Price Discovery Likely to Continue as Rate Hikes Persist

Price discovery battles between buyers and sellers of commercial real estate are likely to continue amid interest rate uncertainty — but hope is on the horizon, according to one global brokerage chief executive.

“The real estate industry relies on predictability, so rising interest rates are not such a big issue, as long as they’re rising as predicted,” Christian Ulbrich, CEO at JLL, told CNBC last week from Davos. “That wasn’t the case in ’22. They were rising really fast and on top of that, the spreads were widening as well. So that came as a bit of a shock to the industry, and that’s why transaction volumes declined massively and we are currently in a price discovery phase.”

As for whether interest rates have hit their peak, Ulbrich was circumspect, noting that the CRE markets will likely stay “muted” but said JLL is hoping for a return to more normal levels by the third or fourth quarter of 2023.

“Real estate people tend to be optimistic so some people hope we’re close to being (at the peak),” he said. “But we have to watch inflationary pressure is still very high. We’re celebrating that we’re coming down from super high levels but they are still on a non-sustainable level so I think we will see slightly more moves from the central bank and as long as we don’t have clarity…we will see real estate markets to be slightly muted.

Ulbrich also dug into the structural changes at play in the leasing market since the pandemic, suggesting a “bifurcation” of the market in which Class A and trophy projects remain in high demand while outdated assets struggle to find tenants and ultimately are repurposed.

“We have seen a trend already that tenants are trying to sign up for shorter leases because it’s very hard to predict how much space you’ll need in 10 to 12 years from now,” he told CNBC. “That trend has been accelerated during the pandemic…Many of the outdated buildings will be obsolete going forward, especially in environments where there are many dated office buildings. New York is a great example and we will see a lot of repurposing of those types of buildings.”