2023 Spring Issue - 32

developments
Global Outlook 2023:
Uncertainty, Lack of
Financing Will Slow
Deal Volume
The economic outlook for real
estate contains major areas of
uncertainty, driven by ongoing
increases in interest rates and lack
of available debt and equity capital,
resulting in low liquidity, concerns
about refinancing of existing loans,
and a wait-and-see mode across
the industry, according to Emerging
Trends in Real Estate® Global
Outlook 2023. A key question
is whether rental growth can be
delivered against a background
of stagnant economies, declining
consumer sentiment, ongoing structural
change, and increasing capital
expenditure requirements.
Emerging Trends Global, based
on interviews with global real
estate sector leaders, sets out their
expectations for the year ahead.
The report from ULI and PwC is
a key indicator of sentiment in
global real estate investment and
development trends across
the globe.
" Real estate leaders are adjusting
to interest rates that are
expected to stay higher for longer
and getting to grips with a new
normal of higher finance costs
and minimal capital growth, " says
Lisette van Doorn, ULI Europe chief
executive officer. " The keys to
success-operational management
and rental growth-depend on
making assets fit for purpose and
ESG compliant. The industry can no
longer 'wait and see,' hoping that
construction and financing costs
will decrease, as occupiers will critically
review their total occupancy
costs at lease renewal, and alignment
with their space and ESG
[environmental, social, and
32
URBAN LAND
" The industry can no longer
'wait and see,' hoping that
construction and financing
costs will decrease, as
occupiers will critically review
their total occupancy costs at
lease renewal, and alignment
with their space and ESG
strategies is key. "
-LISETTE VAN DOORN, CEO,
ULI EUROPE
governance] strategies is key. A failure
to act may imply loss of rental
income very soon. "
The full consequences of central
banks' monetary tightening and
rising interest rates still have to
play out, but the rush of withdrawals
from private open-ended funds
by institutional and retail investors
has troubled real estate leaders.
For institutional investors, the withdrawal
is partly a response to the
" denominator effect, " but these
funds represent a relatively liquid
investment, and the rush to the exit
is evidence of investor concerns.
" Redemption requests from
open-ended funds point to doubts
around current private property
valuations, reflecting a disconnect
between the public markets and
private real estate, " says Gareth
Lewis, Emerging Trends leader and
director at PwC. " The slow speed
with which real estate is revalued
relative to equities and bonds is
causing a problem for institutional
investors, especially in the U.S.,
Europe, and Australia. This denominator
effect is taking some institutions
very close to their cap on real
SPRING 2023
estate holdings and could impact
an important source of investment
for the sector. "
The biggest obstacle to getting
deals done in 2023 is uncertainty
over where and when interest rates
will settle, following which more
clarity will appear on real estate
pricing. With the general expectation
that interest rates will stay
higher for longer, the current price
discovery challenge-amounting for
some to a " phony war " between
buyers and sellers-is exacerbated
by low investment volumes and
low liquidity. Logistics properties
seem to have largely been repriced
in major markets, and hope that
longstanding structural changes
have now been priced in for retail
is increasing, but a huge amount
of uncertainty remains regarding
office markets.
Debt finance is integral to a
functioning investment market and
increasing liquidity, but banks are
tentative, watching the markets,
and it remains to be seen whether
nonbank lenders will seize opportunities
and plug the funding gap.
Finance is scarce for new projects
and redevelopment, where high
construction costs, labor shortages,
and uncertain occupier demand
add too much risk for most banks.
As existing loans are refinanced,
distress on the scale of the Global
Financial Crisis is not expected, but
many investors will feel the pain.
At the same time, there is a huge
need for repurposing and accelerating
the ESG agenda, not least to
maintain buildings and earn rental
income, and this puts the industry
in a tough position because it may
no longer be possible to postpone
investment in upgrades and capital
expenditures.
This challenge is especially
prevalent for offices, and there is
a strong sense that the sector will
experience a disruption similar
to that experienced by the retail
sector. Most industry leaders are
working on the assumption that
office occupancy will trend downward,
and they share a strong
belief in bifurcation of prime and
secondary holdings, as well as
those that are ESG compliant and
noncompliant.
Retail itself is showing encouraging
signs of life. Investment
managers note strong operational
performance in their retail portfolios
in the United States and Europe,
and not just in the relatively resilient
subsectors like convenience,
grocery, and retail parks. Meanwhile,
the logistics sector seems
to be emerging from the current
market malaise stronger than ever,
with repricing in some markets reinforcing
the sector's appeal.
Housing is still unattainable
for a growing number of people,
even though rising interest rates
have dampened demand and
cooled residential price growth in
some markets. The widespread
supply/demand imbalance has
seen a reallocation of capital,
resulting in residential overtaking
offices to become the largest
real estate sector by deal volume
since the pandemic. Continuing
the trend seen in the past couple
of years-with investors increasingly
interested in different types
of residential space, from both an
attractive risk/return and social
impact perspective-the current
market supports a focus on more
defensive property types with more
reliable recurrent income, including
multifamily, senior living, and student
housing.
The report finds a small but
growing interest in carbon pricing
as a driver of decarbonization.
Translating carbon emissions into
monetary terms is seen as needed
2023 Spring Issue

Table of Contents for the Digital Edition of 2023 Spring Issue
