Real estate market: what are the trends of tomorrow?

Christophe Murciani, Head of Real Estate Private Debt at LBP AM, shares his insights on the trends that will shape the real estate market in the coming months.
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The real estate landscape is undergoing a profound transformation, with significant shifts in the office, retail and logistics sectors. The era of the service economy is drawing to a close, while value-add strategies are injecting renewed energy into the market. And while optimistic prospects are emerging for retail and logistics, the residential sector continues to face major challenges that call for strategic rethinking.

Offices will continue to face a dry spell. We may well have reached the end of the service economy, and many assets no longer serve their original purpose. They will need to be repurposed before they can be marketed again – for example as housing, serviced residences (for students, young workers or seniors) or local shops. Institutional investors and retail fund managers are expected to remain on the sidelines for a few more quarters. Institutional investors are over-allocated in real estate (despite the significant bond rally at the end of 2023 and the solid performance of equities), and they are also impacted by the rise in capitalisation rates – which makes them unlikely to sell this year. Savings collectors, meanwhile, have in some cases had to lower the value of their units and must now intensify their efforts to educate investors in order to boost inflows. They are also bound by commitments (under the SFDR) to invest exclusively in sustainable assets – even though the pool of medium-sized properties is ageing.

The mid-sized asset segment (valued between €30 million and €100 million) with a value-add risk profile focused on sustainability upgrades is expected to drive market activity in 2024. These transactions represent the pipeline of assets that could become core by 2026-2027, when institutional investors and retail fund managers are expected to re-enter the market in search of high-quality properties. These upgrades will help shape the offices of tomorrow.

Retail and logistics: optimistic outlook for 2024

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Household consumption and major international events hosted in France, such as the Paris Air Show, Rugby World Cup and Olympic Games, have supported – and will continue to support – retail activity. The surge in e-commerce, once expected to grow exponentially after the successive lockdowns, has now levelled out into a more linear and less threatening trajectory. Consumers are returning to physical stores, and average basket values are rising steadily (up 1.8% in 2023).

We believe that retail assets will benefit from this momentum in 2024, contributing more significantly to investment transactions than in 2023. Shopping centres have made significant efforts to enhance their appeal and are increasingly positioning themselves as leisure destinations, with expanded dining options, play areas and multiplex cinemas that enrich the visitor experience. There is also scope for residential development through rooftop extensions on assets that, due to urban sprawl, are now closer to city centres.

Just as consumption is benefiting retail, it will also support logistics assets. Converting former industrial sites on the outskirts of urban centres into last-mile logistics hubs while improving environmental performance could, in our view, generate attractive returns for developers. Zero net land take policies will support land values and we expect rents to continue rising.

Residential at a crossroads

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Property owners face mounting investment needs to improve the energy efficiency of their properties, and delays have accumulated. Meanwhile, demand no longer appears solvent – either for purchases or rentals. In our view, a significant price correction would be the most sustainable solution. This would mean prioritising occupants over savers. Why not consider introducing progressive transfer duties that increase with the number of residential properties owned for rental – similar to the way water consumption is taxed? This could discourage landlords from investing in five or six properties, which could ease the upward pressure on prices.