Office, multifamily sectors see most drop in investments

Investment in office and multifamily sectors plummet amid rising interest rates and economic uncertainty, with strategies for recovery in focus.

Global real estate investments have seen a significant downturn, particularly in the office and multifamily sectors which experienced the most decline in investment volumes, raising concerns among investors and market analysts alike.

According to Jaeyoung Kim, Senior Research Analyst for Capital Markets at CBRE, office investment volume in the third quarter of 2023 dropped by 63%, and multifamily investment volume decreased by 59% compared to the previous year.

She said that the decrease is attributed to factors such as the hybrid working environment, lower occupier demands in the US and Europe, and broader economic uncertainties including rising interest rates.

For the office sector, the shift towards remote and hybrid work models has significantly reduced demand. Additionally, multifamily investments, despite attracting considerable attention from investors, have been affected by conservative underwriting standards and escalating expenses such as taxes and insurance costs. 

“The fear of cool down in the labor market, actually, dampens the investment sentiment in that sector. So that was kind of additional risks to the investment and the sector,” Kim said.

Richard Barkham, Global Chief Economist at CBRE, advised a strategic approach for investors, saying that timing, stock selection, and strategy are critical.

“Investors won't want to move too soon, just in case inflation rears its ugly head again, and interest rates stay high and low values drop further. On the other hand, they won't want to wait too late because they'll lose first mover advantage,” he said.

He anticipated a potential fall in interest rates and urges investors to balance the risks of moving too early against the disadvantages of delaying investment decisions. Barkham believed that 2024 will be pivotal for real estate investment strategies.

He suggested that investors seeking low-risk avenues could consider multifamily and industrial sectors, which continue to show global promise. On the other hand, those willing to embrace higher risks might find promising opportunities in emerging sectors like life sciences and data centers, and particularly in the office sector, which is expected to regain popularity.

The decline in global commercial real estate investment, which stood at 51% in the third quarter of 2023 compared to the previous year, was more pronounced in the Americas and Europe. Barkham attributed this to the more aggressive interest rate hikes in these regions, driven by higher inflation rates compared to Asia-Pacific. 

He also noted Japan's emergence as a particularly attractive investment destination, aiding in maintaining investment volumes in Asia-Pacific.

"As clarity on the path of interest rates emerges and financial markets stabilize, we expect a rebound in investment activity in the second half of 2024," Kim said. The cooling labor market and slowing inflation in major countries are anticipated to lead central banks to cut policy rates, creating more favorable financial conditions.

Furthermore, robust real estate fundamentals, excluding the office sector, and higher forward internal rates of return (IRR) across major property types compared to two years ago, are likely to attract renewed investment activity.