Taking Stock
An interest-rate driven downturn in real estate capital markets may soon give way to an interest-rate driven recovery. The eagerly anticipated pivot in monetary policy is finally upon us, with many global central banks now feeling more at ease with the outlook for inflation. Sentiment in the market has already noticeably improved, while various indicators across pricing and activity metrics would suggest that the bottom is either already behind us, or very close to being behind us.
Oliver Salmon
Director, World Research Global Capital Markets
Rasheed Hassan
Head of Global Cross Border Investment Global Capital Markets
We hope you enjoy our latest review of global real estate capital markets.
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GLOBAL OUTLOOK
Savills 2024
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A review of global real estate capital markets, Q3 2024
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Our latest quarterly review of global capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
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regional OUTLOOK
Director, World Research
Rental growth is slowing, in line with weaker demand and growing supply… But investors are still willing and able to underwrite new deals.
The US Fed cut rates in September for the first time since 2020.
50bps
Global industrial & logistics investment in Q3 rose by 4.3% y/y.
US$46.6bn
Total capital raised by global logistics funds in 2024 year-to-date.
US$69.5bn
The global economy is largely tracking expectations. High frequency data continue to show a modest expansion in activity, with PMI surveys highlighting ongoing strength in the services sector, helping to offset some recent weakness in global manufacturing, particularly in Western Europe. A recovery in inflation-adjusted household incomes – underpinned by rising wages, solid employment outcomes, and falling inflation – is providing a catalyst for growth that should sustain solid momentum via a virtuous cycle running from consumer spending to confidence, manufacturing, and investment. A soft landing remains the highest probability scenario, with some rotation in growth away from the US and towards Europe. The Chinese economy will continue to labour somewhat, underpinned by weak domestic demand, unless the central government targets new stimulus at households. But the rest of Asia should benefit from a wider cyclical upturn, particularly through strong trade growth, with AI-related investment driving high demand for semiconductors from key producers in East Asia. Inflation continued to fall through the last quarter, with headline rates now back to target in most major economies. Lower energy prices are responsible for much of the disinflationary trend; global benchmark oil prices have fallen to around US$70-75/barrel on the back of weak global demand, and easing supply pressures, despite some conflict-driven volatility in the Middle East. Central bankers remain reticent in declaring victory however, with services price inflation – a better indicator of domestic price pressures – generally tracking at around 2-3 percentage points (ppts) above target in most jurisdictions. Labour market dynamics show little risk of a wage-price spiral however; wage growth is slowing, and inflation expectations remain well anchored.
Confident policymakers beget confident investors
Policymakers are clearly more comfortable in the inflation outlook, and their attention is now shifting towards growth. The US Fed, mandated to target both low inflation and full employment, pivoted with a 50 basis point (bps) rate cut in September in response to a series of weak labour market data, with chair Jerome Powell emphasising that “the upside risks to inflation have diminished and the downside risks to employment have increased.” ECB President Christine Lagarde noted that “the recovery [in Europe] is facing headwinds” at their latest meeting. Across advanced economies, central banks in Europe were the first to start lowering interest rates, with the ECB cutting by a cumulative 75bps since June. Many emerging market economies are also well advanced in easing rates, having pre-empted the US Fed tightening policy back in 2021. In Asia Pacific, the Bank of Japan raised rates for a second time in August, as part of wider efforts to wean the economy off years of ultra loose policy. The Reserve Bank of Australia remains in a shrinking group of central banks yet to pivot on rates. Continued economic growth (albeit modest) in combination with easing financial conditions, should continue to encourage risk-on investors – global equity markets have seen strong inflows of capital, with leading benchmark indices hitting record highs. Real estate investors should follow suit as we move into next year, driving a more sustained rebound in activity. However, while the underlying risk environment is more balanced than it was 12 months ago, geopolitical risk remains elevated. A recent escalation in conflict in the Middle East has led to some volatility in oil prices, although there is limited feed through to inflation. But as concerns over interest rates and inflation dissipate as we move into 2025, geopolitics will continue to occupy the mind of investors, particularly those deploying capital into relatively illiquid markets such as real estate.
Global industrial & logistics investment turnover
Globally, nearly US$46.6bn was invested in the industrial & logistics sector in the third quarter, a 4.3% increase year-on-year. On a seasonally adjusted basis, Q3 was the second consecutive quarter of positive sequential growth in activity. The macroeconomic backdrop is relatively positive for the sector. However occupational demand remains somewhat muted. Net absorption in the US, for example, was the lowest since 2016 this quarter. But sentiment amongst occupiers is improving, as evidenced by our autumn 2024 European Logistics Census, with the balance of respondents expecting to be in expansion mode for the next 12 months. In the US, some reticence ahead of the presidential election is likely feeding into tenant demand. Across much of Europe, leasing activity is down on the year, although the UK market is an exception, with take-up rising by 26% year-to-date. In many markets, occupiers are increasingly conscious of their outgoings, following several years of rising costs, not only through rental growth, but also energy and labour costs, which is leading to some consolidation in their footprints. Rental growth is slowing, in line with weaker demand and still solid supply, as legacy development is onboarded. This is most apparent in the US market, which will need several years of solid take-up to return vacancy to the pre-pandemic level, as well as in some APAC markets that are also oversupplied, such as South Korea and China. In Europe, there has been a re-anchoring in the historical relationship between vacancy and rents, with average rental growth slowing to 5.8% y/y in Q2, down from 10.4% in Q1.
But investors are still willing and able to underwrite new deals, even with more conservative rental growth expectations. We continue to see major deals complete – highlighting the retained conviction of investors in the long-term fundamentals of the sector – with two of the largest global real estate money managers, Brookfield and Blackstone, acquiring large warehousing portfolios this quarter. More widely, the list of top buyers over last 18 months is a ‘who’s who’ in real estate capital markets. With major scale investors comes a base level of portfolio and M&A activity, which is supporting overall transactional activity. The last quarter was no different; there was at least one transaction in each region breaching the billion-dollar threshold. The industrial & logistics sector is leading the way in terms of price recovery in commercial real estate. In the last few years, strong income growth in many markets has offset the impact of higher interest rates on capital values. Globally, the sector has returned an annualised 11.7% since the end of 2019, according to MSCI, compared with an all-property average of just 3.5%. Now, with growing competitive pressure amongst buyers, we are seeing some inward movement of yields. Already this year, we’ve seen prime benchmark yields come in across core US markets, as well as in some European markets, including London, Madrid, and Île-de-France. The majority of markets, outside APAC, are expected to see further downward pressure over the next 12 months as interest rates come down.
Investors lead occupiers in the recovery
Prime industrial & logistics yields, Q3 2024
Houston 5.75%
Los Angeles 5.00%
Sydney 5.25%
Chicago 5.50%
Shanghai 5.25%
Hong Kong 3.96%
Tokyo 3.30%
Singapore 6.35%
Seoul Metropolitan Area 5.50%
Northern New Jersey 5.00%
Île-de-France 4.75%
Amsterdam 4.75%
Cologne 4.40%
Madrid 5.05%
London 5.00%
Dubai 7.50%
Houston
Sydney
Shanghai
Amsterdam
Cologne
Tokyo
Hong Kong
Singapore
Los Angeles
Chicago
Île-de-France
London
Madrid
Dubai
Northern New Jersey
Seoul Metropolitan Area
Houston 60%
Sydney 53%
Shanghai 40%
Amsterdam 55%
Cologne 55%
Tokyo 60%
Hong Kong 40%
Singapore 50%
Los Angeles 60%
Chicago 60%
Île-de-France 55%
London 60%
Madrid 55%
Dubai 50%
Northern New Jersey 60%
Seoul Metropolitan Area 63%
Houston 7.00%
Sydney 6.20%
Shanghai 4.00%
Amsterdam 3.80%
Cologne 3.80%
Tokyo 1.10%
Hong Kong 6.25%
Singapore 3.60%
Los Angeles 7.00%
Chicago 7.00%
Île-de-France 3.80%
London 5.50%
Madrid 4.30%
Dubai 7.00%
Northern New Jersey 7.00%
Seoul Metropolitan Area 5.80%
Houston 3.88%
Sydney 9.06%
Shanghai 8.28%
Amsterdam 8.72%
Cologne 7.94%
Tokyo 7.59%
Hong Kong 5.27%
Singapore 11.50%
Los Angeles 2.00%
Chicago 3.25%
Île-de-France 8.72%
London 9.95%
Madrid 8.78%
Dubai 12.50%
Northern New Jersey 2.00%
Seoul Metropolitan Area 5.00%
Houston 1.94%
Sydney 1.26%
Shanghai 3.10%
Amsterdam 2.33%
Cologne 2.28%
Tokyo 2.45%
Hong Kong 1.20%
Singapore 3.73%
Los Angeles 1.19%
Chicago 1.69%
Île-de-France 1.83%
London 1.00%
Madrid 2.12%
Dubai 3.69%
Seoul Metropolitan Area 2.51%
Prime yield
Outlook for yields, next 12 months
Typical LTV
All-in cost of debt
Cash-on-cash yield
Risk premium (over gov bonds)
Source: Savills Research and Macrobond Note: Yields may be different to quoted values in markets where the convention is to use a gross rather than net value. Values based on end-of-quarter data. Yields in Singapore reflect the domestic land tenure system, where the longest lease for new industrial properties is 30 years. See Methodology for details.
Methodology: Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A big-box logistics facility located in a prime location, fully let to a single good profile tenant on a 10-15 year open market lease. The typical LTV and cost of debt represent the anticipated competitive lending terms available in each market. Cash-on-cash returns illustrate the initial yield on equity, assuming the aforementioned LTV and debt costs. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.
(as at end-September)
Methodology
key transactions
City: United States Building: Multiple assets located across 20 US markets Tenant: Multiple Lease Length (WAULT): Undisclosed Area: 14.6m sq ft Price/NIY: US$1.3bn/Undisclosed Vendor: DRA Advisors
Vendor Nationality: United States Purchaser: Brookfield Asset Management Purchaser Nationality: Canada Comments: The transaction is reported to be Brookfield’s largest industrial acquisition in over five years, and consists of 127 infill light industrial assets spanning 20 high-growth US markets, largely concentrated across the Sun Belt and Midwest regions. Brookfield is planning a capex program to enhance the sustainability and efficiency of the properties.
City: Europe Building: 32 buildings spanning 7 countries Tenant: Over 110 tenants, mostly comprising 3PL providers Lease Length (WAULT): Undisclosed Area: 12.9m sq ft Price/NIY: €1.1bn (US$1.2bn)/Undisclosed Vendor: Burstone
Vendor Nationality: South Africa Purchaser: Blackstone Purchaser Nationality: Unites States Comments: In one of the largest European logistics deals to complete in 2024, Blackstone has acquired an 80% stake in a pan-European warehouse platform, valued at €1.1bn (US$1.2bn), from the operator Burstone (who are retaining a 20% interest). The portfolio consists of 32 mid-large facilities, spanning 7 countries including Germany, France, and the Netherlands.
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Location remains a key differentiator in asset performance, and investors are more selective in asset choice.
Total investment in Q3 of US$10.6bn across the EMEA region represented a 32% increase year-on-year. This was supported by a pick-up in portfolio transactions, including Blackstone’s acquisition of an 80% stake in a pan-European warehouse platform, owned and operated by the South African listed company Burstone, valued at €1.1bn (US$1.2bn). This deal is indicative of a wider trend of consolidation in the market, with large private equity groups aggregating portfolios in anticipation of launching future IPOs into what is a relatively nascent listed market. Most major regional markets, in terms of recent transactional activity, can be differentiated into two distinct groups; those showing relatively stability in comparison with 2023, including Spain, Sweden, and the UK, and those seeing significant year-on-year growth, including Denmark, France, Italy, and the Netherlands. The exception to the rule is Germany, where activity remains muted, as the ongoing malaise in the economy drags on both occupier and investor sentiment. Investment is broadly tracking at around €1.0bn a quarter so far this year, which represents a 25% decline on 2023. Activity has been supported by owner-occupiers, who account for around 20% of turnover so far this year, compared with a long-term average of less than 5%. This is, however, mostly driven by a single transaction (the largest deal year-to-date), with the City of Cologne purchasing part of the Koelnmesse exhibition centre from the US-based investor RFR for a reported €350m (US$380m). Elsewhere, liquidity is returning, and ‘fair-valued’ assets are seeing competitive bidding, especially those with a viable
story supporting the sale, with some buyers reticent to fully engage in a process that may not get to completion. With few motivated sellers in the market, many sales are being driven by the natural lifecycle of closed-ended funds, or by the cash raising requirements of multi-asset funds (with industrial seen as the most liquid sector). Sentiment is picking up; according to our autumn 2024 European Logistics Census, 60% of investor respondents consider the market environment more favourable than 12 months ago. Investors remain focused on income-producing assets in the UK and core European markets (France, Netherlands, Spain, and indeed, Germany). In this respect, they are largely following the occupiers. Prime yields are stable this quarter, but most markets are seeing downward pressure in the next 12 months. A recovery in risk sentiment is also leading to growing interest in Poland, both to service the fast-growing domestic market, as well as to capitalise on its potential as a nearshoring hub to serve the rest of Europe. Annual take-up across Poland since Covid-19 has averaged around 80% higher than the 2015-19 period. Location remains a key differentiator in asset performance, and investors are more selective in asset choice (again, following the occupiers). In Germany, for example, landlords in peripheral regions are having to provide greater incentives in order to attract tenants, and yields are typically around 50bps above the prevailing prime yield of 4.4%. Access to a reliable energy source is also increasingly important in a sector that is investing heavily in power-hungry technologies such as robotics and automation, as well EV charging capacity to support fleet electrification.
APAC
North America
EMEA
European industrial & logistics investment turnover (Q1-Q3)
The ‘normalisation’ of the US industrial & logistics sector remains a key theme across both occupational and capital markets.
Annual growth in the value of industrial & logistics assets is much stronger than other real estate sectors.
10%
Investment in the US industrial & logistics sector fell by 1.3% on the year.
US$22.9bn
Industrial & logistics CMBS have the lowest delinquency rate of any core real estate sector.
0.3%
US commercial property prices
In Australia, while there were few deals of note in the quarter, pending deal activity suggests continued appetite to transact when new stock is available.
Global warehousing costs
The ‘normalisation’ of the US industrial & logistics sector remains a key theme across both occupational and capital markets. Investment of US$22.9bn in the third quarter was broadly stable, both on a year-on-year comparison, as well as when benchmarked with the 2015-19 average. Indeed, quarterly investment has been tracking in the US$20-25bn range since the beginning of 2023, consistent with activity levels before Covid-19. Investor appetite for the sector remains strong. Large institutions are active – and good assets are seeing competition – despite the rebasing in overall deal activity (compared with 2021-22), with major private equity groups such as EQT Exeter, Brookfield, and KKR in the list of most prominent buyers. In the largest transaction to complete in Q3, Brookfield acquired a 14.6m sq ft portfolio from DRA Advisors for US$1.3bn, which is reported to be their largest acquisition in the sector in five years. Activity across occupational markets has been a little softer so far this year; net absorption of around 120m sq ft year-to-date represents the weakest outcome in nearly a decade. Demand is underperforming the economy, with some occupiers consolidating their footprint, looking to boost efficiency in an effort to control rising costs (sub-lease space continues to rise as a consequence). Some of the weakness may also be due to delayed decision-making ahead of the presidential election. The national vacancy rate rose to 7.3% in Q3, up 20bps from the previous quarter. This was however the smallest quarterly increase since 2022, suggesting that we are close
to the peak in this cycle. Rental growth is broadly flat as a consequence, although there is a significant divergence in outcomes across major markets. In Los Angeles, net absorption has now been negative for eight consecutive quarters, pushing vacancy higher and weighing on rents, which were down by more than 8% y/y in Q3. Tenant friendly conditions also prevail in Northern New Jersey and Chicago, while the Houston market remains very active, boosted by a number of large deals in the quarter, and should lead the wider market in seeing vacancy come down again. A shift in the development cycle will support this dynamic; new completions are now beginning to fall, and the surfeit of new supply will gradually give way to scarcity, with new starts falling sharply. This could, however, take several years to wash through the market. Property values are still rising. Over the last few years, strong rental growth more than offset any cap rate expansion due to higher interest rates. Now with rents stabilising, cap rates are moving in the favour of property owners, with prime yields coming in by 25bps this quarter. This price growth will ensure there is very little distress in the sector – most investors facing a refinancing event will be sitting on large unrealised gains in asset values, and thus lower effective LTVs, as well as high interest coverage. The delinquency rate on Industrial CMBS was just 0.3% in September, according to Trepp, the lowest of all core property types.
Total investment of US$11.6bn across the APAC region represented a 9.4% increase compared with Q3 2023. The positive quarter was primarily supported by growth in Taiwan, Singapore, and South Korea, offsetting large double digit falls in China and Japan. In South Korea, the increase in transactional activity is underpinned by a high share of distressed sales. Around half of all deals done in Q3 were out of distress, with opportunistic buyers looking to capitalise on heavily discounted assets. Turnover was also flattered by a single data centre transaction, with the Macquarie Korea Infrastructure Fund (MKIF) purchasing a 40MW data centre near Seoul from IGIS, the largest real estate manager in South Korea, for KRW735bn (US$546m). Fundamentally, the logistics sector has been in some state of oversupply for several years now. In the Seoul Metro Area, the vacancy rate rose to 9.4% this quarter, up from 8.0% at the beginning of the year. New development is slowing in line with a high build cost, which should help to bring some balance to occupational markets. But it make take a period of sustained leasing activity to absorb the excess supply. In the meantime, downward pressure on rents is likely to push the prime yield out, despite the prospect of interest rate cuts from the Bank of Korea. The Chinese market, meanwhile, makes South Korea look tightly supplied, with the vacancy rate in Shanghai pushing above 28% in the third quarter. Occupational demand is simply unable to absorb the onboarding of new supply, leading to growing pressure on landlords to make concessions when competing for tenants. The prime yield rose by 25bps this quarter to 5.25%, but it is unlikely to stabilise there. There was one notable transaction in the quarter; Taikang Insurance taking a 95% stake in a portfolio of six properties owned by ESR logistics for RMB5.8bn (US$810m). But total investment was still more than 30% down on the year.
In Singapore, investment was propped up by the completion of several large deals, including the acquisition of 4.5m sq ft of assets across the life sciences, advanced manufacturing, and logistics sectors, by a consortium consisting of the US private equity group Warburg Pincus, and the Australian developer Lendlease, for SGD1.6bn (US$1.2bn). In a similar trend to other regional markets, leasing activity has been relatively soft, despite a recovery in manufacturing output linked to strong global chip demand. Most occupiers remain cost-conscious, and new supply due to come on board in 2025 is likely to push vacancy higher, and weigh on rental growth, which has been losing momentum. The Hong Kong industrial & logistics sector is showing more life than other core sectors domestically, with investment rising by nearly 70% y/y in Q3. Owner-occupiers have been prominent in recent transactional activity, with a combination of the high cost of debt and risk averse banks (some banks are reassessing the real estate sector given losses on existing loan portfolios) favouring cash rich buyers. The largest transaction of the quarter involved the purchase of Li Fung Centre in Sha Tin for HKD1.8bn (US$231m) by the property arm of JD.com, the Chinese e-commerce company, which will move in when the building is vacated by the current occupier Maersk. Finally, in Australia, while there were few deals of note in the quarter, pending deal activity suggests continued appetite to transact when new stock is available. Prime yields remain unchanged, more due to a lack of evidence rather than anything else. The anticipation of a delayed pivot from the Reserve Bank of Australia – with financial markets pricing in around 50bps of rate cuts next year – is likely to support some yield compression. Leasing transactions have eased off from the highs seen in 2023, and are now showing signs of normalising through 2024. Market rents are still significantly higher than they were three years ago, but rental growth expectations have fallen back to earth, particularly in markets where vacancy has risen.
(June-2024)
market view
The share of investment backed by cross border investors year-to-date is the highest since 2017.
67%
EMEA industrial & logistics investment rose by 32% on the year.
US$10.6bn
The German share of regional investment is 4ppts lower than the 10-year average.
11.4%
The vacancy rate in Shanghai, which is likely to remain elevated with demand inadequate to fill the space.
28.1%
Investment rose by 9.4% y/y in the APAC industrial & logistics sector.
US$11.6bn
The share of cross border investment in 2024 year-to-date is the highest in nearly a decade.
39.8%
regional outlook
Head of Global Cross Border Investment
Rasheed Hassan shares his view on the market
Last quarter, we spoke of a ‘tilt to the positive,’ but it now feels like we are in recovery mode. We have referenced rising rents for a long time, but we are now witnessing yield compression, to varying degrees, in many markets now and across sectors. This is being driven by a healthy blend of falling borrowing costs (a combination of a reduction in underlying forward rates, as well as lender competition leading to tighter margins), the adoption of rental growth forecasts in investor underwriting, and competition for a small amount of buyable assets from a growing pool of buyers. The buyer types are evolving too. In 2023 we saw a big uptick in activity from private investors, unimpeded by committees and guidelines, who could act with haste if they saw an opportunity, and could be flexible on hold periods if markets did not recover as quickly as anticipated. Over the last six to 12 months, we have seen private equity groups dominating many processes, starting with smaller assets with exceptionally strong fundamentals, where they could be very confident in deep liquidity at the point of exit. This group has been growing, as has the breadth of sectors (the majority will do offices now) and geographies they will consider. Additionally, the lot sizes are increasing quickly. Larger single assets, portfolios and M&A are all back in the conversation.
This is providing vendors with more confidence and will help transaction volumes. Lastly, the highly sought after core institutional money is also back in the market, looking to increase exposure to areas that have not had the same levels of attention in recent years, including offices and retail, particularly in locations that are showing the strongest underlying fundamentals. This downturn has been characterised by a lack of distress and this does continue to be the case, so far anyway. However, a lack of distress does not mean an absence of stress. The last two years have shown us that the market has a resilience that has surprised many on the upside. There is much more equity and debt capital in the system as a whole, and lessons were learned from the GFC about the negative ramifications of overleverage. However, stress does remain in the sector, and we are not out of the woods yet. A major global investor was recently keen to point out that given some of the challenges they can still see in their own portfolio, despite their sheer size and liquidity, they can only imagine the situations that others, less fortunate than them, may be facing. With the emergence of greater market confidence and improving pricing, more owners are choosing or being encouraged by their lenders to call time on their ownerships and sell. All of the above will not dramatically improve 2024 investment turnover figures, but it should set the scene for a better 2025.
