The global real estate industry is in the midst of its biggest collapse in more than a decade, and developers and investors are trying to find reasons for optimism and discuss the possibility of a market recovery – although it has not yet arrived. It is understood that the MIPIM Real Estate Conference held in Cannes on the French Riviera this week was launched against the backdrop of falling commercial real estate prices (CRE) and office vacancies caused by the epidemic.
Different views on the recovery of the real estate market
As an expected 20,000 investors, developers and agents began to arrive, delegates discussed around miniature models of planned development projects and met with clients on yachts contracted by companies. Many are busy discussing the impact on the market, while others are trying to get deals done.
Several of the largest real estate investors, including Jones Lang LaSalle (JLL.US), Greystar, Hines and Federated Hermes (FHI.US) in the United States, AEW in France and Patrizia in Germany, said they were seeing initial signs of a rebound in deal activity.
But some also expressed caution.
“There’s a lot of unrealistic talk on the Croisette,” Philippe Lapierre, head of Europe at LaSalle Investment Management, told the conference, referring to the scene of Cannes’ coastal boulevard packed with real estate agents, “so you have to navigate very carefully.”
Punishing increases in borrowing costs and empty offices have made many real estate investments less tempting, although sectors such as data centers and logistics are performing better.
The value of commercial capital in Europe fell 13.9% year-on-year in the fourth quarter of 2023, the biggest drop since the global financial crisis in 2009, according to MSCI Real Assets.
LaSalle’s Lapierre believes 30% of office space in Europe “may be obsolete.” Meanwhile, prices in U.S. cities have also fallen sharply, with vacancy rates in San Francisco and Los Angeles approaching 30%.
For now, investors would rather wait and see than realize losses. European commercial real estate transaction volumes fell by half in 2023 to 166 billion euros ($181 billion), the worst year for office sales recorded by MSCI since 2007.
Nevertheless, some investors believe a market turnaround could be imminent if central banks start cutting interest rates, easing corporate debt burdens.
“Overall, there is more confidence and enthusiasm for the year ahead,” James Seppala, head of European real estate at Blackstone, the world’s largest commercial property owner, said ahead of the event. “We have been active over the last few months and we will continue to look for activity,” he added.
A tough sell
MIPIM itself will be a big test of improving sentiment. Investors and property agents have celebrated deals at the annual gathering since 1990, but last year there was little to speak of.
“The worst properties in the market are now hard to sell,” said Jose Pellicer, head of investment strategy at M&G Real Estate.
Europe has been less affected by the visible signs of property distress than the US and China, but in specific countries such as Germany and Sweden, some lenders have suffered severe market sell-offs due to their investments in the property market.
The bankruptcy of Austrian property tycoon Rene Benko’s Signa Group – co-owner of New York’s Chrysler Building – in November further shook confidence.
“The global real estate crisis is ongoing,” said Antoine Flamarion, co-founder of Tikehau Capital. “It may take some time to end.”
So far, major banks have been relatively unscathed. According to Morgan Stanley, Europe’s big banks have been reducing commercial real estate lending.
That could leave more leveraged alternative lenders, such as asset managers and insurers, to bear more losses. They already account for 20-30% of commercial real estate lending in Europe, according to Bass Business School.
Further falls?
Whether the fall in office prices turns into a broader crisis depends in part on whether banks and developers can avoid realising losses before borrowing costs fall or demand returns.
Some lenders are returning to the “stretch and fake” approach to souring loans, a popular strategy after the 2007-09 financial crisis to avoid foreclosures on properties.
“You extend and pretend, simply because even if you did, you might not be able to sell the asset in the current market,” Matthew Clouser, managing director of PGIM Real Estate, said ahead of MIPIM.
Property prices may be closer to bottoming in markets like the UK, where prices have adjusted more quickly, but in places like Germany they are expected to fall further. Rob Wilkinson, chief executive of France-based investor AEW, expects German office prices to fall another 10% in the first half of the year.
“Last year was one of the hardest years ever to raise money,” Selena Olsson, director of real estate client solutions at Federated Hermes, said in Cannes. But she said investor interest was returning, particularly from the Middle East and Asia-Pacific: “I’m more hopeful than I was last year.”