The party around real estate is starting to come to a halt

For the past eight years, commercial real estate has been what investors call a “safe haven.” Due to the low interest rates, there was enough money to develop new projects or to make large transactions, and even after the corona crisis, the demand for office space, retail properties and logistics centers appeared to have held up. The risk was low and the rental income high and certain: in the real estate sector it was a party every day.

Meanwhile, there are signs that the party is starting to come to a halt. There is stagnation in various parts of the commercial real estate market. Major deals are delayed because buying and selling parties no longer agree on the price. The end of the madness in the housing market also seems to be in sight. After years of rising, house prices suddenly fell by 5.8 percent in recent months, and although a house is still sold quickly in an average of 27 days, homes are on the market for longer. The underlying causes differ per type of real estate, but there is also a major overarching culprit: rising interest rates.

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Due to the low interest rates, it has been very cheap to borrow a lot of money in recent years. And with a lot of money in circulation looking for yield, commercial real estate prices rose sharply. Since the war in Ukraine, those times are over. To get a grip on the rapidly rising inflation, the European Central Bank implemented interest rate hikes in three steps. As a result, it has become a lot more expensive to borrow the large sums of money required for real estate transactions. Paul Bisschop, real estate sector economist at ABN Amro, sees the real estate market stalling as a result. “Investors no longer want to pay the top price, because financing has suddenly become a lot more expensive for them. At the same time, we see that sellers are not yet lowering their prices.”

Investors no longer want to pay the top price, because financing has suddenly become a lot more expensive for them

Buyer-seller mismatch

In other words, a ‘mismatch’ between real estate investors and sellers, with fewer real estate transactions as a result: buyers are waiting to see where interest rates go. The phenomenon is clearly visible in real estate deals in the highest price segment. Negotiations on transactions from 20 million euros – usually large office buildings – are taking a lot longer this fall than in previous years, according to real estate advisor CBRE. Where an average of 5.5 such deals were closed per week around this period last year, there are now only 2.5. The fourth quarter is usually the busiest time of the year for brokers and real estate advisors, as many investors want to complete their transactions before the turn of the year.

According to Frank Verwoerd of CBRE, these large transactions are slow to get going because there is a greater need for an explanation of the economic conditions. Since the interest rate rises, the research department of the consultancy has been very busy. “We try to explain to our clients what is happening in the financing market and the investment market.” Bringing supply and demand together is not as easy as before, and more time is needed for discussions with both buyers and sellers. “It is a lot more intensive, and therefore it takes longer for a transaction to be completed.”

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Incidentally, the interest rate increases among real estate investors do not come as a total surprise, says Verwoerd. “It is mainly the uncertainty, and that is in the financing interest rate, that has made historic fluctuations in recent months. So the transactions have not stopped, more consultation is just needed.” Verwoerd does not want to speak of postponement or cancellation – these large transactions may still be completed this year.

The state of the economy

Another important factor that influences real estate prices is the state of the economy. Statistics Netherlands (CBS) announced this week that the Dutch economy contracted unexpectedly by 0.2 percent. With the turmoil on the financial markets and uncertainty surrounding the course of the war in Ukraine, there is increasing concern that a recession is approaching.

In addition to interest rates, economic contraction also has an effect on property prices. For example, the demand for office space decreases when companies employ fewer staff. If retail sales decline and retailers go out of business, retail property prices will fall, and if consumers order less stuff online, there will be less demand for distribution centers.

For the ‘mismatch’ between buyer and seller of commercial real estate, the economic forecasts mean that water will have to be added somewhere. With the current interest rates and a possible recession on the way, according to Bisschop it seems inevitable that the sellers will lose out in the long term. “Even if the end of the current inflation is in sight, I do not expect interest rates to suddenly return to the levels of recent years. The calculation is then quite simple: the market will only get going again when prices start to fall.”

Houses Investors and ‘Hugo Rules’

Times have been tough for project developers for some time now. The interest rate jumps of recent months make it difficult to get new construction projects financed and are confusing ongoing negotiations – by the time projects enter the construction phase, the numbers on the financing application are already out of whack.

For some time now, project developers and construction companies have been suffering from sharply increased construction costs, which have climbed to record highs due to the corona crisis and war in Ukraine. High-rise buildings are particularly affected; plans for towers in The Hague, Rotterdam and Eindhoven were postponed until further notice. Finally, there is still no solution to the nitrogen problem, which means that many development plans are delayed due to long permit procedures.

ItThe number of permits granted is therefore lagging behind the government’s ambition to build 900,000 homes up to and including 2030. Statistics Netherlands reported this week that the number of permits granted in the first three quarters of this year has fallen by 12 percent compared to 2021 – while Minister De Jonge wants to increase the construction pace.

With regard to retail property, analysts distinguish between food and non-food, i.e. the sale of foodstuffs and the sale of other items – from household products to clothing. Supermarkets and food specialty stores in particular did very good business during the lockdown periods. Non-food businesses, which had to deal with lockdowns, were hit hard. Such retail property lost value, and was often transformed into real estate for which there was a lot of demand – such as houses or apartments. After the lockdown periods, this retail property regained popularity, partly because the shopping streets filled up again.

For retail real estate, inflation also plays a major role. Landlords have typically included in contracts to increase retailers’ rents based on the Consumer Price Index (CPI) – which reflects what consumers are spending on living expenses. The index has been at a low level for years, but has shot into double digits since the war in Ukraine. This spring, shopkeepers revolted against this, when rents suddenly rose by 10 percent for some. “Property owners indicate for the time being that they will hold tenants to the agreements, but remain open to discussion,” said Paul Bisschop of ABN Amro. “There is no other way, because if shopkeepers cannot pay their rent, they will go bankrupt. And nobody is waiting for vacancy in shopping centers.”

In addition to interest rates and the economic situation, office property owners are faced with the question: who often works from home? As working from home has become commonplace for many employees in recent years, large companies notice that the desks remain empty more often. “We see that such companies are proceeding to divest office space, because the attendance figures are disappointing. Sometimes it’s a few floors, sometimes an entire location,” says Madeline Buijs of real estate advisor Colliers. A well-known example is taxi service Uber, which gives up 10,000 square meters of its newly rented head office in Amsterdam South.

It differs depending on the location how difficult it is to find a new tenant. According to Buijs, there is still a lot of demand for sustainable office space at prime locations. Older buildings in smaller municipalities have a more difficult time. “You have seen there for some time that there is stagnation, and then economic prospects and interest rates do not cooperate.” However, according to Buijs, the office market is not yet at a standstill. “The vacancy rate is still low.”

Logistics business premises, such as distribution halls and warehouses, grew into the most sought-after real estate among investors during the corona crisis. In 2021, 5.3 billion euros was invested in it – a lot more than in homes or offices. Because online ordering took off during mandatory store closures, there was a lot of demand for storage and transhipment locations throughout the country.

In the period after the lockdowns, it turned out to be very important for companies to keep more stocks, because the supply chains from China faltered. All this resulted in an acceleration of the new construction of logistics halls, which were mainly built along highways in the south of the country and around Schiphol. In the first three quarters of this year, too, investors invested the most in distribution real estate – in the first nine months of this year the counter has already reached 4 billion euros.

However, it is unlikely that the supply of new industrial space will still be as large in a year’s time. Minister De Jonge is working on this in response to the criticism about the ‘softening up’ of the Netherlands further regulation of distribution centers. In addition, the nitrogen problem is making it increasingly difficult to build new distribution centres. More will therefore be invested in existing business parks, expects Frank Verwoerd of CBRE. “We already foresee that for next year, but certainly for 2024. Our expectation is that offices and homes – historically the most sought-after real estate investments – will again be the most popular next year.”

Both private and institutional investors view this with mixed feelings the accumulation of rules to counter excesses in the free sector rent. For residential investors, the transfer tax went up considerably from 2021. This was intended to give starters a better chance on the housing market, which was dominated by investors. Municipalities are already allowed to defend themselves against private investors with purchase protection for existing buildings and a self-occupancy obligation for new construction. Added to this are the so-called ‘Hugo rules’, named after Minister De Jonge (Public Housing, CDA). The regulated rent limit will soon be a maximum of 1,000 euros.

Residential investors are critical. On the contrary, they believe that all the regulation will make it so unattractive to invest in mid-market rentals that the number of homes will only decrease. The consequences of all regulations will already be visible this year. Kadaster’s latest quarterly report shows that investors are increasingly avoiding the Randstad conurbation. The percentage of homes sold from owner-occupiers to investors in Rotterdam went from 19 percent in 2018 to 8 percent in 2022. There were similar declines in Amsterdam, The Hague and Groningen. Institutional investors, such as pension funds and insurers, sell little and instead invest in new construction.

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Buyer-seller mismatch

The state of the economy