Investors Shift Focus to Flats and Hotels Amid Commercial Property Recovery
The commercial real estate market has begun showing signs of recovery after a two-year downturn, with investors shifting their focus towards residential properties and hotels while continuing to steer clear of office buildings. According to MSCI, investment in commercial property across Europe increased by 4% in 2024, reaching €189 billion. This marks a notable rebound following a steep 45% decline in the previous year. A similar pattern has been observed in the United States, where property investment surged by 9%.
A Changing Investment Landscape
The commercial property sector saw a wave of dealmaking in the second half of 2024, driven by renewed investor confidence in residential real estate and hospitality assets. Investors also allocated more funds to warehouse properties, recognizing the long-term potential of e-commerce growth.
Conversely, the office sector continued its decline, recording a 10% drop in investment, the worst performance since the 2009 financial crisis. The persistence of hybrid work models and increasing costs associated with upgrading aging office infrastructure have dampened investor sentiment in this space.
Residential and Hospitality Properties Dominate
Chris Brett, Head of Capital Markets for Europe at CBRE, stated that the market had "bottomed out" in early 2024 and would continue to be supported by strong interest in residential properties. "Living is going to dominate, and that isn’t going to change," he remarked. With a higher volume of transactions expected in 2025, the preference for residential and hospitality properties is expected to persist.
Real estate investment volumes peaked in late 2021, fueled by low-interest rates, but declined sharply in 2022 due to rising borrowing costs and falling property values. Since that peak, average property prices across Europe have fallen by 23%, with office buildings experiencing the most significant decline of 38%, according to Green Street real estate analysts.
The Impact of High Interest Rates
Despite the ongoing recovery, analysts warn that the broader real estate market remains vulnerable to high interest rates. Tom Leahy, Head of EMEA Real Assets Research at MSCI, noted that "the mood in the market is on the cautious side of optimistic." He also highlighted that recent bond market volatility has raised concerns that interest rates may remain elevated longer than expected, which could slow the recovery process.
Key Market Players and Major Transactions
The commercial property market has been buoyed by major private equity investors, including Blackstone, TPG, Starwood, KKR, Ares, and Greystar. Blackstone's sale of a luxury retail block in Milan to Kering, along with deals involving Liverpool One and Meadowhall shopping centers in the UK, were among the most notable transactions of 2024. Additionally, Elliott Management and Oval Real Estate's purchase of assets from the Langham Estate in central London marked another significant deal.
The market's positive momentum carried into early 2025, with Abu Dhabi’s Modon Holding securing a 50% stake in GIC and British Land’s new skyscraper at Broadgate. Brett noted that this transaction was a "good shot in the arm for office development," reinforcing London’s reputation as Europe’s top destination for international capital.
UK Market Rebounds Amid Asset Value Corrections
The UK real estate market saw a 26% recovery in 2024, driven by a sharp correction in asset values. As sellers became more willing to accept lower prices, transaction volumes increased. Unlike earlier fears of widespread distressed loans and forced property sales, most banks have managed to avoid significant write-offs. However, a report by the New York Federal Reserve in October 2024 cautioned that the "extend and pretend" strategy—where lenders delay recognizing losses—could ultimately slow the necessary capital reallocation and expose banks to future risks.
Looking Ahead: Optimism with Caution
While the commercial property sector is showing resilience, the path forward remains uncertain. Interest rate fluctuations, demand shifts in the office sector, and broader economic conditions will continue to influence investor sentiment. However, with strong appetite for residential and hospitality assets, and growing confidence in select office developments, the industry is on a tentative path to recovery in 2025.
