Questions for
10 Critical
Can central banks tame inflation without causing a recession?
What does the property yield premium tell us?
Is ESG strategically driving occupiers to seek quality?
What will happen to energy prices in 2023?
Can industrial demand continue?
Will bricks-and-mortar retail remain relevant in Europe?
Will construction costs stabilise?
How are portfolio allocations shifting in the institutional space?
Will higher interest rates and slowing growth erode housing affordability?
Will we see increased levels of ESG legislation?
Historically when the ECB begins to lower rates, property values begin rising two quarters later.
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Harmonized indices of consumer prices – All items Source: Eurostat
10.6%
The highest rate of inflation in the euro area to date (Oct 2022). Since then, inflation has eased to 9.2% (Dec 2022).
How much more consumers are paying for housing, electricity and gas in the euro area compared to a year ago (Nov 2022)
+20.6%
In 2023 markets expect the European Central Bank (ECB) to raise rates twice (Feb & Mar) and the Bank of England (BoE) once (Feb). Although the euro area is likely to have joined the UK in a recession in Q4 2022, we do not expect these upcoming rate hikes to prolong or cause a further recession. UK and euro area inflation is expected to return close to the target (2%) by 2025. However, it is worth noting key central banks around the world have settled on an inflation target of 2%, which is significantly below historical standards of average inflation. Inflation has averaged 3.4% in the US and 4.9% in the UK from 1949 to 2021.
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There is concern that a wage-price spiral is taking hold which will make the central bank's job of taming inflation even more difficult.
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European office prime yields have enjoyed a premium averaging 3.6% over the last 5 years and as high as 4.0% as recently as Q4 2021. However, by the end of 2022, the premium was just 1.7%, its lowest since 2008.
Source: European Central Bank, Cushman & Wakefield
38bps
Prime yields in 2022 in the euro area rose by
Upward movement in euro area bond rates in 2022
279bps
The rise in prime property and bond yields across Europe has not been enough to stop property’s income premium compressing: At the turn of 2022, it was 423bps, finishing the year at 182bps. This suggests property yields will increase. Recent history is not a good guide to what we should expect given the low interest rates since 2014. Pre-GFC, when interest rates were higher, real estate yield premiums were much lower (225bps for European offices). The gap has increased in Q4 2022 and may rise again to be closer to pre-GFC averages as soon as Q1 2023 with just a modest further increase in yields and a stabilization in bond rates. The property premium may be much closer to reaching a new equilibrium.
The Netherlands and the UK are imposing tighter Minimum Energy Performance Standards than the wider EU. In the UK, commercial buildings must achieve a minimum EPC rating of E by April 2023, upgrading to B by 2030. In the Netherlands, as of January 2023, all office buildings need to satisfy a minimum EPC rating of C, with plans to set the minimum to A in 2030.
Source: Cushman & Wakefield Research *Grade A refers to newly built or refurbished space - well located and high specification not previously occupied. **Availability refers to the total amount of space that is marketed as available to let in existing buildings included in stock.
-4.5%
The decline in grade A* office availability** across Europe from Q1 2022 to Q3 2022
The ratio of grade A availability to total office stock in key markets across Europe
<2%
Grade A offices will continue to be most sought after in 2023 as occupiers invest in boosting employee wellbeing and experience, choosing quality over quantity. Sustainability and efficiency will remain top priorities as green regulations come into play across Europe. Strong demand for the highest quality offices drove annual rental growth to 5.3% in Q3. Rental momentum is expected to carry through into 2023, with European prime office rents growing by 1.1%.
Data centres are the most energy-intensive sector, with global data centres consuming 220-320 terawatt-hours of electricity which equates to approximately 0.9-1.3% of global electricity demand in 2021. A proposed solution to drive efficiency could see excess heat from data centres used to heat nearby commercial and residential buildings.
€284
year-ahead forward price for electricity in Q3 2022, down from €582 MWh in Q2 2022.
The share of electricity generated by fossil fuels in Q3 2022, grew from 36% (Q3 2021).
40%
Natural gas storage in Europe is likely to be depleted in Spring 2023. Gas reserves at the end of 2022 managed to maintain regular levels, however, that was due to the larger contribution from Norwegian gas supplies. In the longer-term, this is not sustainable. European nations have prioritized natural gas consumption for domestic over industrial purposes and as such, industrial production has fallen sharply in the chemicals, steel, ceramics and fertilizer sectors. A decline in output places upward price pressure and limits the speed of economic recovery.
Source: Eurostat based on S&P Global Platts data
per MWh
In previous economic downturns, logistics take-up has shown counter-cyclical characteristics. As businesses have looked to reduce operating costs by outsourcing processes and upgrading to operationally and cost-efficient buildings, take-up has been much higher-than-expected in some markets during the same period.
Can industrial occupier demand continue?
In 2022 occupier demand for logistics and industrial space reached record-high levels. This started to slow in H2 2022 as the deteriorating economic outlook dented consumer and business confidence: take-up tends to lag business confidence indicators by 6-9 months, implying that there will be a period of slowing demand in H1 2023. The speed at which the economic environment improves will determine how occupier demand responds in 2023. Our expectation is that occupier demand will begin to revive in H2 2023, as the economy begins to recover from a mild recession.
Source: Cushman & Wakefield Research *Four-quarter rolling total
Highest level of occupier take-up* for logistics and industrial space on record, (Q2 2022).
41m
-20.1%
sqm
Q/Q change in European occupier take-up between Q2 2022 and Q3 2022.
This decline in volume is largely due to occupiers slowing their decision-making processes, but occupier demand remains strong and take-up levels are still at historically very high levels.
-8%
Retail prime rents 8% below pre-Covid-19 levels in Europe (Q3 2022)
Consumer spending y-o-y growth in the euro area in Q3 2022
1.6%
Will the recovery in tourism support consumer spending in 2023?
COVID-19 accelerated the growth in e-commerce, adding pressure to an already adjusting sector. However, since then there has been a renewed demand for in-store shopping driving retailers to restore their focus on brick-and-mortar investments. A quarter of European markets are achieving rent levels equal to or even above pre-pandemic levels. Although the recovery is being slowed by economic headwinds there is clear evidence that bricks-and-mortar retail is an important component of an omnichannel world.
Source: Cushman & Wakefield Research, Eurostat
Retail annual turnover amounts to €3.2 trillion which is approximately 1/5 of European GDP.
Periods of high construction costs are usually followed by similar periods of declining construction costs, as higher costs slow/halt projects, increasing supply and reducing demand.
41%
The highest rate of producer price inflation achieved in Q3 2022 across the euro area
Decline in the cost of a 40-foot container to Europe from Asia since its peak in September 2021 ($20,000)
-80%
Supply chain disruptions have continued to drive up the cost of construction materials. The expectation in the current economic environment is a slowdown in construction activity. The construction sector will face challenges in H1 2023, most notably stricter and more costly financing, resulting in price pressures stabilising. In addition, China is a major supplier of construction materials. COVID-19 restrictions have greatly impacted production and freight transport. As China re-opens its borders this will certainly be good news for the cost of construction materials.
Source: Freightos Baltic Index, Eurostat
Single-asset trades of niche sectors now collectively represent 6% of total CRE volume. In some countries, this is greater—for example, in the Netherlands, niche volumes increased from an average of 6% of all deals (in 2017-2019) to 12% in 2022.
Total niche investment volumes in EMEA in the last 5 years.
EMEA’s niche investment volume in 2022 was 42% above average 2017-2019 levels.
Continued activity throughout the alternative sectors signals ongoing maturation of these sectors which will fuel CRE activity and bring investors and owners more diversification opportunities. Niche CRE presents inflation- and performance-hedging characteristics that will be particularly attractive to investors in the present high-inflation and slowing growth environment.
Source: RCA, Cushman & Wakefield Research
How are portfolio allocations shifting throughout the institutional space?
42%
€58B
Germany has the lowest owner-occupied rate (49.5%), in contrast to Romania, Slovakia, Hungary and Croatia which have the highest shares (above 90%).
In 2021, ‘Housing, water, electricity, gas and other fuels’ represented a quarter of EU household expenditure. This compares to 21% in 2000.
The average house price increase across the EU from 2010 to 2022 Q3, while rents also increased steadily throughout this period (+18%).
Since 2010, rents have increased moderately whilst house prices have risen much faster. The rising share of disposable income spent on housing and rents partly reflect the increase in house prices over the past decade across Europe. Rising mortgage rates combined with higher house prices are expected to add more pressure to housing affordability. Housing demand is expected to slow as the cost of living overburdens many households. As a result, demand for rental homes is likely to increase, placing upward pressure on the cost of renting.
Source: Eurostat
25%
+49%
New Sustainability Disclosure rules come into play from 1st January 2023. Under the new rules ‘…financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have…’ These new rules require disclosure by 30th June every year and are aimed at strengthening investor protection and reducing greenwashing.
The EU has a legally binding commitment by 2030 to reduce carbon emissions by 55%. Although negotiations have been ongoing since 2021 these will reach a critical phase in 2023 particularly due to the upcoming EU elections in 2024. If the commitments are not brought into law in 2023, they are likely to be pushed back until the political landscape settles.
Source: European Commission
of the total floor area of all public buildings requested to be renovated annually by Member States by the European Commission to become energy efficient.
Buildings in Europe could be renovated to meet the European commission requirement
3%
35 M
