Global commercial real estate markets defy expectations to set new record
Global Market Perspective, February 2020
Global investment volumes in the fourth quarter of 2019 grew by 10% from a year earlier to US$245 billion. This brought full-year activity to US$800 billion, up 4% from the elevated levels seen in 2018 and making 2019 the strongest year for commercial real estate on record.
As the current real estate cycle enters its eleventh year, the outlook for the sector remains positive. Target allocations to real estate by institutional investors rose for the sixth consecutive year in 2019, with most groups expected to either maintain or increase their allocations in 2020. Investor conviction in the real estate sector is still strong, supported by robust supply and demand fundamentals in many global markets and healthy spreads to risk-free rates. In this environment we forecast global investment in commercial real estate to moderate slightly in 2020, by 0%-5%, to roughly US$780 billion. While investors are still keen to access the sector, continued caution and selectivity, as well as limited availability of product, stand to impact transaction volumes.
Second-half rebound boosts activity in the Americas to new heights
A very active fourth quarter in the Americas saw regional activity increase by 15% on the previous year to US$97 billion. This helped to boost full-year volumes by 12% relative to 2018 to US$347 billion, the highest level ever registered. The U.S. drove regional performance as full-year volumes increased by 10% to US$317 billion. Meanwhile, Canada also saw healthy growth while a flurry of activity in the fourth quarter pushed up full-year volumes in Mexico and Brazil.
Fourth-quarter surge softens declines in EMEA
The fourth quarter witnessed a notable shift in EMEA as sales volumes jumped 11% higher, to US$107 billion. This took full-year investment to US$284 billion, 5% lower than 2018. While political and macroeconomic uncertainty continued to hamper transaction levels in the UK, Germany and France capped off a very strong 2019 with full-year volumes standing at record levels. Many of the region’s other significant markets also performed well with Italy, Norway, Spain, Sweden and Ireland all posting double-digit growth.
Momentum slows in Asia Pacific
After several record-breaking quarters, investment in Asia Pacific slowed in the fourth quarter. Nevertheless, full-year volumes were up by 6% to a new high of US$169 billion. Core markets continue to drive performance, with Japan, China and Singapore all experiencing growth over the course of the year. Activity in South Korea is also up from the record levels seen in 2018. Despite a strong fourth quarter, full-year volumes edged down in Australia due to the weak start to the year, while political uncertainty continues to adversely affect activity in Hong Kong.
Office capital value growth moderating after robust 2019
Prime office capital value growth accelerated during 2019 to an annualised rate of 6.9% (across 30 major office markets), compared to 5.4% in 2018, supported by further yield compression over the year in a majority of markets. Sao Paulo, Berlin, San Francisco, Boston and Paris have been the stand-out global performers over the past year with double-digit increases. Capital growth is forecast to moderate during 2020, ending the year at roughly 1.4%.