The ‘R’ word: Global property denizens ponder recession in 2023
- February 1, 2023: Vol. 10, Number 2

The ‘R’ word: Global property denizens ponder recession in 2023

by Benjamin Cole

Across the world, property developers and investors in the 2020s are living history large: pandemic, then war in Eastern Europe attended by nuclear saber-rattling and continental energy crunches. Add epic international supply-chain snags, then worldwide inflation and rising interest rates.

And 2023 may deliver a new malady to the mix: a global economic recession.

The same COVID-19 scourge — and government strictures — that savaged office, hospitality and retail property markets around the sphere also led to monetary easing and fiscal spending in the early 2020s. While central bank and government largesse may have allowed nations to skirt untenable business and social disruptions, the policies planted the seeds for accelerating inflation in 2022.

Indeed, by late 2022 Great Britain reported “double-digit inflation,” an expression not heard in decades in the developed world, while most of Europe and North America were nearly in the same boat.

As 2022 drew to a close, major central banks such as the Bank of England, European Central Bank and U.S. Federal Reserve were tightening up monetary policy, even as economies were still wobbling. Other important central banks, such as the Reserve Bank of Australia, the Reserve Bank of India, Bank Indonesia and others also began ratcheting up rates.

Two exceptions through 2022 were the People’s Bank of China and the Bank of Japan, both of which more or less kept monetary policy steady, as inflation in both nations was muted in comparison with much of the world.

So, in 2023 property-world denizens must ponder markets with interest rates that promise to track yet higher while economies struggle. But on the plus side, the pandemic-crunched office, retail and hospitality markets are mostly mending. Moreover, real estate has shown resilience by recovering from prior recessions, including the global financial crisis in 2008.

In any event, commercial property investors are not day traders. Institutional real estate mavens are the epitome of long-term buyers, developing or holding properties for years if not decades. What’s more, the investors behind the investors (such as pension funds) are considered permanent players in the market.

For many, 2023 will be a year of slowing economies, but it may also offer a fleeting window to acquire assets when the prices are right.

Indeed, too-timid property investors may miss the boat in 2023, advises Brian Klinksiek, head of European research and global portfolio strategies at LaSalle Investment Management. “Waiting until pricing adjusts to levels that generally make sense in various sectors and geographies is not an active call,” says Klinksiek. “You can run your models but miss the diversity and inefficiency of real estate as an extraordinarily heterogenous, idiosyncratic and upgradable asset. We can find transaction-specific value drivers in any market environment.”

Richard Barkham, global chief economist at property giant CBRE, adds, “Investors should be cautious, but ready to move if they get fair market pricing.”

Relative bargains, or indeed any softness in institutional real estate prices, have been rare for more than a decade, in a world often defined by “capital gluts.”

In 2023, buyers may find financing more costly but the price tags inviting.


The good news is that much of Asia will likely sidestep the global recession in 2023.

The most recent International Monetary Fund forecast posited that developed Asia’s gross domestic product (GDP) will grow by more than 2 percent in 2023, “which is at least twice the pace of the U.S. and euro zone,” comments Milan Khatri, director, head of research, at Hong Kong–based Phoenix Property Investors.

Japan promises to be the bright spot in Asian property markets in 2023, as a nation with a central bank that is not tightening, and also due to the depreciating yen, adds Khatri.

While the Japanese economy has wobbled with the COVID-19 pandemic and global slowdown, it is still growing, and the nation boasts peerless political stability and low jobless rates. Japan is forecast to post real GDP growth of 2.18 percent in fourth quarter 2022, according to a consensus of economists cited by the Japan Center for Economic Research.

In Japan, institutional property can be leased out profitably, given low mortgage rates.

“Judged by the sheer numbers of leveraged returns, the property investing outlook is brightest in Japan, where the gap between debt costs and property yields remains positive,” says Klinksiek.

While central banks globally tighten the tourniquets, the Bank of Japan is on standby. “Interest rates and bond yields are unlikely to see the same upward pressures as the rest of the world. This should help support Japanese property values on a relative basis,” says Indraneel Karlekar, global head of research and strategy, real estate, at Principal Asset Management.

Adding to Japan’s positive outlook is the declining exchange rate of the yen, which lost more than one-quarter of its value against the U.S. dollar in 2022. Armed with greenbacks, “U.S. investors may be motivated to bargain hunt outside the U.S., due to the strength of the dollar,” notes Barkham.

Japan, literally an island of political and economic stability, could be an investor favorite in 2023.

Even second-tier markets in Japan have been showing good results. “In Sapporo [Japan], we successfully sold a grade A office building in 2022,” says Khatri. Capital will be looking for a home in 2023, and Japan is a “politically stable and low-risk jurisdiction,” he adds.

China, the regional economic behemoth that 1.2 billion residents call home, is something of a cipher as 2023 unfolds. There is no denying that many publicly held mainland China property companies struggled through 2022 — indeed, the Hong Kong Hang Seng Mainland Properties Index lost about 60 percent of its value from the start of 2020 to near the end of 2022.

Some of the nation’s largest residential developers, such as the listed Country Garden, have lost nearly 90 percent of their trading value from five years ago. Listed bonds of mainland developers often trade at 30 cents to face value, and many have defaulted.

Beijing has been on a mission to deleverage property, but when combined with the COVID-19 pandemic in 2022, the timing might have been better, say observers. “While well intentioned, the deleveraging policy has arguably been overzealous, resulting in a cascade of property developer defaults that has hurt buyer sentiment,” explains Karlekar.

The financial headlines are no doubt daunting, but there are investment opportunities in China, still the globe’s premier manufacturing platform, says Klinksiek. “Prospects are best for sectors with fundamental growth drivers and the tailwind of supportive government policy, such as logistics,” he advises.

While Asia overall is too large for generalities, it is still a continent with rising incomes, and many regions, such as India, have growing populations. For example, leasing was strong in major Indian office markets by mid-late 2022, recovering from the pandemic, and prospects were solid in both the IT and non-IT sectors, reported CBRE in late 2022.

In general, as it has for decades, Asia offers to property investors growing economies and huge, upscaling populations. Institutional investors, thinking long term, will not likely bypass the continent in 2023 or in the foreseeable future.


The 2023 economic forecasts for the United States seem to get gloomier with each passing week, but some prognosticators are still planning for slow growth. Late in 2022, IHS Market (now part of S&P Global) forecast a mild 0.2 percent reduction in real U.S. GDP in 2023.

There is no sure refuge from uncertain economies, but U.S. residential real estate is among the best bulwarks, says Noah Hochman, co-CIO of Los Angeles–based TruAmerica Multifamily, which oversees 55,000 units and counting.

“The long-term fundamentals are so solid in U.S. residential real estate that any weakness will create short-term opportunities,” says Hochman.

Unlike during the global financial crisis days, there has been no antecedent building boom in U.S. housing before 2023 — quite the opposite, as many regions of the nation are desperately short of housing, due to decades of tight zoning and building restrictions.

“Apartments may be less pricey in 2023, but in three, five or 10 years from now, they will be higher, and we are long-term investors,” says Hochman.

U.S. office markets have a perhaps more checkered outlook than housing, with many markets still softer than pre-pandemic, and work patterns evolving. “In the U.S., the return to the office has been far weaker [than in Asia], and we are pessimistic about the sector for now,” says Klinksiek.

Other property investors concur. “For offices, there are legitimate concerns over the impact of work-from-home on office demand from end occupiers in the U.S.,” comments Khatri.

Indeed, across the United States, solid double-digit vacancy rates are the norm for the office sector. Vacancies are posting at more than 20 percent in Los Angeles and roughly 25 percent in Dallas and Houston. The national office vacancy rate was 19.1 percent in third quarter 2022, reported JLL Research, even as the Fed targeted higher interest rates.

The retail market likewise remains in flux, though more resilient than might be expected. As a proxy for the market, it is worth noting that the largest retail REIT, Realty Income, is trading well above pandemic lows, and down less than 20 percent from pre-pandemic peaks.

While the jumbo regional malls are struggling, “Grocery [property] remains white-hot, with growth bolstered by aggressive expansion plans from newer market entrants like Aldi and Lidl,” reported PwC in the Emerging Trends in Real Estate 2023 report. Likewise, automotive repair, convenience stores, cosmetics, fitness, hobby stores, home furnishings, off-price apparel, pet-related outlets and sporting goods sectors are prospering and demanding space, added PwC.

The once plebeian warehouse-industrial sector is everyone’s new favorite, and even with firm pricing, opportunities exist. “It is possible to find selective pockets of value given robust fundamentals in sectors like logistics,” says Klinksiek.

North American industrial vacancy rates will remain low, ending 2023 at 4.1 percent, up only 30 basis points from year-end 2021, despite abundant new construction, Cushman & Wakefield recently forecast. Nevertheless, even for the still-hot industrial sector, the simple math is that pending higher interest rates will raise cap rates and relatively reduce the market value of U.S.-based institutional property in 2023.

The Green Street Advisors U.S. Commercial Property Price Index, after soaring from mid-2020 to apex in early 2022, lost about 13 percent of its value near the end of the year.

For many institutional buyers, that sets up a chance to buy U.S. property in 2023 when prices are not at all-time record highs, a window that has been mostly closed for the past 10 years.

Canada may fare a little better in 2023 than its southern neighbor. The Canadian finance minister, Chrystia Freeland, in late 2022 forecast her nation’s GDP would expand by 0.7 percent in 2023, thus avoiding recession.

Canada’s housing markets will remain tight in 2023 (although some cities could see price corrections), while industrial and life sciences properties should hold value, reported PwC Canada in a 2023 outlook report. Canada’s retail and office markets may struggle, especially as debt capital becomes tighter, but also may offer entry points for buyers.


The continent’s challenges are legion, including a regional war, soaring energy prices, inflation and a tightening European Central Bank. Despite travails, Europe as a region will still eke out 0.6 percent GDP growth in 2023, predicted the IMF in late 2022.

But slow growth and rising interest rates make value tough to find in Europe “until pricing adjusts more meaningfully,” says Klinksiek. “Investors should be in position to pick up distressed properties in Europe by mid-2023.”

Despite the daunting outlook, private-sector property owners did not become successful by playing the victim. In Europe, as elsewhere, they are prepared to adjust, upgrade and alter operations. Given soaring electrical bills, many European real estate owners are discovering that on-site solar power now pencils out, notes Klinksiek.

Higher energy bills may dent European property in 2023 but could leave the continent more resilient in the long run and “more green,” adds Barkham.

And in Europe, as elsewhere, the logistics sector is still favored by investors, even though values have taken a haircut with rising interest rates. Lease rates have been firm, and Europeans are looking to warehouses to make more resilient continental supply chains, as well as serve the growing online sales market, reported JLL Research in late 2022. “Severe supply constraints mean that landlords and developers” are able to drive industrial rents higher, reported JLL.

In Europe, as in the United States, residential “real estate remains highly prized, being seen as having more income stability than commercial sectors,” advised PwC in Emerging Trends in Real Estate: Europe 2023, co-authored with the Urban Land Institute.

European office markets are varied, with chronic tightness defining some locales, such as Paris’ central business district, and others somewhat looser, such as office markets in Poland.

In Europe, across all property sectors, the investments most at risk will be those unable to pass rising energy costs onto customers, advises Karlekar.


Picking the “absolute trough” of the 2023 real estate cycle is likely near impossible, advised experts. Instead, property buyers should look for opportunities, perhaps in slightly fading core properties that could use a makeover and upscaling.

While Europe and the United States may have to struggle through uneven economies in 2023, most of Asia appears headed toward modest economic expansion in the year. Every bear market and property down cycle is daunting, and yet even the global financial crisis was resolved, and many years of economic growth and especially property appreciation followed.

Most likely, investors in the future will look back on 2023 as the time to enter the market.

Benjamin Cole is a freelance writer based near Korat, Thailand.


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