February 23, 2017

2016 was a year of political shock and upset which, surprisingly, caused less turmoil to global real estate and financial markets than had been expected.

The shock of the UK’s EU referendum and the upset result of the U.S. Presidential election dominated headlines over the year – and yet, despite the fear that political upheaval would affect business confidence and trade, the global economy has seen some improvement.

Shrugging off concerns of a post-Brexit collapse in sentiment, the UK economy appeared reasonably upbeat by the end of 2016. Likewise, in the Eurozone, concerns about a toxic Brexit spill-over have not materialised, although the recovery is sluggish, with core economic growth rates stuck below two percent. Emerging markets strengthened towards the end of 2016, and the risks of a hard landing appear to be easing.

By year’s end, global real estate markets appeared to have recovered from the uncertainty in the first half of 2016 with full year transaction volumes of US$661 billion – slightly higher than expected.

JLL’s Global Capital Markets Research Director, David Green-Morgan, sums up sentiment across real estate markets thus: “Investors are more cautious as they navigate the end-of-cycle environment. Occupiers are still bullish, but the debate around the use of space in office and retail markets continues.”

Of course, each of the three major global markets tells its own story, as JLL’s experts explain.


  • Excepting the outlier UK market, European markets improve over 2016
  • Continental market investment up six percent year-on-year
  • Germany the most sought-after European real estate market

As JLL’s Head of Research in EMEA, Robert Stassen, points out that once decoupled from the UK, European real estate markets improved over 2016.

JLL research shows Europe office leasing activity up six percent in the year to Q3, excluding the UK, and vacancy is trending downwards. There was also strong retail rental growth across Europe in the quarter, and prime rents are expected to strengthen further as new retail pockets emerge in larger cities.

Warehousing and logistics average vacancy edged down over Q3, and could reach a cyclical low by when year-end figures are tallied.

“Political surprises appear to have had little effect on continental European markets,” Stassen says.

“The European market reported €225 billion of investment in 2016 compared to €241 billion in 2015, a seven percent decline year-on-year. However, with the UK excluded, continental European markets recorded an eight percent increase year-on-year.”

“The UK investment market has been the major outlier in 2016 and investors have polarised opinions regarding its future in 2017, with some investors waiting for the markets prices to stabilise.”

Germany remained the most sought-after market in 2016, with an annual investment level of €50 billion, an 11 percent increase on 2015. The weight of demand in the German market is supported by a strong domestic investor base, growing international interest and burgeoning occupational markets.

“Looking forward, demand for German assets looks sustainable, even at new lower levels of returns, as relative attractiveness of real estate in the market persists,” Stassen says. “The main problem in 2017 will be sourcing assets in the market.”

French real estate markets also improved over 2016, with total commercial real estate investment flat year-on-year at €26.6 billion in 2016.

“France, more specifically Paris, is increasingly on the radar of international core investors despite current prime office yields at three percent with numerous signs showing positive movements in the underlying occupier market,” Stassen says.

Office market take-up in Paris has increased six percent year-on-year with positive net absorption, and prime rents in the city are set to grow by 2.2 percent over the next three years.

The Americas

  • Markets in The Americas recover from a slow start at the beginning of 2016
  • Office and multifamily were standout sectors in the U.S. market
  • New U.S. leader and interest rates on the mind of real estate investors

The cautious approach taken by real estate investors to the U.S. market in 2016 may shift to a more positive outlook in 2017 – particularly if the economy gains more momentum in the first part of the year, according to Josh Gelormini, JLL Vice President (Research, Americas).

Despite a slow start to the year, investment activity in the Americas picked up during the second half of 2016, and reached US$78 billion in Q4, eight percent off the pace of activity in the final quarter of 2015.Regional volumes for the year stood at US$285 billion, nine percent below 2015.

Activity in both Canada and Mexico was down in Q4 2016 from the same period a year earlier, although the full-year 2016 volume declined by a modest five percent in Canada, and 14 percent in Mexico. One relative bright spot at the end of 2016 was Brazil, where investment activity rebounded smartly from the historically very low levels that had dominated over the first three quarters of the year – preliminary volumes for the period reached US$1.2 billion, and represented over 75 percent of activity for the full-year. Investment in retail assets was especially active in the fourth quarter, a trend that may hold into 2017 as investors begin to opportunistically anticipate better economic fundamentals developing by late in the year and particularly 2018.

The United States continues to enjoy solid employment growth supporting healthy leasing volumes across a range of office markets and industry sectors. Office vacancy is trending downwards and the retail market continues to tighten steadily, with positive absorption and a low development pipeline.
Demand is outpacing the warehousing and logistics development pipeline, and the market further tightened in Q3 of 2016.

In the final three months of the year, the office sector stood out for growth in investor demand, as volumes increased seven percent, year-on-year. For 2016 overall, office investment volumes in the United States were roughly even with those in 2015 while multifamily activity continued to defy many expectations for a pullback. Although fourth quarter volumes decreased year-over-year, it was the only sector in which full-year activity increased over 2015. In addition, annual volume levels for the sector stand at their all-time record level, and for the second consecutive year narrowly bested office volumes.

Gelormini says the biggest market dynamics to affect U.S. real estate in 2016 were the tightening of lending standards, particularly for construction loans and multi-family loans, and the realisation by investors that U.S. cap rates have essentially bottomed out. The reaction to the UK’s Brexit has thus far been a virtual non-factor.

Instead, real estate investors will take more heed of the surprise election of Donald Trump as president, and the party alignment of Congress.

“This is a significant movement heading into 2017, as expectations for economic growth, inflation and Fed rate hikes among the investor community have been raised, and the degree to which reality meets these altered expectations will have numerous implications for property investors,” Gelormini says.

“Since the presidential election in November, investors at large have become somewhat more optimistic about growth in 2017 and are anticipating somewhat higher inflation than they had a few months ago, due to perceived likelihood of expansionary fiscal and deregulatory policies being implemented. Thus, commercial property investors are also likely to have had their sentiment somewhat boosted in recent months, although some of the prior caution developed over the previous few quarters certainly remains.”

The Trump Administration’s policies, interest rate movement, and the depth of the buyer pool for core and core-plus assets in the United States, will all be significant factors in real estate investment for The Americas over 2017.

Asia Pacific

  • China overtakes the United States to become largest cross-border real estate investor
  • Office leasing down and retail rental growth subdued, but industrial markets positive
  • Investors struggle to secure quality assets, will shift to off-market trades and assets in secondary locales

Active investors coupled with cautious occupiers pushed core yields to new lows in many markets across the region in 2016, according to JLL’s Head of Asia Pacific Research, Dr. Megan Walters.

JLL research shows office leasing volumes were down only 2 percent in 2016, largely due to lower levels in India and China, which had recorded record-breaking performances in 2015. However, an uptick in office vacancy is anticipated over 2017.

Retail rental growth in Asia Pacific markets remained subdued over 2016, with limited increases in China’s Tier 1 markets as well as Sydney and Melbourne.

However, third-party logistics providers and e-commerce retailers bolstered demand in 2016, and were particularly active in Beijing.

Perhaps more importantly for the outlook of the region, China overtook the United States to become the largest cross-border real estate investor in Q3 2016, investing almost US$18 billion into commercial property assets globally over the year’s first three quarters.

“China would well retain its dominant investment position due to its enormous capital base and, if this comes to pass, it will have profound impacts to the key investment decisions for mainland Chinese investors,” Dr. Walters says.

“Regulatory shifts in policy by the Chinese Government will influence the size, scale and timing of outflows, and this will impact real estate markets across Asia Pacific and even the world.”
Crow expects the commercial real estate investment market to remain stable in 2017, with institutional appetite for real estate struggling to deal with an ongoing shortage of stock.

“We see continued institutional appetite for real estate in the region, but finding value is challenging,” she says. “As a result, investors will increasingly look for value in off-market deals, newer/secondary cities as well as newer sectors.”

Likewise, occupier sentiment is expected to remain stable and leasing market conditions to be broadly similar to H2 2016.

However, investors will keep a watchful eye on factors external to the real estate markets.

“Currency volatility, in part due to uncertain interest rate outlook, will be an area of concern for cross border investors,” Dr. Walters says. “Such volatility after Brexit and immediately after the US elections has shown that it has a big impact on real estate total returns for international investors, and it will continue to impact on real estate returns the year ahead.”

Looking forward – slow progress ahead

  • Asia Pacific to remain the driver of global real estate market growth
  • Headwinds for the U.S. market expected to ease in 2017, potentially to the benefit of global markets
  • Political environment still uncertain, but investors remain cautiously optimistic

Analysts see slight improvement ahead for the global economy, with world GDP expected to edge up towards 3.5 percent over 2017, still slightly below par.

Asia Pacific will likely remain the main engine of global growth by a margin, despite a steady loss in momentum over recent years, much of it due to a slowing Chinese market.

“India is predicted to maintain its recent status as the lead economy in the region, though policy risks there are greater than for China,” says Green-Morgan. “Japan is the region’s weak spot, as well as its largest developed economy. Even after the announcement of new radical monetary policy measures, growth expectations for Japan are minimal for the next two years and beyond.”

For the United States, external headwinds are projected to ease slightly in 2017, allowing support for the domestic upturn. However, expected growth rates remain well below pre-GFC averages.

To date, the Eurozone expansion has been durable, but growth will struggle to rise above a mediocre annual rate of 1.5 percent. “In the core, activity is sustained by steady domestic demand, with Germany and France seeing broad convergence during the next 12 months,” Green-Morgan says.

“By contrast, the UK economy is forecast to slow abruptly over the coming quarters, as the EU withdrawal begins in earnest.”

Looking ahead, he believes bond rate movements, the potential for a widening gap between buyers and vendors, and the potential for market chaos emerging from ongoing political upheaval will be the biggest factors determining real estate market movements for the short to medium term.
Stock market and political uncertainty may, however, be to real estate’s advantage, with investors potentially increasing their allocations to the asset class because of its perception and a ‘safe haven’ and the possibility of relatively higher returns.

“Investors are cautiously optimistic,” Green-Morgan says. “If interest rates remain low, sentiment will improve, although this probably indicates that economic growth is not very strong – good for investors, not so good for occupiers.”


David Green-Morgan

Global Capital Markets Research Director, JLL

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