Navigating real estate cycles

Olaf Margeirsson, Head of Real Estate Research & Strategy – Europe ex DACH discusses the impact of leasing and interest rate fluctuations on investment opportunities in real estate. The oversupply of office spaces and rising demand for life sciences and residential real estate highlight shifting sector dynamics. With interest rates stabilizing and rental growth returning, signs point to a potential market rebound in 2025.

In economies and markets, one thing is clear: their natures are cyclical. Technological development, deregulation and re-regulation phases, credit cycles and investors’ psychological natures are just some of the factors responsible for this phenomenon. The equilibrium of economies and markets is everchanging. Like the weather, economies and markets comprise a complex system, constantly shifting and never fully reaching equilibrium. The saying, ‘nothing is constant but change’ aptly applies.

Commercial real estate is a prime example of a market that follows this cyclical nature. The term commercial real estate, however, hides the details of what is going on within the complex nature of different sectors, countries, cities, climates and geopolitical realities. And when we invest in commercial real estate markets, there are three fundamental steps to take.

Investors must be cautious and selective when it comes to commercial real estate, particularly in the context of commodified office spaces. For instance, think of large office towers in dense business districts such as London’s Canary Wharf. Built to accommodate the surge of office workers from the 1980s onwards, these spaces are now facing a significant drop in demand due to technological advancements and the societal acceptance of flexible working arrangements.

While the shock is certainly not of the same nature or similar degree as when the combustion engine wiped out the leasing market for stables approximately 100 years ago, the oversupply of such offices in many concentrated areas around the world is undeniable. Some pundits love to point this out and write real estate off as an asset class. Pessimism drives clicks.

But the devil is in the details. Prime offices, for example, are thriving. High-quality space in areas such as the Paris CBD saw rents rise by 20% in the year ending third quarter 2024. Similarly, another sector with a substantial potential is the life sciences real estate sector. As the global population ages and wealth increases, it forces and allows us to spend more on pharmaceuticals and other products the life sciences sector produces, which enable us to improve our lives.

Geopolitical shifts are also driving the need to face the new realities, where regionalization of the supply chain is favored over outsourcing it to potential geopolitical adversaries. The real estate assets needed to sufficiently regionalize the supply chains do not currently exist, however. They need to be built. Again, the demand for such units – both labs and manufacturing sites – compared with existing supply is strong and likely to drive returns in the sector in the years to come.