MSCI: 2023 a year of decline for CRE – office sector is worst hit

Last year was one of the worst on record for the performance of European commercial real estate investments, according to MSCI data. The decline was led by the office sector, with values falling by 13.9% year-on-year on 2023 and by 5% in Q4.

“The office sector remains under pressure,” said Tom Leahy, head of research EMEA & APAC, MSCI real assets. “A slowdown of this magnitude is on par with the loss of value recorded in 2009 amid the global financial crisis. However, one main difference between then and now is the decoupling of office and industrial property.”

In 2009, these two property types moved in concert, but the changing fortunes of office and industrial since the pandemic means performance has diverged. Industrial real estate generated negative total returns of -2.1% in 2023, whereas office properties generated negative total returns of -10.9%

“Total returns for the €280 billion of commercial real estate tracked by the MSCI Europe Quarterly Property Index deteriorated at the end of 2023, as falling office values dragged down the all-property performance,” said Leahy.

European property was hit by the rapid shift to higher interest rates, which caused a withdrawal of investment capital and a revaluation, which is still ongoing. 2023 was also the worst year since 2007 for sales of offices, with core German markets being the worst affected.

The MSCI Index, which covers 13,034 property investments with a value of €278.7 billion, showed that investments delivered a negative  -4.7% total return in 2023 and a negative QoQ total return of -2.1% in Q4. Total returns combine the positive income return from rents with the capital return, that is changes to the appraised values of the properties in the Index.

Quarterly total returns for Q4 2023 weakened to -2.1%, for an annualised return of -4.7% in 2023, compared to -2.8% for 2022.

The one bright spot was the hotel sector. Europe’s hotel market emerged with the best performance in 2023: annualised returns shifted back into positive territory for the first time since September 2022, reflecting the rebound in tourist travel. Transaction activity for hotels also held up relatively well in 2023, with volume down 18% year over year versus a 46% decline for the European property market as a whole.