Global Commercial Property Market Still Searching for a Bottom, MSCI Research Says

The global commercial property market remained stuck in a downturn in the first quarter of 2024, with deal volume plunging to its lowest level in over a decade, according to a note published by MSCI Research last week. While some signs point to a potential narrowing of the gap between buyer and seller price expectations, investors are still waiting for a clear signal that the market has bottomed out.

Global deal volume plummeted 17% year-on-year in the first quarter, totaling just over USD 140 billion. This represents the lowest quarterly volume since the second quarter of 2012, even surpassing the lows experienced during the COVID-19 pandemic.

"By either yardstick, current levels of market activity are still very muted," says MSCI Research.

Amid this muted activity, investors are increasingly exploring opportunities across the risk spectrum, with real estate debt gaining traction due to higher interest rates and a perception of greater stability in a declining market. Preliminary results from MSCI's European debt fund index reveal that funds focused on senior debt and whole loans have outperformed core real estate and more opportunistic equity strategies.

However, a significant pricing gap persists between potential buyers and sellers in the real estate equity market. MSCI's Price Expectations Gap model, which measures the disparity in pricing expectations, indicates that buyers continue to anticipate paying significantly less than sellers are willing to accept. While this gap has narrowed for some market segments, suggesting a potential shift in sentiment, the vast majority remain in negative territory.

The note highlights some encouraging signs from listed real estate markets, where forward-looking sentiment is reflected more quickly in asset prices. MSCI's Liquid Real Estate Indexes, which adjust for leverage and broader market volatility, show a general upward trend in rolling 12-month returns since the end of 2022, particularly in the U.S. This could be a positive signal for the underlying real estate market.

"While we may still have some road yet to run before we reach a recovery in real-estate markets, monitoring a wide range of data sourced from across the investment spectrum can help provide waypoints as we navigate the remainder of the journey," concludes MSCI Research.