investment volume among the three other global regions.
Office investment was down 18% to stand at $11 billion. Office investment was mainly driven by Japan and mainland China, with investors favoring tier-1 cities in these countries. Investor interest in Asia Pac office assets is predicted to remain strong, given the relatively high rate of return to office in this region.
Industrial investment dropped 43% YOY to $3 billion, primarily because of the limited availability of prime assets and a slowdown in the growth of e-commerce. Markets with low vacancies, like Japan and Australia, are expected to capture investor interest throughout the year.
Interestingly, retail investment saw an increase of 12% YOY to $5 billion, fueled by transactions in Singapore and Hong Kong. Rising regional tourism is projected to boost prime retail assets in key cities and attract investor attraction.
GLOBAL FORECAST
A weakening macroeconomic outlook, tight credit conditions and volatility in the financial market are likely to soften real estate fundamentals and investment activity in Q2 and Q3, CBRE said.
For the full year, a 26% reduction in global investment volume, with declines of 27% in the Americas, 30% in Europe and 5-10% in Asia Pacific, is expected.
As economic conditions stabilize and a better outlook appears for central bank policy, CBRE expects commercial real estate investment volume to start improving in Q4.