Europe Real Estate

Similar to the rest of the developed world, European economies have made a remarkable recovery. GDP growth has been strong, though there are significant differences across countries. France and Germany have nearly reached their pre-pandemic levels, while southern European countries are still lagging by 5% to 8%. Southern Europe relies more heavily on tourism, manufacturing, and construction, which have not yet fully rebounded. Regarding unemployment, Europe attempted to discourage employers from laying off employees by offering furlough programs, whereas the U.S. directly paid unemployment benefits to workers that lost their jobs. In the coming months, after these programs have expired, the success of these programs and the real unemployment rates will emerge. However, given the strong economic growth, it is possible unemployment holds steady at 7.3%, according to Capital Economics. In fact, some markets—notably the UK—are facing significant labor shortages as consumer demand continues to grow.

Inflation has been a key topic of conversation. The International Monetary Fund recently raised its inflation forecasts, increasing them from 1.6% to 2.8% for 2021 and 1.7% to 2.3% for 2022. These increases are significant and hard to justify as transitory, especially when several workers’ unions have been asking for higher wages. Higher prices can be seen in Angelo Gordon’s own real estate projects, with the cost for construction work up 5% to 10% from previous levels. Some inflation, however, is good for real estate—especially in Europe, where many leases have indexation clauses.

Even as vaccination rates increase and restrictions are lifted, lingering behavioral changes from the pandemic—including an increase in online shopping and part-time remote work—have impacted real estate values. Industrial property values increased more than 10% since late 2019, retail values decreased approximately 12.5% from pre-pandemic levels, and office values have rebounded to 2019 levels.

Real estate transaction volume has remained generally unchanged in 2021. Investor appetite for industrial and multifamily assets is strong, while demand for office has flatlined and demand for retail has decreased. Net absorption in European office space dropped dramatically in 2020—falling to less than 500,000 square meters as compared to 2.5 million square meters in 2019. Despite the impacts from COVID-19, tenant interest in office space has started to increase in the second half of 2021. The region faces limited supply of office space, so as employers implement return-to-office policies, companies must find adequate space from the existing supply. Office viewings have increased dramatically over the past few months, with tenants now requesting more flexible and amenitized workspaces.

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European mobility has reached its pre-pandemic levels, as most employees returned to work after the summer months.

The industrial sector continues to outperform, the office sector has improved since 2020, and the retail sector remains weak.

With limited new supply in the European office market over the past decade, tenants must choose from the existing space as they return to the office.

While government employment benefits are pulled back across the continent, strong economic growth has kept the unemployment rate relatively stable.

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AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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