Mr. Tony Horrell reports

THE JOURNEY SO FAR SUGGESTS GLOBAL REAL ESTATE MARKET STABILIZATION TO TAKE HOLD MID-2023

After a volatile year of geopolitical tensions, economic shocks and uneven monetary policy, Colliers International Group Inc. anticipates the process of stabilization of the global real estate market to take hold by mid-2023 in its latest global investor outlook. While some countries, such as the United Kingdom and the United States, have already witnessed a rapid pricing reset, this has not been universal. Investors can expect big differences in how the reset plays out across sectors and markets next year.

"Real estate markets offer a solid, long-term investment and income stream, once pricing levels are clearer. Local events and macroeconomic factors still have the potential to disrupt positive momentum. Investors should be prepared for regression before progression in markets that remain susceptible to further shocks," said Tony Horrell, head of global capital markets. "We anticipate investment activity to pick up as central banks end rate hikes and greater economic certainty emerges. In the meantime, investors will remain on the lookout for bargains, with significant funds being drawn up to act."

Liquidity and sustainability driving opportunities

Capital values will continue to be negatively impacted by the transition to higher interest rates, causing some distress in 2023, especially for non-core assets. There is an acceleration in opportunistic fundraising, indicating a focus on finding pockets of opportunity amidst the current reset, which include:

• Closed-ended real estate funds reaching their termination dates;
• Investors that may be caught short when it comes to refinancing;
• Creative routes to market in the debt space as more investors explore solutions like mezzanine debt, bridge loans and project finance;
• Listed funds, like real estate investment trusts, and developers that continue to trade at discounts to net asset value, creating opportunities to acquire bonds and convert to equity, place capital into existing structures or, in some cases, privatize.

More broadly, environmental, social and governance (ESG) criteria continue to be key factors in investor decision making. In 2022, only 10 per cent of investors had a capital improvement, disposal or acquisition strategy that incorporated ESG considerations. This has risen to 17 per cent in 2023, with 45 per cent of respondents looking to dispose of up to 20 per cent of their existing portfolio in the next five years.

"In response to occupier preferences, growing regulatory requirements and the rising cost of operating assets, investors are rethinking value and placing a greater emphasis on a range of ESG factors this year. There is both an expectation and greater evidence that assets with strong sustainability characteristics can command a premium and those that don't will be heavily discounted," said Damian Harrington, head of research for global capital markets and EMEA (Europe, the Middle East and Africa). "It will be interesting to see just how capital is distributed across the capital stack in terms of refinancing, the retrofitting of assets, new construction or divestitures."

Core assets prevail

Market volatility has led investors to focus on fundamentals and defensive strategies. Across the board, investors' top-three sector preferences for 2023 are offices (60 per cent), industrial/logistics (60 per cent) and multifamily/BTR (48 per cent). While core assets in established, larger cities are investors' preference (60 per cent), sectors closely connected to changing demographic and economic realities, such as multifamily and senior housing, are driving activity in smaller-growth cities. There is growing interest in first-mile logistics, as investors recognize opportunities for nearshoring or reshoring of manufacturing to mitigate supply chain disruption and increase inventory, with a focus on container terminals having doubled over the past 12 months in EMEA and Asia-Pacific.

Rising costs and challenges ahead

Investors surveyed cited interest rates (88 per cent), inflation (74 per cent) and supply chain disruption (68 per cent) as their primary macrochallenges for the year ahead. Furthermore, current inflation and interest rates are fuelling an increase in operational and construction costs already exacerbated by supply chain issues and energy price increases. Globally, 85 per cent of investors said rising construction costs would have the most negative influence on their ability to pursue their investment strategies, followed by higher asset operating costs (77 per cent).

"Understanding and managing the multitude of rising cost pressures impacting real estate is critical. Cost of capital is only one part of the equation," said Chris Pilgrim, director of global capital markets. "An experienced partner with local expertise can help investors understand market nuances that impact costs and values."

About Colliers International Group Inc.

Colliers is a leading diversified professional service and investment management company. With operations in 63 countries, the company's 18,000 enterprising professionals work collaboratively to provide expert real estate and investment advice to clients. For more than 27 years, Colliers's experienced leadership (with significant inside ownership) has delivered compound annual investment returns of approximately 20 per cent for shareholders. With annual revenues of $4.6-billion and $92-billion of assets under management, Colliers maximizes the potential of property and real assets to accelerate the success of its clients, investors and people.