Cost of capital slowing investment flows

The rising cost of capital and conservative underwriting are subduing transaction markets. Fundraising is more challenging in the current climate, as the denominator effect limits capital inflows to commercial real estate (CRE). Capital deployment is muted, as institutions remain cautious with a greater focus on current portfolios. Direct investment declined globally during Q2, down 54% year-over-year to US$139 billion. This brought first-half volumes to US$276 billion, reflecting a year-to-date decrease of 54% and the lowest level of first-half direct investment in a decade. These declines were evident across the regions, with Japan the outlier predominantly due to its stable market conditions and more accretive rate and currency environment.

While all major sectors experienced notable declines during the first half of 2023, sectoral outlooks in the short and long term are varied, as sentiment and performance across property sectors remains bifurcated. The office sector continues to be under pressure amid weak global sentiment from investors and lenders. However, investor sentiment and bidding dynamics for logistics remain resilient, with liquidity even improving for select larger deals and groups re-emerging which have been inactive for several quarters. The living sector also remains strong, and fundamentals are resilient across the regions.