The global real estate sector is facing challenges such as central bank policies affecting lending, geopolitical issues and investment pressures against climate change, all influencing prices across various segments. François Trausch, CEO and CIO of Pimco Prime Real Estate, and John Murray, Managing Director of Global Private Real Estate at Pimco, analyse these factors to identify current and future investment trends, opportunities, and risks in the real estate market.
Key drivers of global real estate supply and demand
Like many sectors, the real estate market faces challenges but also presents significant opportunities. Experts believe that, for those with capital and experience, the current environment offers promising investment prospects. Sectors such as data centres and logistics, driven by trends in digitalisation and e-commerce, are particularly attractive.
Success in this turbulent market will require resilience and adaptability. Identifying and leveraging hidden opportunities will be crucial. By focusing on alternative assets and considering factors like digitalisation, decarbonisation and demographic shifts, investors in commercial real estate will not only be able to navigate current disruptions but thrive. Pimco's experts analyse the key sectors to invest in.
The main real estate investment sectors
Housing market
The outlook for the residential segment is generally positive, supported by "structurally robust" demand.
In Europe, rent is steadily rising with no signs of easing. Limited supply, driven by high construction costs and stricter environmental regulations, coupled with increasing demand from new families and migration to major metropolitan areas, continues to push rents higher.
In the Asia-Pacific region, property prices and rent are strengthening amid moderate supply shortages. Rising house prices and the migration of young people to cities are driving rental demand. Demographic shifts, such as later family formation and increased single-person households, are extending tenancy durations. Additionally, the growing interest in shared and community living, along with a demand for service availability, is boosting the growth of residential and co-living solutions.
In the United States, the short-term outlook for the residential sector is less optimistic. The market saw a record supply of around 583,000 new properties last year, the highest in 40 years. This increase in stock, coupled with rising capitalisation rates, has caused market values to decline by over 25% to 30%. Although long-term rental demand fundamentals remain strong, short-term pressures suggest ongoing challenges for the US residential market.
Overall, the US market is expected to stabilise between now and 2026. New construction has slowed significantly due to rising costs and tighter financing conditions. The Sun Belt – home to half of the US population – is a notable growth area. Newcomers from other parts of the country and abroad are projected to drive population growth from 335 million to an estimated 373 million by 2054.
Office market
The global outlook for the office segment remains challenging, with limited demand and ongoing difficulties in determining the market’s break-even price. Valuations continue to be under pressure due to declining office usage. The share of offices in institutional commercial real estate portfolios has decreased from 35% in 2022 to 29% today and is expected to decline further.
In Europe, there is robust demand for high-quality, green buildings in central urban areas. While remote working is a growing trend, it is less established in some regions due to downsizing housing and efficient public transport networks. Despite this, long-term leases remain common due to the complexity of language, currency, and regulatory differences across countries. Additionally, energy regulations are expected to significantly reduce the existing stock, as many properties may struggle to meet increasingly stringent European standards.
In Asia-Pacific, demand for central offices remains largely stable compared to 2021. This is due to smaller household sizes, shorter commutes, and a stronger ingrained "office work" culture. Similar to Europe, there is a high demand for business hubs in city centres, particularly those that cater to living, working, and leisure needs.
In the United States, cost-cutting measures and a greater inclination towards remote work have led to slower demand for office space compared to job growth. Prices and rents, except for prime real estate (A+), are expected to continue falling as investors remain cautious.
Logistics market
Globalisation and e-commerce will continue to drive long-term growth in the warehouse and logistics sector. While geopolitical factors will affect demand, logistics structures tied to digitisation, such as e-commerce, have a more stable demand outlook. In Europe, although demand is slowing, rents are rising. Logistics remains a top preference for investors and can provide support in the current higher interest rate environment.
In the Asia-Pacific region, online sales are projected to grow from about 20% of total sales in 2021 to nearly 40% by 2026. Additionally, de-globalisation is fueling the nearshoring/friendshoring trend, benefiting countries like Vietnam and India as production shifts from China.
In the US, demand in the industrial segment remains positive, although there has been a slowdown in net absorption in the last six months, with Q1 2024 being the first slow quarter since 2012. New premises have peaked, although some markets in the Sun Belt in the southern US are struggling with an increase in supply that could lead to a prolonged period of increased availability in the market, especially for larger industrial properties. In recent years, operators have focused on real estate development projects of more than 9,000 square metres (m2).
Data centres: the energy race in the age of AI
The rise of artificial intelligence (AI) has created a significant global demand for data centres and the green energy required to power them, while also posing risks to the commercial real estate sector. In the long term, AI might reduce the need for office spaces, student accommodation, and population density in city centres, potentially diminishing the appeal of long-term rentals and secondary city locations. However, the speed and extent of these changes remain uncertain.
What is clear is that the surge in AI and cloud services has sparked a global race for data centres with sufficient capacity. In the first quarter of 2024, global volumes in this sector exceeded 1,800 megawatts, seven times more than three years ago, with growth showing no signs of slowing.
The race is further intensified by governments pursuing digital sovereignty, aiming to control critical hardware, software and data. Conversely, limited available power is increasingly constraining data centre development globally. In the coming years, data centres will be pivotal in investors' portfolios, providing a stable investment opportunity to capitalise on AI growth without the risks of betting on which companies will lead the market.