Is recession inevitable?

The drop in gas prices, the decline in headline inflation and the improvement of survey data in December are giving the impression that for the Eurozone, 2023 might be better than expected. However, it is most likely that in twelve months’ time we will look back at 2023 as a recession year, a year of disinflation, and a year when central bank interest rates reached their terminal rate and stabilized.

A year of desinflation

All indicators are showing that the peak of inflation is behind us in the US and in Europe. However, disinflation might be slower than expected as energy prices could rise again this year.
As such, we are still expecting inflation to be above the ECB target in 2023 (+5.0%) and in 2024 (2.3%).

Investment plummeting

The dramatic increase in financing costs in Europe during 2022, led to repricing in H2. Consequently, investment plummeted over the rest of the year to reach €248bn (-14% vs 2021), and 7% below the average of the last 5 years.
The Q4 volume of €47bn (-57% vs Q4 2021) was the lowest quarter of the year when Q4 is generally the most active.

Yields are expanding

2022 shows the first strong signs of expansion and it is affecting all the main sectors of real estate. The principal factor behind yield expansion is the change in the macro-financial environment. The persistence of inflation is prompting more robust response from central banks to normalize monetary policy.

Office take-up returned to its long-term average

Take-up at the end of 2022 saw a significant increase (+12%) compared to last year. Almost 10 million sqm was transacted in Europe’s 20 main markets, in line with the 10-year average. Letting activity showed first signs of consolidation in Q4, with the post Covid-19 rebound mitigating.

An increasing focus on quality over quantity

With the widespread uptake of hybrid work models, companies are seeking attractive and modular workplaces offering greater connectivity. Demand is also high for energy-efficient and sustainable buildings. These increasing quality requirements drive values up in the most sought-after markets.

Dirk Den Hollander
Head of Research & Consultant Capital Markets
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