Research Briefing | Dec 1, 2022

Key themes 2023 – Real estate values to correct sharply

We expect real estate values to correct sharply in 2023, but pressure should gradually alleviate as policy rates peak. We’ve identified five key themes that will shape both the scale of the downturn and the pace of the subsequent recovery.

What you will learn:

  1. Policy rates peak, but commercial real estate valuations correct. By mid-2023, we expect advanced economy policy rates to peak, as supply-chain bottlenecks ease and inflation falls back to near-target levels.
  2. Income remains resilient in the face of a shallow recession. We anticipate that most advanced economies will fall into recession in 2023, albeit registering both a modest contraction in output and a moderate rise in unemployment, by historical standards.
  3. REITs outperform the private market. Global REIT pricing remains dependent on inflation and interest rate movements, but an easing in inflation and a slowdown in the pace of tightening in 2023 would allow REIT pricing to recover ahead of the private market.
  4. Construction cost growth rates to normalise. Construction cost escalation – driven by supply-chain disruptions, labour shortages, and greater infrastructure spending – has led to cost-blowouts and project delays. Higher financing costs and deteriorating exit values have further challenged development viability.
  5. The office sector underperforms as non-prime assets suffer. Globally, office availability rates have risen with an acceleration in the flight-to-quality phenomenon. Non-prime offices are suffering from accelerated depreciation as occupiers, investors, and lenders reassess their requirements. Overall, we expect offices to underperform both in 2023 and the medium term.
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