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European commercial real estate market enters pause

Virginie Wallut of La Française Real Estate Managers conducted an analysis of the European commercial real estate market in the first quarter of 2023 and has concluded that it entered a pause.

This is due to a number of factors that have overwhelmed investment activity, such as tightening inflation and the European and U.S. banking crises. As a result, the pace of trading slowed and has forced some investors to take a 'wait-and-see' position, reports big data platform Brainsre.

However this is not only causing market paralysis effects, but high net worth investors see this as an opportunity to create value through rentals or enhanced performance (particularly the environmental characteristics of the assets).

The European real estate market is currently undergoing a period of adjustment. According to data, in Europe the volume of commercial real estate investment fell by 63% year-on-year, €26.5 billion in the first quarter of the year.

The number of global investors is increasing (compared to Europeans), looking to take advantage of price levels. Among asset classes and markets, diversification assets saw a decline in investment levels, compared to other assets that may also have seen a decline.

The most dynamic European real estate markets continue to be the United Kingdom and Germany, despite declines in investment volumes of 68% and 71% year-on-year respectively. On the other hand, Ireland, Belgium and France are holding up, with investment declines of less than 30%.

Real estate yields in peripheral locations are on an upward trend and continued in a range of 25 to 50 points across Europe in the first quarter, while prime office yields remained stable. High inflation and rental value growth, plus low vacancy in central locations would help to offset the effect of rising interest rates on the value of prime real estate assets.

In general, vacancy rates are increasing across Europe. However, there is a difference between the rates of increase from one country to another. While in Germany the vacancy rate is low and acceptable, in peripheral countries such as Spain, Ireland and Italy it exceeds 10%. The differences in availability rates in central locations compared to peripheral locations are striking.

Naturally, peripheral locations have lower rents, are known to be oversupplied and experience upward pressure compared to central locations.