The Global Commercial Real Estate Markets are Firmly in Recovery Mode

In August, I wrote of a tilt to the positive in the global commercial real estate investment markets. Now it feels like we are firmly in recovery mode.

We have been referencing rising rents as a sign of positivity for a long time, but we are now witnessing yield compression, to varying degrees, in many markets and across sectors. This is being driven by a healthy blend of falling borrowing costs, itself the result of a reduction in underlying forward rates and increased lender competition leading to tighter margins; the adoption of rental growth forecasts in investor underwriting; and good competition for a small amount of buyable assets from a growing pool of buyers.

The purchaser types are evolving too. Last year, we saw a big uptick in global commercial real estate transactions activity from private investors: they were responsible for 44 percent of global deals last year, compared with the pre-covid-19 2015-19 average of 30 percent. Unimpeded by committees and guidelines, such investors could act quickly if they saw an opportunity, and could be flexible on hold periods if markets did not recover as quickly as anticipated.

Over the last six to 12 months, we have seen private equity groups dominating many processes, starting with smaller assets with exceptionally strong fundamentals, where they could be very confident in deep liquidity at the point of exit. This group has been growing, as has the breadth of sectors – the majority will consider offices now – and geographies they will consider.

Additionally, over the last few months, the lot sizes we’re witnessing have increased quickly, with the average deal size globally in Q3 2024 up 17 percent on the same period last year. Larger single assets, portfolios and mergers and acquisitions are all back in the conversation. This is providing vendors with more confidence and will help to boost transaction volumes. Lastly, the highly sought-after core institutional money is also back in the market, looking to increase exposure to areas that have not had the same levels of attention in recent years, including offices and retail, particularly in locations that show the strongest underlying market conditions.

The 2022-24 downturn has been characterized by a lack of distress. However, a lack of distress does not mean an absence of stress. The last two years have shown us that the market has a resilience that has surprised many on the upside, with very few forced sales taking place. There is much more equity and debt capital in the system as a whole, and lessons were learned from the global financial crisis about the negative ramifications of overleverage.

However, stress does remain, and we are not out of the woods yet. A major global investor recently told me that despite their sheer size and liquidity, they still were facing challenges in their own portfolio. They could only imagine the situation was worse for others with fewer resources than them. With the emergence of greater market confidence and improving pricing, more owners are choosing or being encouraged by their lenders to call time on their ownerships and sell, contributing to an increase in activity. While this may not dramatically improve the 2024 investment turnover figures, it should set the scene for a better 2025.