The pipeline of new real estate projects is drying up in many markets as institutional investors reallocate their capital to other asset classes and developers manage higher construction and refinancing costs.

Investors and advisers speaking to fDi Intelligence at Mipim 2023, held from March 14–17 in Cannes, France, say there has been a significant deterioration in the real estate investment market due to higher interest rates and inflation. Some believe there is risk of large “fire sales” — where real estate assets are sold at a large discount by distressed owners — and that valuations in major asset classes such as offices will continue to fall.

“Everyone is sitting on [their] hands and waiting for the world to become better again. There’s no longer investment activity and leasing activity dried up considerably,” says Marco Kramer, the head of research and investment strategy at Real IS, a Germany-based property fund manager with investments across 11 countries and €12bn of assets under management.

While there are some real estate asset classes with significant demand from tenants and the need for more supply, such as logistics, the market uncertainty is making investors reluctant to commit to new projects. The focus on capital market uncertainty at Mipim marks a distinct change from the events of a year ago, when uncertainty and supply chain challenges caused by the invasion of Ukraine had dominated conversations. 

The problem lies in the sheer number of challenges facing the real estate industry, according to those speaking to fDi, after more than a decade of near-zero interest rates and steady inflows of institutional capital. Henning Koch, the CEO of Commerz Real, says investment markets are “quite dead” as real estate funds compete with higher returns offered in other assets like corporate bonds.

A report on 2023 global real estate sentiment, published on March 16 by the Urban Land Institute and PwC, says that the industry is “extremely cautious” about current market conditions, with reluctant buyers and sellers unable to agree on pricing. In 2022, global sales of commercial properties fell by 21% from the previous year to a total of $1.1tn, according to MSCI Real Assets figures cited by the report.

“You have an environment [where] people are struggling and nobody wants to sign up to the ‘greater fool’ theory. Nobody wants to be the person that makes a mistake or, much worse, makes the first mistake,” says Mark Rose, the CEO of Avison Young, the global real estate advisory company, who says this is stifling both innovation and development.

There is some nuance to the availability of financing by geography and asset class. Some lenders are flush with cash, in countries such as Canada, but many banks are prioritising their existing clients and have become less willing to provide debt and equity capital to new real estate projects. 

While carbon neutral complaint, high amenity residential developments are still relatively easy to fund, according to Mr Rose, lower-grade office buildings outside of prime locations are very unlikely to receive funding. 

Stefanie Lütteke, an associate partner and head of property companies at Drees & Sommer, a real estate consultancy, says that a lack of current construction activity means “there will be a gap” in residential developments in the coming years.

“We don’t see a lot of projects in the pipeline in Europe. Construction costs and interest rates are high, and then you can’t build affordable housing anymore,” she explains. “There has to be a political environment that supports these developments with short periods for building permits and it has to be much easy to start building residential housing.”