Global Real Estate Sector Outlook
What’s in store for real estate sectors?
The outlook for the year ahead is nuanced and varied across markets and real estate sectors. While we expect continued volatility the extreme post-pandemic disruption will moderate, providing opportunities for investors and occupiers to execute on their strategies. In this article, we share our outlook for core property sectors and forecasts for market conditions in 2024.
|Time in Cycle
Demand gradually recovering as economic conditions and hybrid work policies stabilize
Following another year of transition for many office occupiers in 2023, there are signs of a gradual improvement in demand as interest rates begin to decline and many companies reach an equilibrium in office attendance or advance their objectives in driving higher office utilization. Over 80% of employees globally are back in the office at least one day a week, compared to 61% a year ago, with most employees now working from the office an average of 3.1 days per week. Attendance rates have increased consistently over the last year even among the earlier adopters of remote-first policies. Of the world’s 10 largest technology companies, 8 are now mandating a minimum of 3 days per week in the office.
Greater clarity as utilization rates stabilize will empower companies to make longer-term decisions on their workplace plans. This should support a gradual increase in office leasing activity through the year as economic conditions improve. Leasing volumes will remain below pre-pandemic levels but are expected to rise by up to 10% from the previous year across regions. Newer-vintage and creative office space in vibrant locations will be the primary beneficiary and offices of that profile are already seeing availability decline. Meanwhile, overall vacancy will continue rising, albeit at a slower pace, as 14.6 million square meters is delivered globally and occupiers upgrade into higher-quality space.
Office sector outlook by region:
- Office demand is expected to register a gradual recovery in the U.S. and Canada during 2024. While office utilization rates are lagging other regions, more tenants will withdraw sublease space and re-enter the market as physical occupancy increases. Vacancy will continue rising but higher leasing volumes, slowing new construction and a record level of conversions mean that aggregate vacancy in the U.S. is likely to peak over the next 12 months, while availability for prime space will tighten further. New development is also at historic lows across most Latin American markets, which combined with increased return to office activity should continue to reduce vacancy across the region.
- Supply remains limited in many CBDs across Europe, pushing demand out into well-connected nearby submarkets. A higher level of completions in 2024 will provide more options for tenants and rents for prime, central space will remain buoyant, while vacancy rises in less favored out-of-town locations. New supply will support leasing activity in several major markets despite subdued economic expectations, including Germany and the UK, where requirements for spaces of over 5,000 sqm are at a 19-year high. Another tailwind to offices leasing will be increased legislation requiring more energy efficient office stock, prompting more tenants to upgrade their portfolios.
- Conditions in Asia Pacific have been more stable than in other regions, with most markets back to pre-pandemic levels of office attendance. Growth is likely to continue in 2024 with India leading demand, boosted by the tech sector. Occupiers will continue to be cautious in China but activity should improve in the second half of the year, supported by new supply and tenant-favourable conditions. With a record supply pipeline regional vacancy will rise incrementally while rental growth is forecast to remain flat on average over the year.
|Time in Cycle
Industrial activity strengthening following slowdown in 2023
Global industrial and logistics markets largely returned to pre-pandemic activity levels in 2023 as they faced obstacles including elevated interest rates, inflationary pressures and heightened occupier uncertainty. However, the outlook for 2024 is positive with an anticipated increase in activity due to pent-up demand from occupiers who put new deals on hold over the last year.
Despite disruptions following the pandemic supply chains have largely recovered and adapted to changing demand. Regulatory bodies and customers are pushing for sustainable and transparent supply chains, leading to transformations in pricing, procurement and operations. ESG initiatives and energy efficiency will be increasingly crucial in all aspects of industrial activity worldwide, and are contributing to the manufacturing, energy and utilities sectors emerging as key sources of leasing and development demand.
With interest rates expected to decrease in the near future, construction starts will regain momentum. The ongoing trend of nearshoring operations and the need to replace aging industrial buildings with more efficient spaces will drive global construction activity. In densely populated cities, the construction of urban logistics buildings and last-mile delivery spaces will be essential in meeting the growing demands of e-commerce.
Logistics sector outlook by region:
Leasing activity in the U.S. is expected to rebound in 2024, increasing by 5.0% year-over-year. The majority of buildings currently under construction are set to deliver by mid-year, spurring the need for new construction starts. The regionalization of industrial users as companies nearshore operations to diversify supply chains and locate closer to end-users is also set to boost demand in Mexico and Canada.
Industrial fundamentals in EMEA are forecast to remain largely stable due to economic headwinds and softening demand. However, a lack of developable land and regulatory initiatives will increase demand for newer, more sustainable buildings, keeping upward pressure on prime rents.
Net absorption and rental rates in Asia Pacific surged through 2023 but that growth will moderate during 2024. The regional construction pipeline remains above historic levels but is reducing from an all-time high, which will keep net absorption at similar levels through the next year.
|Time in Cycle
Retail poised for continued recovery
Real wage growth and rising international travel are expected to support continued retail spending growth in most major economies during 2024 despite muted economic conditions. Many retailers believe that the worst disruptions to trading conditions stemming from the pandemic and e-commerce are behind them, and strong retail brands are developing store expansion plans for the next three to five years. Retailer demand remains focused on securing space in high-quality locations including prime high streets, dominant shopping centres, tourist corridors and out-of-town destinations.
Retail sector outlook by region:
North American retail leasing markets will remain active in 2024, supported by a broad range of retailers, food & beverage operators and leisure companies looking to grow their footprints. With demand outpacing new construction over each of the last three years in both the U.S. and Canada, national vacancy rates have fallen to record lows. Net absorption is likely to moderate with limited availability, although selected retailer bankruptcies will offer opportunities to secure space in high-quality locations.
In Europe, many prime locations are anticipated to see continued retailer demand and competitive tension for space in 2024. With strong leasing activity last year and a reduction in available prime space, some major markets are likely to register a moderate slowdown in leasing volumes. Prime rental growth is forecast to gradually broaden through the year and accelerate in 2025.
The post-pandemic recovery in Asia Pacific is expected to continue in 2024, driving consumption demand and retail activity. Tourist arrivals should also increase further, boosting footfall and sentiment across the region. Retail leasing activity is anticipated to remain healthy in most markets with steady rental growth, powered by a broad base of tenants including F&B, entertainment and fashion companies.
|Time in Cycle
Living sectors remain a bright spot
Efforts to provide adequate new housing for the approximately 80 million new urban inhabitants around the world every year have repeatedly fallen short, but for some countries 2024 will represent a new low as housing construction declines in many major markets. Combined with affordability constraints and structural demographic changes – including aging populations, rising tertiary education and shifts in household formation rates – this will drive long-term demand for a broad range of housing types and sizes.
Living sector outlook by region:
New home construction in the U.S. has been relatively strong over the past year, particularly for single-family housing. However, over the past 15 years there has been a cumulative housing shortfall of 3.4 million. While JLL forecasts 1.3 million new home starts in 2024 this will track slightly below the average new household formation rate, maintaining the supply gap. Within multifamily, completions are spiking and will reach 658,000 units in 2024, double the average levels of the last cycle. This will lead to oversupply dynamics in high-growth markets, but absorption should keep pace with new deliveries nationally and hold overall occupancy steady and rents in the 0%-3% annualised range before supply begins to taper off in 2025. In Canada, aggressive immigration targets are expected to keep population growth and new household formation high. This will contribute to a continued housing shortfall for both single-family and multifamily homes through 2025.
In Europe the three largest economies – Germany, France and the UK – have been gripped by a steep decline in housebuilding due to rising build and debt costs and developer insolvencies. The three countries have seen a combined housing undersupply totalling nearly 1.6 million homes in the last five years. JLL predicts a worsening of this undersupply, with the three countries building the equivalent of 48% to 60% of their national housing needs in 2024. With multifamily construction also set to decline in each market next year, this will keep occupancy elevated and push rental growth higher.
Rising costs and challenges for developers have also contributed to slower construction starts in many major markets across Asia Pacific. Chronic undersupply, rapid urban population growth, and the least affordable ownership rates are leading to the emergence of an institutional multifamily market in China, Australia, and elsewhere, while also boosting demand for other Living property types such as co-living, senior housing and student accommodation.