Fergus Hicks Zachary Gauge Kurt Edwards

Global real estate performance remained strong in the first quarter. Investment activity pulled back slightly from the record high at the end of 2021 and the pace of cap rate and yield compression eased. The war in Ukraine is curbing economic growth, boosting inflation and is expected to have a cooling impact on real estate returns.

Across Europe, for many years, the main argument in defense of ever-lower property yields was that the spread over fixed income yields remained comfortably above historic levels. This is no longer the case, with the spread between government bond yields and prime office yields now below their long-term average in every major market. We expect performance to become polarized between the select few sectors and micro-locations where there is a genuine supply-demand imbalance and landlords can pass on some of the inflationary pressure to tenants. For the rest of the market, the record low property yields now look exposed to rising rates.

In the US, growing economic uncertainty based on weaker consumer sentiment and inflation concerns increases the importance of focusing on durable income growth across real estate sectors, metros, and product types. Continued strong industrial and apartment return performance is anticipated, but at a lower margin than 2021, given interest rate pressures. We expect a deteriorating performance for office and a gradual strengthening in retail performance through 2022.

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