Market Perspectives of Commercial Real Estate | General Location and Investments

Market Perspectives of Commercial Real Estate | General Location and Investments


Background
09.10.2020 Author/s: Andreas Schulten
Cities in Change - Extract from the ZIA Autumn Report
Städte und Ökonomien wandeln sich – und damit unsere Wirtschaftsimmobilien.

For the autumn report of the ZIA, we analyzed investments, office, logistics, hotel and care properties. Please read our general assessment and the summary of investments and performance: The spectrum of corona influences is enormous.

Due to the close connection between the real estate market and economic power - whether in certain periods or at certain locations - the strong economic impact of the corona pandemic is also being felt, in some cases significantly, in commercial real estate:

  • Hotel: Massive loss of income and value as well as investment uncertainty, collapse of transactions
  • Stationary textile retail trade: loss of income and value as well as investment uncertainty, collapse of transactions
  • Food retail: High income and value stability
  • Office: High income and value stability, transaction collapse
  • Logistics: partial increase in revenue and value, increase in transactions
  • Industrial/corporate real estate: Extensive stability of income and value

The spectrum of corona influences ranges from loss of rent in some affected sectors, to the threat of insolvencies in the medium term, to broad-based sales and earnings growth, for example in online trading or other logistics services. The situation on the real estate markets still has to be viewed in a highly differentiated manner.

With a few - certainly serious - exceptions, such as in the textile retail sector or in the business hotel sector, commercial real estate has not yet seen any massive slumps in value in the past few months in spite of the incisive recession. In contrast to previous cycles in the 1980s and 1990s, one key element of a downturn in the market for commercial real estate is missing: oversupply. There is no threat of high vacancy rates, neither for offices nor for logistics and industrial space. There are still large gaps in supply both for offices in the major cities and for logistics halls in the logistics regions. The Corona impulses have not (yet) changed this fact, or have done little to change it, but could of course have a negative impact in the medium term in the event of a prolonged recession, increasing corporate insolvencies and sharply rising unemployment figures. The good news in logistics and office is being masked by the negative market data for hotels and retail. In terms of volume, however, they are somewhat less (system) relevant - at least in their critical segments - and thus also in economic terms.

Investment in commercial real estate in Germany by A-cities, H1 2019 to H1 2020, index value. Source: bulwiengesa AG, RIWIS; graph: ZIA
Investment in commercial real estate in Germany by A-cities, H1 2019 to H1 2020, index value. Source: bulwiengesa AG, RIWIS; graph: ZIA

The strong first quarter on the German real estate investment market has also contributed to the fact that German class A cities are even at the top of the world's major cities in terms of real estate value development in the first half of 2020. In August 2020, the global market analysis company RCA, Real Capital Analytics, reported an average increase in the value of commercial real estate of over 12 % for the first half of the year, while cities such as New York and Boston are at 10 % and below, Tokyo is at 3 % and London below -6 %.

These figures confirm the increasingly strong assessment that, similar to previous years when property bubbles were discussed, strong capital and investment pressure on German real estate is continuing, resulting from low interest rates in the euro zone and German performance figures.

Due to the largely high price level and the continuing high demand, it can be assumed that some portfolio holders are carrying out portfolio adjustments. Due to the economic downturn, particularly in tourism and also in the manufacturing sector, the pressure to invest is likely to ease somewhat. However, with low interest rates, high liquidity reserves among investors, penalty interest on deposits and the manageable earnings prospects for government bonds, the underlying conditions on the capital markets will continue to make investments in German office and other commercial real estate attractive.

 

Note: The autumn report can be downloaded from the ZIA website (only in German language).

Contact person: Andreas Schulten, general representative at bulwiengesa, schulten [at] bulwiengesa.de