Builders and real estate companies under high tension

Residential real estate, the double punishment

The residential market faces a double constraint, both supply and demand. The rapid rise in interest rates has led to a drop in household demand due to the reduction in their borrowing capacity in the face of a high price market.

Added to this is a global labor shortage. This is the main obstacle to construction identified by European companies between 2021 and 2023[1]. This trend is seen in the United States, where construction job openings are nearly 30% higher than before the pandemic, and in Japan, where 60% of construction companies cited a labor shortage. work in 2022.

These initial problems, along with rapidly rising interest rates over the past two years, have led to rising construction costs on all sides: material prices have risen, wage pressures have intensified, and construction costs have increased. funding has skyrocketed.

Commercial real estate: restructuring market and high interest rates

Commercial real estate companies, mainly active in industry, offices and retail, have been particularly sensitive to the difficulties of recent years.

While various lockdowns and the rise of e-commerce have reduced the need for businesses to open new stores, the spread of teleworking has led to a decline and change in demand for office space. Office vacancy rates are at their highest in more than 15 years at 7,5% in Europe and 20,2% in the first quarter of 2023 in the United States.

A strong link also exists between high interest rates and a slowdown in the number of real estate transactions. The volume of commercial real estate transactions in Europe thus fell by more than 50% in 2023 (year of high rates) to reach its lowest level since 2010.

Outlook 2024: towards falling prices in advanced economies

The real estate market will continue to navigate a delicate balance between rising interest rates and limited supply.

Although prices have adjusted slightly to rising rates, continued supply constraints (unwillingness of potential sellers to give up their low mortgage rates or sell at a lower price) have kept them at elevated levels in 2023.

The year 2024 was expected to mark a turning point in this dynamic with price reductions expected in the majority of advanced economies (34% in Germany, 31% in Japan) from the point of view of buyers.

At the same time, the complicated context of commercial real estate forces some companies to resort to strong measures such as selling assets. Commercial real estate prices have already fallen by 25% at the start of the year compared to their highest level. We have even seen important buildings sold at discounts of more than 50%, a sign of the very difficult situation in which some companies find themselves.

2024 will be a year of mixed fortunes, favored by a welcome drop in key rates. However, concerns persist. With some existing debt already stuck at fixed rates and lending margins for new loans at their lowest level in over a decade, a question arises: the planned rate cuts will be sufficient to support a market which is showing signs of weakness?

Find here the entire study (in English)