Commercial real estate: is 2024 shaping up to be like 2023?

2023 was a challenging year for commercial real estate in Europe, but what lies ahead in 2024?    Christophe Murciani, Head of Real Estate Private Debt at LBP AM, shares his insights.
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2023 was arguably an annus horribilis for commercial real estate, with investment volumes in the asset class down 54% across Europe.* Several indicators highlight the market’s weakness: in the Île-de-France region, more office assets were withdrawn from sale (€4.2 billion) than were actually sold (€3.6 billion). The Accor Tower in Issy-les-Moulineaux alone accounted for 10% of the market – a 30-year record – and only €15 million were invested in La Défense.*

The office vacancy rate in the Greater Paris region was 8.5% in December and is expected to reach around 9.5% within a quarter or two – equivalent to approximately 5 million square metres, a 20-year high.* 
The market’s woes – Covid, rising construction costs, supply chain disruptions and the rise of remote work – could give the impression of a “perma-crisis”. But oversupply has been in the making since 2015. 
At that time, developers began constructing around 44 square metres of office space for every new tertiary job, according to a study by the French Institute for Real Estate Savings and Investment (IEIF). Only 1.9 million square metres were placed on the rental market, 18% below the ten-year average, despite stable rent-paying capacity among companies and a moderate rise – rather than a spike – in corporate defaults. Leased space was concentrated in established markets – central Paris, La Défense and the southern inner suburbs – some of which are now undersupplied, pushing rents upwards.

Grand paris express falls short, leaving the market struggling

Hopes pinned on the Grand Paris Express, and the expected proliferation of new business hubs, have yet to materialise. The Saint-Ouen/Saint-Denis hub is projected to have nearly 600,000 square metres of new space by the end of 2024 – equivalent to six years of leasing at today’s pace. Companies that have relocated over the past 18 months have generally downsized by 25%, on a like-for-like budget basis, prioritising centrality, access to transport and the quality of workspaces to encourage employees to return to a shared office environment.

Sustainability pressures and market impact

On top of supply and demand dynamics, sustainability requirements are mounting. In France, the Tertiary Decree and, in Europe, the SFDR for investment products are seen by many real estate professionals as poorly timed, coming amid cost inflation, shortages of both raw materials and labour, and falling demand. But is there ever a good time to tackle a crisis as critical as the disruption of living conditions on Earth?

Retail assets rebound after five years of underperformance

Retail assets are regaining favour after five years of underperformance. The rise of e-commerce during the pandemic, along with the collapse of many clothing, toy and even general retail chains, drove investor disinterest. However, there are signs of improvement – both in household consumption and in business sentiment (optimism in the retail sector). Over the past three decades, real disposable incomes have increased by an average of 4% per year. While many households may not feel this – we look at the example of housing later – the numbers don’t lie.

Logistics: post-pandemic boom and new sustainability challenges

After two decades of stagnant rents (in real terms), the logistics sector has experienced a golden age since the pandemic. The strategic need to shorten supply chains and the push for reindustrialisation have driven strong demand for warehouses. Logistics operators are investing heavily in automation and the buildings they lease. The shift towards zero net land take is boosting the value of existing assets and encouraging sustainability upgrades of existing building stock. E-commerce is also driving new formats in last-mile logistics, sparking creative solutions, including the use of underground parking and the conversion of former industrial sites.

Housing crisis in France: supply still lagging behind demand
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Housing remains a major challenge. Production delays have accumulated, while demographics and the fragmentation of households have caused demand to surge. The length of the development process – including land acquisition, permitting, partial pre-letting, financing, construction and sale – is penalising for those who secured land before interest rates began to rise. This is reflected in reduced buyer and tenant solvency. Transactions fell sharply in 2023 – by around 40% – prompting developers to abandon some land plots or divest non-core activities (e.g. agency networks). Yet prices have barely corrected. Sellers are holding out, preferring to wait for better returns.