People
Global real estate markets have been upended – what’s next for the sector?
Real estate markets have experienced severe turbulence in recent years due to a combination of cyclical and structural challenges that have disrupted traditional models and the investment status quo.
The era of low interest rates prevailing since the Great Financial Crisis of 2007-08 ended abruptly in mid-2022, as the global inflationary surge prompted central banks worldwide to implement strict quantitative tightening programmes. The resulting increase in policy rates, such as the 500bps hike in the U.K., led to a substantial rise in the cost of real estate debt and finance.
This paradigm shift caused investors to adjust their return expectations, which resulted in a broad-based reset of real estate values and swung total returns negative, despite resilient income returns. The damage to market sentiment led both investors and lenders to adopt a significantly more risk-averse approach, causing global investment markets to collapse.
According to AlixPartners’ 2024 Turnaround and Transformation Survey, 57% of respondents expect Commercial Real Estate to face significant distress in 2024. Yet, in spite of these challenges, the actual rise in distressed assets has been modest so far.
What sets the current market situation apart is the unique combination of cyclical and structural factors. While real estate has historically recovered from downturns with renewed strength and focus, the present dislocation is different and presents unique challenges and, indeed, opportunities. To shake off the investment market paralysis, we see a number of potential catalysts for renewed activity, including:
- Improved stability, visibility, and sentiment
- An unprecedented debt maturity wave…
- …driving substantial Debt Funding Gaps; and
- Deepening distress crystallising
Substantial attention has been focused on managing the dislocation arising from these mostly cyclical headwinds, diverting attention and finite resource away from the challenges and vulnerabilities exposed by diverse and profound structural forces, resulting in significant investment deficits that will need to be addressed.
These structural factors will continue to play out over a protracted time horizon and will likely exacerbate the cyclical valuation reset, widen the bifurcation between winner and losers, and delay recovery. But dislocation also creates opportunity.
For a deeper understanding of these key themes and to explore proactive strategies for navigating this complex market, download the full report here.
