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
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.”