Corporate Real Estate Crises 2024: 30 Years of History to Understand the Future

To restore the competitiveness of the sector, a phase of stock clearance seems inevitable, which could extend over five to seven years. This situation of oversupply is not new: the history of the sector teaches us that similar rebalancings have already taken place in the past.

By delving into the crises that have marked the last three decades of commercial real estate, it is possible to draw valuable lessons for tackling the current situation. Is this a simple readjustment between supply and demand or a real structural change?

A look back at five major crises since the 1990s sheds light on the question.

1990-1999: The emergence of the tertiary real estate market

The 1990s marked the advent of a structured tertiary real estate market in France, driven by the tertiarization of the economy that had begun in the previous decades. This growth resulted in the massive development of offices on the outskirts of the Île-de-France region and the creation of tertiary hubs. However, the Gulf War (1990-1991) and the ensuing recession triggered the first major crisis in the sector. In 1993, the supply of offices in the Île-de-France region exceeded demand by a factor of three, reflecting a blatant overproduction. It would take nearly nine years for investments to return to their 1989 level. This first shock highlighted the importance of a slow and complex adjustment between supply and demand, often lengthened by the inertia of construction cycles.

2000-2009: Financialization and its crises

The 2000s saw the financialization of commercial real estate. Regulatory changes, such as the creation of Listed Real Estate Investment Companies (SIICs) in 2002, OPCIs and SIIC 3s in 2007, encouraged the influx of international investors. Commercial real estate became an asset class in its own right, with investment volumes increasing fivefold compared to the 1990s. This period was marked by a favorable macroeconomic context: lower financing costs, outsourcing of real estate functions and controlled production.

However, two external financial crises shook the market: the bursting of the internet bubble in 2002 and the subprime crisis in 2007. While the first crisis remained relatively under control, the second, amplified by growing debt and the financialization of acquisitions, had more lasting effects. Despite this turbulence, commercial real estate showed remarkable resilience, with relatively short recovery cycles – around two years – for both the investment and rental markets. Real estate thus asserted itself as a solid asset in the face of financial market volatility.

2010-2019: The golden age of low rates

The 2010s marked a golden age for commercial real estate, thanks to an extremely favorable economic climate. The low interest rate policy implemented by the European Central Bank (ECB) as part of Quantitative Easing (QE) made financing very accessible, attracting institutional savers such as insurers or SCPI & OPCI. Real estate became a safe haven, offering an attractive return in the face of the depreciation of so-called "risk-free" assets. While the European sovereign debt crisis temporarily affected demand for offices, the massive injection of liquidity by the ECB stimulated investment and new construction.

Yields, boosted by this abundance of cheap credit, remain at high levels, sometimes artificially supported by accompanying measures, such as rent exemptions. However, this period of prosperity is largely based on an exceptional situation of very low rates, which masks certain structural vulnerabilities.

Since 2020: An unprecedented multifactorial crisis

Since 2020, commercial real estate has been facing an unprecedented multifactorial crisis. The COVID-19 pandemic had an immediate and brutal impact on demand, compounded by investor uncertainty. The perpetuation of remote working, although often cited, has not yet revealed all its long-term effects, but is contributing to a visible contraction in demand for office space. What is emerging today, however, is less a crisis of demand than a crisis of supply. Demand could potentially rebound with an economic recovery, but supply remains overflowing.

The real tipping point comes in mid-2022, when the ECB begins to tighten its monetary policy to combat inflation, a consequence in particular of the energy crisis linked to the war in Ukraine. The end of Quantitative Easing and the 400 basis point increase in key rates are shaking up the sector, with an increase in vacancy rates and deliveries of new buildings not marketed. At the same time, new regulatory constraints – such as the Zero Net Artificialisation (ZNA) objective or the requirements linked to the energy transition – are increasing the pressure on existing assets.

The sector is also suffering from the discount of real estate stock indices, which have been negatively outperforming stocks since 2016: a 40% drop for listed real estate compared to 10 to 20% for unlisted real estate. This situation suggests a long period of rebalancing, where the revaluation of assets and the restructuring of the real estate portfolio will be inevitable.

Lessons from three decades of crises

Analysis of past crises shows that the commercial real estate market has always been able to recover, but at the cost of sometimes long and painful adjustments. While some phases of recession are the result of exogenous shocks, others, such as the one we are experiencing today, reveal structural flaws. The current crisis will require profound transformations, both in terms of renovating obsolete assets and adapting to new user expectations, in a more restrictive financial context.

The history of the last 30 years teaches us that, although recovery is always possible, it requires structural adaptations. One thing is certain: commercial real estate, like the resilience it has demonstrated in the past, will once again be able to evolve to adapt to new paradigms.

Tribune by Raphaël Amouretti, CEO & Head of Capital Markets Île-de-France Catella Property (LinkedIn).