A Focus on the Future
Key takeaways from EXPO Real 2023
By: Christopher Mertlitz | Investments
The mood at this year’s EXPO Real was understandably somber. Investment volumes across Europe are down significantly and uncertainty around the future of interest rates prevails. While typically a platform to get deals done, attendees this year were more focused on getting a better understanding of the market and discussing challenges, solutions and opportunities for the year ahead – neatly summed in the slogan “survive to ’25.” Here were three of the most prominent topics discussed.
Interest rates hinder transaction volume
Just a few weeks prior to EXPO, the European Central Bank raised interest rates to a record high. ECB officials believe that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution” to reducing inflation, although did not rule out further increases. The uncertainty surrounding where rates will peak – and when they will potentially decrease – has created turmoil in the investment market, with global commercial real estate transaction volume down 54% year-over-year as of the end of the second quarter.
Most attendees at EXPO largely echoed that rates will likely not start to decrease in the near future, meaning the financing environment through the end of the year and into 2024 will remain challenging. This high interest rate environment is most challenging for asset-level borrowers, as lending for individual properties is increasingly difficult to secure. With no rate cuts in sight, the consensus was that deal volume will be muted into 2024 as both buyers and sellers adjust to the new real estate cycle and pricing expectations.
New development stalling due to insolvencies
Another topic of conversation was the increasing number of developers, particularly in the German market, that have filed for insolvency due to rising interest rates and construction costs. Big names such as Gerch and Development Partner have gone under, with more project development casualties expected to follow in the coming weeks as lenders look to get out. A recent Development Monitor survey shows that 40% of all development projects in the country are running at least a quarter or more behind schedule, with the number of new developments being started also down 50% from last year. Though these development challenges have largely impacted the residential market so far, we expect it will trickle into commercial real estate, adding to the long list of struggles the German market is facing.
Sale-leasebacks in the spotlight
A beacon of hope in the real estate market is that the sale-leaseback model remains an attractive financing option for corporates looking to unlock immediate capital. Cap rates on sale-leasebacks have increased less than interest rates on bank loans, making them a more attractive financing option for companies on a cost-of-capital basis. In this environment, the influx of cash from a sale-leasebacks can be incredibly valuable for companies, supporting debt restructuring, strengthening their balance sheet and providing capital for operating expenses and growth investments.
W. P. Carey has been operating for 50 years through all real estate cycles, and in our experience, sale-leasebacks are a great tool for corporates in any market environment. While 2024 will certainly have its challenges, we are optimistic about the future and are confident in our ability to continuing working with companies to realize the full value of their real estate assets.