Rising interest rates are threatening to derail the recovery in global commercial real estate, with deals being repriced or shelved as buyers and sellers rethink valuations. Property deal volumes were expected to rebound this year after a lacklustre period following the 2022 rate surge. However, inflation from the Middle East conflict and higher borrowing costs have prompted a rethink of deals struck months ago.
Industry experts warn that real estate values must fall given the inverse relationship between asset prices and long-term bond yields. Ten-year US Treasury yields have climbed above 5%, and UK gilt yields hit 5.53%, their highest since 2007. Investors are negotiating single-digit price cuts, with one firm seeking a 5% discount on a $100 million industrial deal.
Smaller transactions show similar pressure, as UK warehouse second-round bids fell below first-round offers. Workspace CEO Charlie Green warned asset disposals will take longer due to subpar offers, while an industry conference in Munich described the mood as "dire," with bankers noting deals are "in the teeth of this." Despite the downturn, executives expect robust rental growth in residential and prime office markets to partially offset higher rate impacts. The current repricing is not expected to reach 2022 levels, though investors are holding assets longer amid global uncertainty.
Industry figures compare the situation to 2022, when rates rose after the Ukraine war and Liz Truss's mini-Budget sparked a painful correction, but note there are no near-term answers to current economic problems.
Source: Financial Times Companies · Summarized by HeadlinesBriefing