MSCI Real Assets, part of the New York-based data and analytics firm, has published several key findings of its 2023 “Look ahead” report.
When it comes to London office values, it says prices needed to drop 29.3% in order to drive transaction volumes back to normal.
The price adjustment estimate is based on an historical analysis of supply and demand trends.
Also in its outlook report, MSCI highlights prices in New York’s office market also need to decline by 10.4% to lift transactions to normal levels.
Jim Costello, executive director of research, said the entire US market had slowed, with sellers hesitant to take a loss and buyers sitting on the sidelines. Bringing volume back to long-term-average levels would require a drop in prices to pique buyer interest.
Several factors are pointing to price declines in the quarters ahead. The MSCI US REIT Index already declined 30% from the end of 2021 to the end of September, as investors quickly updated estimates of the net asset value of these companies in response to the changing interest rate environment.
Pricing for real assets has only just started to show signs of decline, with the RCA CPPI for offices in central business districts down at a 2% annualized rate in the third quarter relative to the second.
Deal volume was the first shoe to drop in the market for US commercial properties. From a Q3 high of $218 bn in 2021, activity fell to $172 bn in Q3 this year. ‘Potential buyers and current owners have simply moved too far apart on price expectations,’ said Costello.
‘Visiting with appraisal professionals over the last four months, I have always asked: “Have you started to mark asset values down?” Inevitably the answer is no. These experts note that they have not seen enough sales comparables to say with confidence that prices should move.’
The outlook for the real estate market is the most uncertain since 2008, during the Global Financial Crisis.
MSCI also opined industrial real estate remained well placed relative to other sectors, underpinned by lower levels of vacancy and superior growth in net operating income.
Meanwhile, the “green premium” for buildings with sustainability ratings will galvanise owners to invest in buildings to reduce energy emissions, and sales pricing will reflect capital expenditure required to bring buildings up to standards demanded either by the market or by legislation.