European commercial real estate deals declined for a seventh consecutive quarter at the start of 2024, dashing hopes of an early recovery in activity this year as the sector continues to grapple with falling valuations, higher interest rates and a poor economic outlook.

Completed commercial property transactions of at least €5m in Europe reached a total of €34.5bn in the first three months of the year, down by 26% from the same period of 2023, according to data released by MSCI Real Assets on April 25. This was the lowest transaction volume recorded since the third quarter of 2010. The number of companies buying and selling commercial property also fell to a 12-year low.

Deals for commercial real estate — which include apartments, hotels, industrial buildings and offices — rely heavily on debt financing and boomed during the historical low-interest-rate environment after the global financial crisis. Property valuations and transaction volumes have fallen as demand was hit by the new living, working and commuting patterns that emerged from the pandemic and rising interest rates since 2022.

“The direction on rates is a huge influencing force for our sector,” said John O’Driscoll, the global co-head of real estate for Axa IM Alts, the alternative investment arm of the French insurance group.

Central banks have rapidly hiked interest rates in the wake of the pandemic to fight spiralling inflation rates. With inflation rates now coming down, the market consensus expects central banks to start cutting interest rates in the second half of 2024. Against this backdrop, while early 2024 is an “interesting re-entry point” for real estate investment, low investment volumes in the past two years has meant a “backlog of sellers”, added Mr O’Driscoll.

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Following a slow year of activity in 2023, many real estate leaders were hopeful that European property investment would recover in 2024.“The continued and sometimes painful readjustment to the end of historically low interest rates means the market remains a difficult place in which to transact,” said Tom Leahy, the head of MSCI’s research into real assets in Europe, Middle East and Africa.

Cross-border real estate acquisition volumes in the first quarter of 2024 also fell to their lowest level since 2010, representing less than 35% of total investment. While US-headquartered companies were the main source of cross-border capital in the past 12 months, most players have scaled back their spending, according to MSCI.

A major hurdle to real estate deals being done is the difference between the price expectations of buyers and sellers. For instance, there is a 20% gap between the asking prices for London office properties and the prices realised in completed sales, according to MSCI. 

The continued uncertainty is reflected in the spike in the number of deals being terminated and for-sale properties being pulled from the market. Some 110 busted deals were recorded across Europe in the first quarter of 2024, the highest level since the global financial crisis, MSCI data shows. 

The number of distressed sales — where an owner is forced to sell a property often at a discount due to financial difficulties — have also begun to tick upwards. Germany has particularly high levels of distress, according to MSCI, as several large sales have recently emerged from the July 2023 collapse of German developer Centrum Group.

“The market demands a new and different approach,” said Robert Thornborough, CEO of the Society of Industrial and Office Realtors, a member organisation for real estate advisers and brokers. “Whether you’re a property owner, broker or appraiser, you’re having to find a unique way to reposition yourself in the marketplace to bring value.”