Despite the severe impact on economic activity triggered by the Covid-19 pandemic, the European commercial real estate market is well-positioned for a recovery, with investment volumes expected to return to pre-pandemic norms by 2022, according to the EMEA Real Estate Market Outlook 2021, published today by global real estate advisor CBRE.
CBRE predicts that euro area GDP will contract by 7.3 per cent in 2020, before recovering by 4.6 per cent in 2021, assuming the lockdowns ease and a broad-scale vaccination becomes available. Short term interest rates are not expected to rise until 2023 and CBRE expects monetary policy to remain very accommodative for at least the next 18 months, which is positive news for the real estate market.
CBRE forecasts aggregate European commercial real estate investment to fall by 25 per cent in 2020, increase by between 5 per cent and 10 per cent in 2021 and return to pre-Covid norms by H2 2022, providing the current vaccine timelines remain on track. Appetite for assets remains strong, particularly for Logistics, Multifamily and Prime Office assets in major markets, and this is expected to continue in 2021. Distressed sales in Hotel and secondary Retail assets will likely materialise in the near-term.
Leasing demand for Office space has been challenged by the lockdown measures and for the first three quarters of 2020, was down 40 per cent against the same period in 2019. However, CBRE expects some recovery in 2021 with continued demand for high-quality, amenity-rich space in core city locations. Vacancy rates across Europe are expected to continue to rise, which will reinforce the downward pressure on rents seen since Q1 2020. Occupiers are also expected to execute more agile workplace strategies to position themselves for more distributed working patterns. Some are looking to reduce their office footprint, support increased remote working and start to shift towards more choice-based work patterns, including greater use of flex space. The impacts will not be immediate, or certain, but they will represent a potential headwind to leasing demand, offset by a resumption of economic growth, likely reduced levels of space densities and a growing preference for higher quality, wellness‑capable and tech-enabled buildings.
Online retailing, accelerated by the pandemic, is expected to grow further and will continue to drive demand for Logistics space in 2021. Take-up from e-commerce will be supplemented by further demand driven by the reconfiguration and expansion of supply chains. Prime rental growth for Logistics is forecast to be at a rate of 1.9 per cent per annum for the period 2020-2024 with higher rental growth in urban locations, due to land scarcity and greater demand from e-commerce occupiers.
Multifamily and Data Centres have also shown resilience through the Covid-19 crisis. Multifamily has displayed robust levels of occupancy and rent collection when compared to other sectors and CBRE expects investment to reach record levels in 2021. The boost in ‘build-and-buy’ Data Centre investments seen in 2020 will continue in 2021, supporting the emergence of new Data Centre hubs across Europe. A record supply of Data Centre volume is scheduled for 2021 with even more scheduled for 2022 to meet the growing demand.
Retailers remain challenged and in the medium term, the full recovery of major city locations depends on a widespread return to the office and of tourism and business travel. Opportunities exist in the Grocery sector, which offers investors a combination of long leases and more predictable income, as well as Retail Parks. Demand for exceptional assets in the best locations is expected to remain, but discounts are being sought, and the recalibration of retail rents and property values will provide opportunity for repositioning and repurposing of retail assets.
Hotel and the Leisure and Entertainment sectors will remain under pressure but will experience a material boost in demand as a result of the vaccine, with overall hotel demand expected to return to pre-pandemic norms by 2024. CBRE expects certain travel segments, such as domestic leisure, to recover sooner. More resilient aspects of Operational Real Estate, such as Healthcare, will fare better. Assets where the landlord and operating platforms are able to partner most collaboratively will perform the best.
Jos Tromp, Head of Research, Continental Europe, CBRE, says: “Quite clearly 2020 has been a year of enormous disruption for real estate markets, with the Covid-19 pandemic bringing the previous economic cycle to an abrupt end. As with all crises, the impacts and recovery will not be uniform across all sectors and geographies, but new opportunities will emerge, and the likely introduction of vaccines offers grounds for a sustainable recovery as we enter 2021.”