This Downturn Is the Real Deal
From September 2007 to March 2009, which marked the peak-to-trough property pricing movement during the Global Financial Crisis (‘GFC’), Green Street’s Commercial Property Price Index (CPPI) fell by a cumulative 18% in Europe. During the same period, cumulative inflation totalled 4%. Since the most recent peak in real estate pricing exactly 12 months ago (i.e., 1-May-22), the respective figures have been 21% and 7%. In other words, the correction in real (i.e., inflation adjusted) pricing during this downturn – call it the ‘GHC’ for Great Hiking Cycle – is materially worse, at -28%, than the -23% we saw unfold during the GFC-induced property downturn in Europe. As importantly, the length of time it has taken for this decline in real estate pricing to transpire has been meaningfully shorter compared with the GFC.
Sector wise, Pan-European industrial experienced a similar fall in real pricing in the GHC (~29%) versus the entirety of the GFC peak-to-trough period (~29%). Given night-and-day better operating fundamentals today than in early ’09, industrial pricing now appears compelling relative to retail, residential or the office sectors, per our latest Commercial Property Outlook published last week. U.K. office, a notable underperformer during the GFC, has corrected as much as U.K. industrial, albeit the real decline of ~34% is still short of the ~41% fall seen during the GFC. Office pricing has the most relative downside of all four sectors.
It is important to remember that Green Street’s CPPI series for each of the four sectors outlined in the charts below track B/B+ quality real estate across each of the 30 metros under coverage in Europe. A-/A quality offices (predominantly the type of office real estate owned by listed REITs) have outperformed B/B+ during the GHC by ~10/15%, unlike in the GFC when office pricing dislocation was much more indiscriminate across both quality and location spectrums.
This Quick Take was published on 27 April 2023.
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