Global Real Estate Perspective November 2022

Signs of caution evident in occupier and capital markets

Markets holding up well but headwinds starting to impact sentiment and activity

Economic headwinds strengthened in the third quarter with several major economies expected to tip into recession over the coming months. However, some countries such as commodity exporters are faring significantly better, reflecting an uneven slowdown. Globally, inflation has continued to climb. Central banks continue to act aggressively to combat this with more rate increases anticipated into 2023. This is filtering through to heightened uncertainty and is weighing on sentiment. Occupiers are now starting to have a more cautious approach with lengthening decision-making processes and in some cases reduced requirements. In the capital markets, investor sentiment and transaction volumes have weakened as these headwinds filter through to activity.

A slowing of momentum is becoming evident in the office market. Global office leasing declined by 5% from the previous quarter during Q3, although activity remains above Q3 2021. Additionally, net absorption was still positive but 31% lower over the year. In the logistics sector demand stayed resilient but is down from peak levels across all three regions, with take-up restrained by a lack of available space in many markets. Global retail sales growth softened in Q3 as the squeeze on real incomes impacts consumer activity, and this is likely to filter through to more constrained retailer activity.

While effects from the pandemic have receded in most parts of the world other headwinds have appeared and strengthened in the second quarter. Inflation accelerated sharply for a number of reasons including the war in Ukraine, sanctions against Russia, Covid restrictions in China and ongoing supply chain disruptions. This triggered an accelerated tightening cycle by central banks. These are all feeding into heightened uncertainty and are dampening sentiment. Decision-making processes are lengthening as occupiers take a ‘wait and see’ approach. On a positive note, labor markets are continuing to perform strongly and pent-up demand from the pandemic is still helping to support activity. For investors, the increasing cost of debt and inflation are impacting pricing and bidding dynamics around the world.

Global office leasing volumes held stable over the quarter, but this bucks the pre-pandemic trend where the second quarter would usually show an increase on Q1. Additionally, while global net absorption remained positive in Q2 it was down 89% over the quarter. In the logistics sector demand remained strong and is becoming more broad-based as ecommerce occupiers play a less dominant role in the market. Leasing activity in the retail sector was robust across many mature markets despite a weakening sales outlook and rising costs.

Global Real Estate Health Monitor

Global Real Estate Health Monitor

Volatility measures elevated and weighing on investor sentiment

Investors in a new phase of price discovery

The protracted challenges posed by the current economy, monetary policy and geopolitics are impacting investor sentiment and underwriting. Volatility has extended into currency and hedging, which are playing a greater role in the global economy and in shaping market activity. These factors are supporting an outlook which is more uncertain, triggering more cautious, delayed decision-making and introducing capital constraints for more market participants. As a result, liquidity in the markets weakened further during Q3, and price discovery is impacting investment market conditions. In the current environment, there is an elevated focus on portfolio strategy as assets are tested by market volatility, and opportunistic managers and some of their investors are anticipating dislocation to result in investment opportunities.

The impact of the economic climate and rising rates is being felt globally at mid-year in the capital markets, reflected in investor selectivity and the slowing pace of growth in the direct investment markets. During this new phase of price discovery, the bid-ask gap is widening in the transaction market, and bidding intensity is moderating. With that said, the tailwinds supporting the real estate asset class remain intact, and there is no lack of equity or debt market liquidity. Debt markets are liquid, but more cautious amid increased scrutiny on underwriting assumptions. Looking ahead, incremental rate changes will introduce additional price discovery in the markets. However, the continued depth and diversity of lenders and investors is expected to mitigate the risk of a deeper, prolonged impact on capital flows in real estate.

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Carol Hodgson
Global Research Director, Property Sectors
Sean Coghlan
Global Head of Research, Capital Markets
Matthew McAuley
Director, Global Insight
Benjamin Breslau
Global Chief Research Officer
Julia Georgules
Head of Americas Research & Strategy
Tom Carroll
Head of EMEA Research and Strategy, JLL
Roddy Allan
Chief Research Officer, Asia Pacific