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European Macro Outlook: What’s in a number?

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Two consecutive quarters of negative growth is the technical definition of a recession. There has been a great deal of debate on whether the economies of the euro area and the UK are in a recession.
If growth remains flat or is revised down for the final quarter of 2022, the underlying truth is that growth for the euro area and the UK has been subdued. Although the near-term outlook looks brighter than many expected six months prior, some downside risks remain. We continue to expect a mild recession in the UK and the euro area. In this report, we break down our baseline economic forecast and the implications it will have on CRE property sectors over the next couple of years.


Economy: A Lacklustre Recovery 

Rate hikes are expected to weigh on growth more than inflation in 2023. This largely explains growth remaining well below potential, with an expected euro area growth rate of 0.4% year-over-year (YoY) in 2023 and -0.3% YoY in the UK. 

  • emea-section-econThe impacts of monetary policy on the real economy are often lagged.
  • Policy rates will settle at 3.5% in the euro area and 4.5% for the UK, provided inflation returns close to target (2%), as expected. Further interest rate hikes could remain a possibility if there are fresh signs that inflation would remain elevated. 
  • We expect the impact of the mild recession to begin showing in the labour markets in H2 2023. Increases in unemployment will be relatively contained, we expect the unemployment rate to peak at 7.2% in the euro area in 2024 before it begins to trend down.
  • Bond yields will start off 2023 on a better footing, as economic activity is expected to remain low yields are expected to finish the year only marginally higher than in 2022.

Capital Markets: Reset, New Reality  

As we enter 2023, commercial real estate is still undergoing a period of price discovery. Lower liquidity is a natural result of these periods of market uncertainty. Sellers are reluctant to sell at discount and tend to hold on to their assets until they have a clearer view of the outlook. Buyers want to reflect the ongoing repricing as financing costs increase–resulting in a mismatch between buyers and sellers. 

  • emea--section-capmktsAll sectors will witness a correction in yields over the first half of this year. 
  • Polarisation in prime and secondary property assets will continue with average yields expected to rise further than prime.  
  • In the short term, we expect investment volumes to remain moderate and to pick up later in the year once interest rates stabilise. 

Office Sector: A…B…C…D…ESG  

The relationship between office-based employment and office demand remains tested and has become more decoupled in the wake of hybrid and remote working. Demand for high-quality offices (with high amenities and desirable locations) will remain strong. Fundamentals, like leasing and rental growth, in such high-quality offices are expected to outperform, as occupiers focus on employee well-being and experience, and as they home in on ESG credentials.

  • emea-section-officeThe office sector registered positive net absorption of 3.5 million square meters (sqm) in 2022.
  • There are encouraging signs that Grade-A, prime-office vacancy will peak in 2023.
  • Rising financing and construction costs, along with the structural ramifications of hybrid and remote working remain key challenges for the office sector in the short term. But Europe’s commitment to decarbonization and monetary policy normalisation suggests strategic repositioning and repurposing of offices, which poses as much opportunity as does the risk of obsolescence.

Retail Sector: Cautiously Optimistic

Consumer behaviour during the pandemic does not match behaviours during past recessions. After lockdown rules lifted across Europe, spending on consumer durables recovered very quickly. Typically, durable goods only rebound once the recession is over. Demand for services fell further than durable goods, largely due to the government interventions in place shutting large parts of the service sector. As of today, demand for durables is beginning to ease, particularly as those transactions were large, one-off purchases. In contrast, demand for services is picking up, which will help insulate the retail demand outlook. 

  • macro-outlook-section-retailConsumers will be grappling with the squeeze on real incomes, higher interest rates, and still-elevated levels of inflation. As we expect inflation to fall in H2 2023 (allowing real wage growth to resume), consumer confidence, and subsequently consumer spending, is expected to improve. 
  • Many retailers have already undertaken significant cost cutting; this, in effect, will help the sector withstand the upcoming recession. 
  • For investors, the fallout of the outward shift in yields across Europe will be relatively contained, as retail yields were comparatively higher than other sectors prior to recent movements in interest rates. 


Logistics Sector: Leader of the pack  

The uncertain economic environment had little impact on logistics demand during the first half of 2022. Ultimately however, the rise in debt costs, uncertainty surrounding the economic outlook and inflation, and the concomitant slowdown in consumer spending caught up. Against this backdrop, we expect demand and take-up to moderate in the short term before picking up in H2 2023, as more clarity emerges around the consumer outlook. Even with moderation, occupier demand will remain robust and should continue to come in above pre-pandemic levels in the coming years.

  • emea-section-indThe China-EU container freight index fell around 80% in February 2023 from the peak in January 2022. This had an impact on take-up for the sector across Europe, with take-up settling at 8.6 million sqm, representing a 29.8% decline over the previous year and -2.1% compared to the previous quarter. 
  • The vacancy rate remains very low compared to historical levels and it should continue to support above-average rental growth in the sector.
  • The search for prime logistics buildings that are strategically located, near transport hubs and well connected to the road network will intensify as occupiers strive for operational- and cost-efficiency in a challenging economic environment.


Alternatives Sector: No Longer Niche

The alternatives sector is attractive to investors because it is less correlated with economic growth and therefore offers investors the portfolio diversification they need, particularly during uncertain times. The sector also presents inflation and performance hedging characteristics, which are particularly attractive to investors in the present high-inflation environment.

  • macro-outlook-section-multifamInvestor interest in alternatives continues to rise, with the level of investment reaching €58 billion in the last five years. 
  • Opportunities within the sector that are linked with underlying structural trends, such as demographics and urbanisation are poised to do particularly well, even during a mild recession.



Sukhdeep-Dhillon-Head of EMEA Forecasting
Sukhdeep Dhillon

Head of EMEA Forecasting
London, United Kingdom

+44 (7920) 574823

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Guilherme Neves
Guilherme Neves

Senior Research Analyst
London, United Kingdom

+44 (20) 32963892

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