Global Pricing Resets Will Shift Investor Strategy

Pricing resets across commercial real estate markets globally will usher in a shift in investor strategy, according to analysts from Colliers, who say capital values could correct by up to 30%.

“The full outcome for the market could take up to 24 months to fully materialize, but the next six months will be driven by a re-calibration of pricing,” said Damian Harrington, Head of Global Capital Markets Research, Global and EMEA at Colliers. “The scale of the reset will differ markedly across locations due to the speed and extent to which interest rates are changing, in combination with variant local real estate fundamentals and pricing dynamics.”

Colliers analysts say that on average, yields will move out by 75 basis points, or a 15% reduction in capital values. But the scale of change could range from 0 to 30%, they say, and timing will vary from market to market.

But there’s (comparatively) good news: “The shock the market is now feeling can largely be absorbed, as current market dynamics are not echoing the past financial crisis when loan-to-value levels were much higher than today,” they say. “Equally, these changing conditions create new opportunities.”

Specifically, deployment of capital will shift from equity to debt, and refinancing requirements will build as interest rates rise.

“This equates to higher returns for those providing debt into the market, typically at lower risk,” Colliers experts say, adding that contracyclical investment, primarily sale and leaseback opportunities will also surface. And other sources of deal activity, like the termination of closed-end funds leading to the sale of assets, will support investment activity asinvestors prepare for their reset.

“Now is a time of opportunity. If investors pick their markets, assets and strategies carefully, this is a good time to capitalize,” added Chris Pilgrim, Global Capital Markets Director at Colliers. “Cash is king and equity-driven investors, notably private buyers can bid for assets in an environment with limited buy-side competition. They are typically immune to market forces and will continue to be active despite market flux. Markets with a renowned safe haven status, such as London’s West End will be active. Similarly, locations with deep, embedded levels of private capital will also prosper.”