Europe Surpasses U.S. as Commercial Real Estate Investment Leader

The U.S. is generally the largest and most liquid region for commercial real estate deal activity, but Europe surpassed the U.S. for investment in the second quarter, reported Real Capital Analytics, New York.

“Trends into July are not looking favorable for the U.S.,” said RCA Senior Vice President Jim Costello.

Costello said commercial real estate deal volume can indicate expectations for an area’s economic health. “Expanding that view from the perspective of a local market to that of a national and regional view, the commercial real estate data suggests that there is less confidence in the U.S. at the moment,” he said.

European deal volume has not regularly surpassed U.S. volume since the Great Recession, Costello noted. “The U.S. housing market was the spark that set off that global economic downturn and confidence in the U.S. economy lagged for some time after that recession ended,” he said. “A single large entity-level transaction boosted quarterly European deal activity ahead of that of the U.S. in late 2017, but otherwise the U.S. has been a larger investment market.”

But as the U.S. fell into recession starting in March, U.S. commercial real estate investment plummeted. In the second quarter, U.S. investment volume for deals priced $10 million and greater slipped behind those in Europe by $19 billion, RCA reported.

In addition, the U.S. dollar has fallen in value compared to the Euro, which increases the value of European transaction volume when converted into dollars, RCA said.

“The issue faced in the U.S. today is the uncertainty around the economic fallout from a harsher impact from COVID-19,” Costello said. He noted daily deaths from COVID-19 were nearly 10 times greater in the U.S. than in the European Union in mid-August.

“With a harsher public health situation in the U.S., investors face greater uncertainty around underwriting future income trends for a property,” Costello said. “The social safety nets of European countries can look more expensive, but in a time of crisis, they can also help investors understand how economic losses will be distributed.”

Despite its new status, European real estate sentiment is slipping. The Royal Institution of Chartered Surveyors, London, said the COVID-19 pandemic is lowering European investor sentiment. RICS’ global indicator showed a -36 reading for Europe in the second quarter, falling from a relatively firm reading of -14 in the first quarter. Both occupier and investor sentiment fell sharply during the second quarter.