Midyear Global Real Estate Market Outlook 2024

Julie Whelan:
Welcome to CBRE’s Global Midyear Outlook for 2024. Global real estate markets and sectors are diverse and perhaps never more so than today. I'm joined by twelve of my global colleagues that specialize across sectors to discuss how all the factors in the economy are impacting commercial real estate fundamentals and investor trends around the world.

As an organization we are focused on shaping tomorrow’s cities in this post-pandemic world and after this webinar you can look at our research and insights page to read the full report on that topic. We have received your questions in advance and we do our best to cover them in our dialogue. We have a lot to cover so let's get started.

Julie Whelan:
Starting with the economy, I welcome Dr. Richard Barkham, Global Chief Economist and Head of Global Research. Richard is the economy reaches a turning point how will it impact the back half of 2024 into 2025.

Richard Barkham:
Despite the sharpest rise in interest rates for 40 years, which has caused a big drop in real estate values around the world, we are still predicting a soft landing in the global economy.

Why is that?

Inflation, which has been very problematic is trending down and should be close to target by about the end of 2025 maybe even earlier than that. Global growth continues to be resilient, particularly in the United States and in China. Most importantly I would say we are over the hump with interest rate rises.

The Bank of Canada and ECB have already cut interest rates and we expect the Federal Reserve to cut interest rates in September and again in December and then proceed with four cuts through 2025. Those rates globally will trend down over the next 18 months or so.

Looking forward we expect global growth in 2025 of 3.2% which is close to the 3.2% in 2024. It is slightly below par but it will be patchy and still pretty good out turn given the interest rate situation.

If we look at each individual part of the global economy, the United States is really outstripped all the other developed economies over the last two years. Partly to go on expenditure, partly due to a really resurgent consumer, there are signs now the U.S. consumer is flagging and slowing down. I don't think there is enough serious stress in the consumer sector but there's enough to cause a slowdown in the United States at least for the next four quarters. The European economies have had to endure both inflation and the rising energy costs due to the war in Ukraine. Also they have to be more fiscally conservative. So, growth in the European economies has been quite weak over the last 18 months but Inflation is trending down and it's trending down a bit quicker than the United States. And what that’s allowing is a very promising consumer led recovery to develop in the European economies.

As for China, it hasn't had an inflation problem but it does have a collapsed housing market. And the government has had to introduce monetary stimulus and fiscal stimulus to keep growth going and its been quite successful at that. So we see growth in China one of the world's largest economies continuing at around 5%. All of that adds up to patchy slightly subpar growth but a reasonably good growth outlook for the rest of 2024 into 2025.

Having said all of that are we without problems? I think far from it.

One problem I would like to spike out is the Parlor state of government finances around the world. In all the developed economies we have budget deficits. And there's a particularly large budget deficit in the United States. That points to reduce government spending over the next two to three years or increased taxes and we are beginning to see that already in the recent choices of the new government in the United Kingdom. But that fiscal consolidation that will have to come will be headwind to growth. Not decisive but a headwind to growth.

Secondly there is a growing chance there will be another trade war with China. Governments in Europe and the United States are keen to protect domestic manufacturing and China has a very competitive manufacturing sector. I think potentially there is the new tariffs will come and there will be retaliation. And that could be a headwind to growth in 2025 and introduce some volatility into global markets.

Finally I would say not exactly a headwind to growth but a word of caution, labor markets as a product of a soft landing labor markets around the world remain uber tight. Very low unemployment. So, the scope for central banks to reduce interest rates will be limited, they will trend down. But were not going to the world of 2009 to 2019 to push interest rates down that far would seriously run the risk of reigniting inflation because of those tight labor markets.

Interest rates are going to trend down but only slowly over the next 18 months. In any case taking more of that together I think the real estate environment is likely to be modestly improved over the course of the rest of 2024 into 2025. So to discuss that I will hand it back to you Julie.

Julie Whelan:
Ok, well thank you Richard. A soft landing is certainly better than the alternative of a recession even if we aren't necessarily in a booming economic period.

Julie Whelan:
I want to now turn to the subject of Capital Markets and to discuss how that outlook is shaping up in light of Richard’s comments. To do that I welcome my colleague Darin from Utah, Raphael from Italy and Gus who is joining us from Singapore. Richard just talked about interest rate cuts and we know increased interest rates were a key headwind to global investment activity but now with the cuts can we expect a revival in capital markets? Raphael let's start with you since the ECB has already cut rates.

Raphael Rietema:
We seem to already be in a capital markets revival. The central bank made the first rate cut since 2019 and is growing evidence that the transaction market has turned a corner in the first half of 2024.

Investment volumes are up 10% year on year driven by a strong performance in the U.K. in Germany on the back of more and specifically larger transactions. Stabilizing asset prices have helped the recovery. Yields in the prime of the market have already remained flat since March this year.

We also see the recoveries carried broadly and all major sectors have posted growth. The increasing investment volumes allows for price discovery which gives the market more comfort around price levels. This will be good for liquidity helping to sustain this increase in volume for the remainder of the year.

From a historical perspective investment volumes remain modest at around 35% below what we've been used to in the decade prior to 2022. The market will need some time to get momentum before it can fully recover back to those levels.

Julie Whelan:
Gus, listening to Raphael’s comments, how are you feeling about Asia-Pacific?

Gus McConnell:
Well, what we are seeing in Asia-Pacific Julie, is that we are playing catch up so we have been playing catch up with pricing, we’re playing catch up with central policy rates and we’re also playing catch up with investment volumes. So generally over the first half of the year it's been a bit flat if you look at the first half of 2024 versus the first half of 2023 so as a result of that we have slightly revised down our overall forecast to about 0-3% growth rate year on year.

The main reason for that is the slowdown in Japan which is down 48%. And mainland China which is down 34% quarter on quarter. There are the two biggest markets. Other markets in the region are at differing stages of the cycle. If you look at Singapore and Hong Kong two markets which have really sat on the sidelines as of repricing over the past 24 months. Now beginning to reprice assets to meet other markets within the region.

If you look at Australia, Korea, New Zealand. Three markets which have reached the bottom of pricing, investors are now looking to capitalize on discounts for core assets in prime locations. Investment is expected to pick up in these markets and the second half of the year.

Finally India continues to grow as favorite investment destination. Investment volumes were up 86% in the first half of 2024 versus the first half of 2023. Year-to-date there the fourth-largest market in the region in terms of overall investment volumes.

Julie Whelan:
Wow, that is an amazing stat from India. So, Darin, let's talk about the U.S..

Darin Mellott:
I would characterize markets in the U.S. as having been in a stabilization stage in recent months. Generally speaking values have been stabilizing, activity to be showing early signs of improvement. Looking ahead we think we will see some momentum built throughout the second half of the year in markets and that's just giving greater confidence in the path of inflation and interest rates.

Although the Fed interest rate cuts will be important psychologically keep an eye on the 10 year yield, that’s really what matters. If yields remain close to 4% stable that will aid activity and validate our forecast. Should yields decline more we will see volumes probably move towards higher end of our forecast.

I would wrap up by saying importantly although conditions are improving we remain very measured in our expectations especially given some of the risks that Richard outlined. So we anticipate volumes will be at a 0% to 5% on a year-over-year basis. I would just say to close us out quickly a lot of people of ask about the election.

Long story short we can find no impact from elections on investment market dynamics. That’s not to say that don’t matter and won't have longer-lasting nuanced impacts but that’s something to keep in mind in the coming months as well.

Julie Whelan:
Thank you for that context. You've outlined where investors put their money does matter but also what their money in matters as well. So Darin, let's stick with you and discuss the commercial real estate sectors are most attractive to investors in the U.S. and specifically is there distress mounting that is particular appealing to opportunistic investors.

Darin Mellott:
In the U.S. multifamily and industrial continue to be the most favored, there are a lot of reasons for that our colleagues will talk about that but there's some compelling long-term stories. Retail has also been a place where investors have been comfortable. Coming away from a decade were all the headlines around retail were very negative that’s not the case anymore the fundamentals are quite strong.

Something I know you will appreciate Julie, is we are beginning to see investors getting interested in office again. Again, don’t want to overstate things even if overall activity is still somewhat subdued in that sector we find investors looking for opportunities in prime assets and the tier just below that, select submarkets. But there's even some activity elsewhere in office where investors are finding value.

Looking at this from a geographical perspective, investors are shown a preference for high growth in sunbelt markets and larger East Coast markets. Regarding the distress, we are seeing it materialize and we expect to see a lot more of it.

In terms of impacts on the sector, we could see bank losses upwards of $60 billion that will weigh on bank lending into our sector. It's quite substantial but we don't think it is a systemically destabilizing issue. A couple of things to understand about this, it will play out over the course of two to three years and the most troubling exposure is in smaller community banks, so, while it will have an impact it's not going to be a destabilizing issue.

Julie Whelan:
I know you've been studying that deeply so you have that story for quite a while now. Raphael, from a European perspective how are sectors doing?

Raphael Rietema:
It is an interesting time to be active as we have entered a buyer's market in Europe and there is plenty of undeployed capital out there. Investors should be looking for assets with good income growth prospects, as rental growth has surprised to the upside as scarcity of high-quality product persists. We see this in many of the sectors that were already mentioned – Multifamily, Industrial, Hotels and Offices – fundamentals are strong especially in the prime segment.

We should also not sleep on Retail. The Retail sector has seen yields move out for more than half a decade now, which means that yields are relatively high making cash on cash returns in the sector very attractive. We also see a lot of potential in Student Housing, which in Europe is an underserved but fast-growing market and we see a consolidation trend emerge.

In terms of distress, 2024 will remain a year of two tales. On the one hand we are seeing the first signs of a market recovery, while on the other we will see distressed situations come to the light as the market still needs to work through some of the problems caused by higher interest rates. However, what is very promising is that there is plenty of debt available in Europe and that lenders are open for business. We recently published our European lender intentions survey as almost two-thirds of lenders expect an increase in origination activity. The growing willingness to lend is a positive sign as the availability of debt financing is essential for the transaction market to recover.

Julie Whelan:
That financing is so important. Gus, take us home with your Asia-Pacific on sectors.

Gus McConnell:
It's similar to what was Darin and Raphael mentioned. It is quite attractive for investors as our colleagues will mention later there are some supply challenges alongside a slowdown of occupier expansion, but rents are quite elevated compared to historical levels and vacancies. But then I am very quietly confident about the office sector rebounding over the next 18 months. Most of the markets within the region have hit the bottom in terms of pricing.

Our local teams are very adamant that rental growth is on the horizon so the Asia-Pacific market has been quite resilient in terms of return to office which we have discussed at length and now the discount available across core CBD assets is at a very attractive level, the enquiry levels have grown.

Lastly a want to talk about hotels. I think many markets are outperforming on a RD and RevPAR basis so markets such as Japan, Korea and Singapore alongside Australia have been key investment destinations over the past 24 months. From a distressed perspective we haven't seen it much in Asia Pacific. A big part of that, is the recourse loan structure within the region so essentially what we found in our debt gap funding report, is that three quarters of all loans in the region use recourse loan structure. What that means is it allows the lessee to leverage other assets in their portfolio when interest-rate repayments or refinancing becomes an issue. It allows investors to be more flexible in terms of which assets they would need to dispose of if the situation arose.

Julie Whelan:
Very interesting nuance that Asia Pacific market. So, Darin mentioned he is modestly interested in thinking that growth in investment in office will go upward and you mentioned you are quietly optimistic about it. I think that's a term you used which might not be so quiet since 7000 of our closest listeners are on the line but I'm interested to see if that trend does stick and I have some specialist from an office market perspective to move on to next and to go deeper on that particular subject.

Julie Whelan:
I welcome our office sector expert Jessica joining us from Phoenix and Richard who is joining us from London. Welcome Jessica and Richard. So, office has been a scrutinized asset in recent years simply because of how people work has changed and that has impacted vacancy. I would like the insight of this team to understand what utilization looks like now after four years since the start of the pandemic and in turn how space needs are changing and what preferences look at for organizations. Jessica, since all of this is such a prominent trend in the U.S.. Let's start there.

Jessica Morin:
Utilization is largely stabilized to just under three days a week but we see a significant difference in movement within peak days. So,peak days are usually Tuesday and Wednesday. And attendance on these days is pretty much on par with what we saw pre-pandemic. So, its essentially full. However we do still see that throughout the week there is lower attendance than we were pre-pandemic and so organizations are planning for that. And for the most part they see their portfolios will remain stable or even grow over the next three years which is a significant shift than what we saw pre-pandemic where sentiment was largely leaning towards contraction.

So the growth mindset is significant in the smallest companies and those are the organizations that will continue to drive velocity and leasing volume. The type of space companies are looking for is also different than it was pre-pandemic. It is stronger towards that flight to quality. We have this prime office set that represents the top 8% of office space in the U.S. and overall the segment has continuously outperformed the rest of the market in terms of net absorption.

We have had positive net absorption throughout the pandemic. In terms of vacancy rate for prime buildings is 4.5 percentage points below nonprime buildings and also in terms of a rent premium these buildings command more than an 80% rent premium over nonprime buildings which is a wider margin than it was pre-pandemic.

This is also driven by substantial drop in new supply so we are going to see vacancy within prime space return to its pre-pandemic level we are forecasting by 2027 which is a conservative estimate. We will see some markets reach that equilibrium even faster based on their supply. So, for instance, Park Avenue we have a 9% availability rate there.

You compare that to overall Manhattan commodity building and availability rate of around 22%, so there is a stark difference within just even that segment of the office market across the U.S..

Julie Whelan:
Very interesting and that prime report you wrote was very interesting. Richard let's talk about the rest of the world when it comes to hybrid work and space preferences.

Richard Holberton:
I will start in Asia-Pacific. As mentioned earlier, home working now less prevalent in the region anyway. But perhaps it is still an issue for big multinationals in the region who want to develop perhaps apply global policies in the area. Here in Europe we have just published our office occupier sentiment survey for the region and we found very few companies yet seeing average utilization back in the territory that used to be typical but it is rising quite strongly.

One of the reasons for that is more companies now have guidance or mandates in place around office attendance and I expect that approach to become even more widespread. To Jessica's point about quality preferences certainly that is a trend in Europe and if anything it's becoming even stronger. There are a lot of companies across Europe looking at their existing portfolios and existing leases to assess whether they are still fit for purpose. For those who do have additional space needs, that informs part of their wider employee value proposition so they are looking closely at quality things like public transportation access, nearby amenities and increasingly sustainability as well.

All of those things are things that I think will drive a trend towards movement to better quality space for the most part in city centers. I would add I think that's also a process that will give rise to further expansion in flex office markets in Europe.

That central good quality space is pretty scarce. I will give you one example. In Paris the vacancy rate for CBD on its own is about 2.8%. For the city as a whole it is 8.2%, so there is a big disparity there so we are seeing that kind of dynamic playing out across a lot of European cities too.

Julie Whelan:
That is a staggering low vacancy rate. So, I guess the Olympic Beach Volleyball isn't the only game that wants to be in central Paris. I have the Olympics on my mind. We talked about structural changes but we need to talk about cyclical changes because even though we are in for soft landing it is still slow growth. What's the biggest impact on the market over the next 12 months given that fact? Jessica, lets start with you.

Jessica Morin:
In the U.S. we are seeing this cooling of office using job growth which does have some negative impact on office demand, however that negative impact isn't as significant as it was pre-pandemic just because job growth and space demand aren’t as tightly linked because of hybrid work.

Looking ahead ultimately soft office using job growth, combined with high interest rates will continue to put upward pressure on vacancy we are expecting vacancy will reach a peak by 20% by 2025. At that point we expect to see a recovery and office using job growth, however we expect interest rates will remain higher for longer even though they will steadily go down. So ultimately I think it will be the interest rate that will have the greatest impact on office demand going forward.

Julie Whelan:
Richard, close us out with your perspective with the rest of the world.

Richard Holberton:
I'm expecting office-based employment in Europe to grow to 1-1.5% per annum over the next couple of years which is slower than we become accustomed to. But probably enough to support some gradual growth in leasing activities over the course of this year and next.

One thing to look out for in Europe is the supply side where conditions are just starting to become a little bit more favorable for development which we haven't seen much of in this cycle. Value stabilizing, better quality space still scarce and importantly construction costs which have been an inhibitor rising less quickly than they were so as a result of all those things, completions and some of the bigger markets, London, Paris and Frankfurt among them likely see develop completions over the next couple of years running at levels a bit higher than their recent averages.

Just rounding our on Asia Pacific, I think that's a different story again, there is a supply boom going on there nearly 70 million square feet of office space expected to deliver this year. As a result of that most of the key markets are likely to see some increase in vacancy this year.

Julie Whelan:
So, office is a diverse market in and of itself is what you're telling us in keeping an eye on the supply side will be interesting because on one hand we need newer quality office space because that’s what people want to be in, but on the other hand we need to be very careful in the vacancy story. So thank you both.

Julie Whelan:
What has been a more consistently positive story although not without its own challenges is that of industrial and retail. I would like to welcome my colleague Amanda who is joining us from Chicago to discuss the global retail markets and Pol who is joining us from Barcelona to discuss the global industrial markets.

Amanda, I want to start with retail. So, despite these high interest rates we've been talking about, what’s been interesting is that consumer spending has been very robust yet recently cracks have started to show in that story. What is the impact on the retail sector right now considering it has proven to be really surprisingly resilient over the last few years?

Amanda Ortiz:
Well, that’s absolutely right Julie. Consumer spending has outpaced projections and continued spending his cap the retail sector resilient in the market is fairly tight. In the U.S. year-to-date retail sales were up about 2.3% at midyear.

Demand for retail space though has been subdued and lower than the historical average. One of the reasons for this is the scarcity in construction projects in the market, a limited development has kept supply tight and this supply demand in balance has allowed landlords to leverage their position to maintain those higher rents. And still fill those vacancies relatively quickly.

We are seeing similar dynamics in Europe as well. The European retail sector is showing renewed optimism and is evidenced by couple of sizable transactions of both trophy assets and shopping centers particular in southern European countries. It's unclear at this point how long consumer spending strength will last but as Richard mentioned earlier we are looking towards an interest rate cut here in the U.S. in September so that could support spending late in the third quarter.

Julie Whelan:
For now, retail still a good story. So, Pol, let's turn to industrial. Retail has been a steady performer and much of that is because of good demand but also because of the interesting supply story. The industrial sector is a little different. It's really grown on the supply front as demand is still good but has moderated a little bit. But what will happen over the next five years especially for context of the last five that did see above average work?

Pol Marfa Miro:
Indeed, Julie. The last 5 years were indeed extraordinary, and as such we are not expecting them to be repeated any time soon. 

The market is normalizing, maybe even faster than expected. Leasing volumes and rental growth have moderated and our forecasts for the rest of the year are conservative. But the sector has seen some lasting positive changes and we are still expecting real rental growth for the next 5 years in most of the prime locations. That wasn’t common in the past in Europe, for example.

The supply response to this market normalization will play a crucial role in future performance, in this market that it is normalizing. In the U.S., we believe the vacancy rate has already peaked at around 5.6%, whilst in Europe, new supply is also drying out but the current vacancy rate of around 4.3% will probably still increase a bit more. Finally, in Asia Pacific, the logistics pipeline is actually higher in H2 than it was in H1, so availability will keep increasing and affecting growth perspectives there. However, as our capital markets colleagues said, industrial has strong fundamentals and is one of the preferred sectors for investors.

Julie Whelan:
This building boom in Asia Pacific seems to be a central story and also Jessica mentioned that office vacancy is rising to over 20% in the U.S.. So, I guess, when you look at industrial vacancies peaking at around 5.6% that is not so scary. There are some unknowns though around industrial which could be disruptors and one of those is as Richard mentioned in his opening economic context the possibility that escalated trade wars. What is your perspective Pol on how these unknowns could impact the industrial sector going forward?

Pol Marfa Miro:
Look Julie, trade wars would be just another challenge in an already quite long list of external shocks that supply chains are currently facing. I come from a logistics planning background and I can tell you that, historically, logistics planners and supply chain operators are quite good at navigating challenges and finding ways to minimize supply chain disruption.

That's not to say that a potential trade war would not have an impact. It would simply boost the ongoing restructure of supply chains: nearshoring, diversifying suppliers, and moving stock closer to points of consumption all of them could be magnified.

In fact, we have already seen some changes in trade patterns between the two hypothetical geopolitical blocks, but the World Trade Organization are optimistic in their latest forecast: they expect global merchandise trade to increase 2.6% in 2024 and 3.3% in 2025, mainly lead by Asia. So, trade will find its way and the logistics sector will need to accommodate to it, probably handling higher flexibility demands from occupiers. Our recently launched European Logistics Occupier Survey explore this and other topics affecting the sector.

Julie Whelan:
I just saw your post that on LinkedIn so I look forward to reading that. My take away from you is industrial is a nimble industry with strong fundamentals that's probably a testament as to why we are in such a sought after asset to invest in. Amanda I want to close out with retail. The lack of supply story has helped retail fundamental stay strong. Do you see that shifting and how are some retailers solving that?

Amanda Ortiz:
It is certainly starting to shift. I mentioned the scarcity of new supply earlier and development is actually down 23% year-over-year. There is still demand for prime retail space and we are seeing retailers respond to this in a couple of different ways.

We see more pop-up shops that allow retailers to test new markets and new concepts without those long-term commitments and we are seeing more of a focus on the customer experience. In fact, luxury brands are in fact even buying flagship stores in many global markets. And flagship stores are so much more than just shopping. Brands want to create a unique curated experience with personalized service and they want the most control to do so. This flagship store serve as pivotal locations for brand visibility and customer engagement. They usually offer more immersive experiences that go well beyond the typical retail transaction. Ownership of these flagship locations would allow them to have that control over the design, the layout and customer experience. We see in a couple of examples of this in the U.S. but this trend is much more prevalent globally.

It's happening on main luxury streets in Hong Kong, Paris, Tokyo and even in London. And this trend is one the definitely shows some staying power even though it does require a hefty investment up front. We are keeping tabs on this trend and ensure we will have more information to come in the coming quarters.

Julie Whelan:
This trend towards experiential retail is fascinating. I'm in the Boston market and I can see that in our high street district. I don't necessarily see it in the luxury retail stores but I see a lot of the athletic brands doubling down on attracting their consumers through that experience in those new flagship stores. I might just be noticing that because I have three children that seem to be forever outgrowing their soccer cleats or as Richard Holberton likes to tell me I should call them football studs. I will keep an eye out for that trend.

So, Pol and Amanda have both told us that industrial and retail are both at different points of their evolution as an asset but both continue to be solid performers although in the case of industrial may be off the heights that were most recently seen.

Julie Whelan:
I would like to talk about two additional consumer driven sectors, multifamily and hotels. Matt will be joining us from the Pacific Northwest, Frank is joining us from Amsterdam, they will both discuss global multifamily markets with us and Rachel is joining us from Virginia where we will discuss her global view on hotels. I would like to first start with Matt.

In the first line of the 2024 Outlook for multifamily your line was the biggest wave of new apartments supply in decades will temper rent growth and improve affordability for renters for 2024. How is that sentence aging now that we are more halfway through the year?

Matt Vance:
Well, I think we nailed the outlook Julie. We are in the peak of new supply right now. We are adding roughly 4% to the total inventory nationally and it's doing its job, landlords are competing for these tenants especially in markets with heavy supply pipelines. In those markets inventories will grow by more than 10%. As a result, rents are flat and even falling in those markets with the most new supply. Anecdotally I've gladly renewed my lease twice now without an increase.

Julie Whelan:
That is certainly good news, it means your salary is going further which is always great. All of this is good news for tenants. Is there enough renter demand to handle the new supply? Speak more to the investor side of things.

Matt Vance:
There is so far anyway. A few things should continue driving this. The for sale market remains unaffordable for many, job growth, household formation, fueling demand and the discounts people are taking advantage of in the new properties that are leasing up. For the first time in two years, maybe more, occupancy did not fall it moved sideways in the second quarter and U.S. multifamily fundamentals or turning the corner right now.

We expect occupancy across all markets to begin recovering later this year driving accelerating rent growth heading into next year. The market is also turning a corner in other ways I would say as well, expenses have improved this year. And insurance costs are going more slowly finally and cap rates have stabilized in the first half of the year as we heard from Darin earlier. We expect all of this to drive a steady recovery in multifamily property values really in the next few years.

Julie Whelan:
Frank, let's turn to Europe, opposite to the U.S. in Europe the 2024 outlook led by talking about lack of supply despite demand. How is that story unfolding in 2024?

Frank Verwoerd:
To be honest, I think renters in Europe are a bit jealous of the situation in the United States. Many countries in Europe are still struggling to add enough homes relative to annual household growth annually. In the past year, the number of building permits fell again by 25% on average in Europe, mainly because of the rise in interest rates. Yet tenants will continue to find it difficult to find suitable affordable housing in the coming years, especially within the bigger cities in Europe. This is the main reason that more and more countries are starting to introduce rent regulations on the rental market to keep the small available supply affordable. Up till now, in these countries it works out counterproductively and actually causes less capital to go into the rental housing market in these countries. So hopefully this can be a lesson for countries where this is still under discussion.

Julie Whelan:
Regulation does not always give us the impact that we are looking for. It sounds a good challenging market for tenants and still little supply for investors. How are investors acting in this environment?

Frank Verwoerd:
Fortunately, new supply will increase in the upcoming 6 to 12 months. We already see that capital values are rising, which helps to push permit levels upwards again. Besides that, investors are also expanding their strategies to the broader living sector such as student housing and the senior living market, especially in the less mature Continental European market in comparison with the UK.

Back to the overall living sector, it is visible that there is still a lot of dry powder available. This is partly institutional investors are still underweighted in the sector and have just started to rebalance their portfolios more towards the living sector. So in answer to conclude still mainly a lack of supply in Europe, but with clear improvements in sight in the upcoming 12 months if you ask me.

Matt Vance:
I would add one comment there. Outside of the Americas and Europe, Japan is pretty noteworthy. Despite the ongoing population declines we read about, we are seeing strong rental demand from the rise in single person households and dual incomes households. We also see a growth in foreign residents who have a fairly strong propensity to rent homes. Japan residential market is certainly a sector to watch as the country’s demographics evolve in the coming years.

Julie Whelan:
Thank you for that context Matt. I would say demographics is probably most important to the multifamily market especially in a world where much of it is aging, it's important to pay attention to. Thank you for those comments, Frank and Matt.

Rachel, we have talked about consumers through the lens of the economy, retail and multifamily but hotels is another asset that is successful when the consumer is going strong. How are hotels globally performing in the current climate and are there some specialty types that are doing better than others?

Rachel Rothman:
Just to harken back to Amanda and Richard's comments earlier, hotels are an interesting sector because of the short lease term and availability of forward-booking data so you can see future demand and that means we see shifts in the consumer often times earlier than other sectors.

So as Richard and Amanda highlighted we are starting to see some cracks in the U.S. consumer. It started initially in the lower price points and now seems to be moving higher. In the U.S. we expect our measure of same store sales which we can RevPAR to be in the low single digits heading into the last part of this year and into next year.

That isn't to say there aren't markets or asset types as you highlighted expensing stronger growth in the U.S. for example, New York City and Nashville looking strong from an investor standpoint and for consumer demand. In fact even before the Paris Olympics, air travel in May was up about 11% globally and if we think about how that breaks down across the globe it means up 15 in Asia Pac, up about 10 in Europe and up five in the U.S. so still a strong propensity to travel.

If you think about some highlight markets we talked about recently in our global hotels investor intentions survey. In Asia-Pacific as Gus mentioned we are seeing mainland Chinese tourists venture out. They are focused on markets like Japan, Korea, Southeast Asia. In the Middle East from a consumer demand standpoint, we still expect strength in the Kingdom of Saudi Arabia and from an investor standpoint the potential legalization of casinos in that market is driving strong interest in the UAE, select markets there.

We have all been watching the Olympics, it’s been amazing it's been a very strong market overall with record outbound U.S. visitation into Europe. Two markets we would like to highlight with enduring strength on the consumer and investor side are Spain and the United Kingdom. Madrid and London specifically.

If we look at the Caribbean and Latin America were so strong during the pandemic we see continued strength in the region on the consumer side, tourists going to the Riviera Maya as they land more planes, build out more train infrastructure. In the luxury theme Los Cabos which is on the west coast of Mexico.

The final theme we have is near shoring which is the propensity to move industrial assets closer to the U.S. and that is fueling demand in Tijuana and Monterey. Again we deep into all of the market our recent global hotels recent hotels investor intentions survey so I would love everybody to take a look at that.

Julie Whelan:
Yes, the amount of detail you have in these markets is amazing. I think air travel being up 10% to Europe is due to everyone going over there except for me. But I am contributing to U.S. air travel as I’m going to Alaska later in August. We appreciate the detailed comments around multifamily and hotels from all of you. It looks like they are relatively right sized ahead for both sectors.

Julie Whelan:
I would like to close out with a sector that is potentially the brightest and certainly burns the hottest, data centers. To cover that asset at a global level I welcome Gordon Dolven joining us from Denver. Gordon, you are certainly covering the asset of the year. Let's jump right in, how much is this sector set to expand over the next handful of years?

Gordon Dolven:
The numbers are truly staggering, Julie. From our recent 2024 global investor survey over 37% of respondents estimated over 50% of their global assets under management will be in data centers by 2029.

This is an astonishing transformation for the industry compared to five years ago. Whether we are streaming a movie, utilizing generative AI to review a tenant lease agreement or uploading a video on social media we all use digital infrastructure and data centers on a daily basis. As a result this leads our sector to expand by double digit percentages on a global basis year-over-year with the only hindrance of this being power availability.

Details on which markets are expanding the fastest are featured in a recent publication the 2024 global data center report. And speaking of power, Julie, power is the main challenge limiting a supply shock from hitting the market. This keeps rental rate pricing high, while supplies under construction and not being delivered to the market in an expedited fashion.

Julie Whelan:
I find the power discussion fascinating and it is reaching kitchen tables around the country because my father-in-law and my father have an extensive discussion about of power and where we will get it. What is your view on how data centers can actually get the power they need?

Gordon Dolven:
We are seeing a lot of innovation on the clean energy power front, recently this year. A major hyper scaler purchased an existing Nuclear Power Plant purchase agreement. We've seen some initiatives with geothermal energy in Nevada and in addition to this in Europe, there is a lot of headway being moved into small modular reactors based on the lack of electricity supply that's currently in that market.

But above all, regardless of the solution we are trying to provider industry and its transition to a greener generation source of electricity, permitting planning and zoning will be involved as we make this transition.

Julie Whelan:
Seems like a lot of people in the race to figure out how to get the power where it needs to go so we will see who wins. Data centers are clearly an investable asset class right now and it seems like a no-brainer to invest in it but there's only so much of it. Give us context around the size of the data center market and why may not be so easy to break into?

Gordon Dolven:
The size of the industry is to the tune of hundreds of billions of dollars of annual capital expenditures on new greenfield projects. This does not mean traditional real estate developers and investors can’t get exposure to the space. So they can invest in public equities, private infrastructure funds, land acquisitions, operating platforms and ground up developments which would all provide different risk and reward dynamics for investments As our digital infrastructure needs evolve so will the way capital is allocated to our industry.

Julie Whelan:
I know the data center solutions group that you support has a lot of intelligence around all of that so thank you for those comments. Thank you all for joining CBRE's global midyear Outlook. To learn more about what we said today and the reports that her colleagues have mentioned please visit cbre.com. Wishing you a safe and healthy remainder of 2024.