Window of Opportunity Opens for CRE Investment

After the last few years, a challenge for commercial real estate is knowing when to start investing again. Have markets hit bottom? Still, sinking down? The Federal Reserve cut rates by 50 basis points in September. Will they come down further?

There’s no guaranteed timing for investment success, but a recent Oxford Economics report suggests a window of opportunity that will be a good time to buy. The firm thinks that over the next 12 to 18 months, investors will find the best point for direct CRE investment.

Property values have largely corrected, the firm said, with some sectors advancing more than others, and there’s money to be made starting in 2025 and possibly into 2027. Europe will lead the way followed by North America and then Asia-Pacific.

Oxford Economics classifies markets into three categories: excess returns, neutral returns, and subpar returns. It projects that starting in 2025 and extending into 2027, the combination of neutral and excess returns will be about 80% of global CRE markets. Between those years, the portion of excess returns falls, but the change is covered by neutral returns. That change would be due to limited capital growth driven by yield compression “due to higher terminal rates relative to pre-pandemic.”

Perhaps to no surprise, the strongest sector is industrial. Even though it has faced some market corrections, Oxford projects that industrial allocations will continue to increase over the next few years. The best opportunities will be Switzerland, the Netherlands, Sweden, Germany, and Portugal because they have the widest spread between their required return and expected return. Growth will be slower than in recent years but continue positive by e-commerce growth, supply chain reorganization, fiscal incentives, and environmental concerns.

The second strongest sector is hotels after two years as the most attractive property type. The firm thinks that overnight stays will end 16% above 2019 levels, although growth is slowing. There’s more downward pressure on higher-priced travel identified with business and higher-end leisure travel. The focus is coming on value travel.

Residential is close to the heels of hotels. Home prices in advanced economies will likely see price growth in 2025. Multifamily rental growth will remain above inflation because of an ongoing supply and demand mismatch. But the U.S. isn’t on the list of countries that will see excess returns.

Retail has improved over the last six months. Yields are “well placed relative to the risk-free rate in many markets and rental growth has reemerged in some markets after a multi-year absence,” said Oxford. Stock per capita is reduced in many areas while household incomes continue to recover, so there may be some pricing power for landlords.

As for office, it continues to face hybrid working, climate-related obsolescence, and slowing or shrinking working-age populations, and so offers less incentive for investors.