Global Tensions, Real Estate Impacts: Unpacking the Numbers for the US, UK, and Europe

Quarter three perspective, 2024

As we move into the latter half of 2024, economic indicators across the US, UK, and Europe signal a slowing economy, but not one headed for recession. It appears that the markets continue to be relatively optimistic despite regional political and military tensions. The US August employment report revealed that 142,000 jobs were added, but below the 160,000 expectations. However, this was enough to lower the unemployment rate from 4.3% to 4.2%, as labor demand exceeded supply. This prompted the Federal Reserve to cut interest rates by 0.5% in September, a more aggressive move than the anticipated 0.25% cut, indicating concern about maintaining economic momentum.

In Europe, inflation continues to pressure growth. The UK’s inflation rate is improving at 2.2% in July, 2024, while the Eurozone faced similar figures at 2.2% (Aug 2024) down from 2.6% (July 2024, ECB). Central banks across Europe, including the European Central Bank (ECB), have been cautiously adjusting interest rates to curb inflation without stifling growth to manage a positive landing. However, with the recent USA Fed rate cuts, reports suggest that Eurozone may experience a less than firmer, riskier landing in the near term.

The broader economic narrative, however, raises critical questions about the reliability of labor data and whether the economy will achieve a “soft landing,” avoiding a full recession. The real estate market across the US, UK, and Europe may well be affected by these dynamics.

Real Estate Sector Breakdown

Office Space: The demand for office space remains subdued, with hybrid working models now entrenched. The overall office take-up in London is expected to be down by 9% compared to the long-term average according to Workspace. The West End area has seen a 24% decrease and Paris have experienced a 17% reduction in office leasing in 2024, a trend mirrored in the US, particularly in major cities in the USA, like New York and San Francisco running 23.7% vacancy rates according to Avison Young. Knight Frank’s 2024 report notes, “Flexible office spaces and shorter-term leases are becoming the norm, with companies seeking cost-efficiency amid economic uncertainty.” Office managers are under pressure to optimise space usage and renegotiate leases.

Retail: E-commerce continues to dominate retail, with physical store vacancy rates rising by 14% in the UK and 12% in the US. Retailers are shifting their budgets toward creating omnichannel experiences to maintain competitiveness. According to JLL, “Retailers who fail to adapt to the digital-first strategy risk being left behind as consumer behavior continues to shift.” Nothing new here.

Hotels: The hotel sector has shown resilience in 2024, with global occupancy rates reaching 68%, up from 62% in 2023. Revenue per available room (RevPAR) increased by 10% year-over-year. However, rising operational costs and labor shortages remain challenges. Continued investment in technology and personalised experiences is crucial for sustained growth. We saw softening in RevPar (revenue per available room) and GOPPar (Gross Operating Profit per available room) in August 2024 drop in the USA and ASIA by close to 6%, whilst Europe grew by 6.9% (HotStats). Luxury and Economy are projected to continue to be resilient. ‘Revenge Travel’ may be on the back in of the curve. New reality in 2025?

Build-to-Rent (BTR): The Build-to-Rent sector remains resilient in both Europe and the US. In the UK, cities like London and Manchester have seen rental prices increase by 5-8% due to housing shortages. The US market is following a similar trend, particularly in urban centers where homeownership remains out of reach for many. JLL’s 2024 outlook states, “Build-to-Rent is proving to be one of the more stable real estate investments, with demand consistently outstripping supply.”

Healthcare: Healthcare real estate saw significant growth in 2023 and 2024, with primary care centers and doctors’ practices expanding by 12%, driven by rising demand for outpatient services. CBRE reports a 9% increase in leasing activity for medical office buildings in the U.S., reflecting this trend1. “The shift to outpatient care has created a boom in healthcare real estate, especially in primary care,” notes Lisa Stover, Senior Analyst at JLL. This trend is expected to continue as patient volumes increase and healthcare shifts to more localised models.

In the UK, healthcare real estate investment captured 57% of European healthcare investment in the first half of 2024, up from the five-year average of 29%. Europe also saw a significant rise in healthcare real estate, particularly in care homes, which accounted for the majority of healthcare transactional volumes in the first half of 2024.

USA Election Impact and Market Sentiment

As the US heads toward its general election, markets are bracing for increased volatility. Historically, markets stabilise when there is a political split between Congress and the White House, but a one-party sweep tends to create more uncertainty. Jimmy Chang, CIO of Rockefeller Global Family Office, highlights the importance of staying conservative with investments. “Short-term shocks are inevitable but maintaining a low-risk portfolio in times of political and economic uncertainty is critical to long-term success.”

Conclusion

As we approach Q4 and 2025, economic uncertainty will continue to impact real estate markets in the US, UK, and Europe. Sectors such as Office, Retail, Hospitality, Wellbeing & Leisure, Build-to-Rent, and Healthcare must adapt to evolving conditions with flexibility and strategic adjustments. At TREIO, we focus on long-term investments, interpreting short-term trends as valuable data points. While we remain cautiously optimistic, proactive measures and a strong focus on asset optimisation throughout the hold period are paramount for managing our clients’ portfolios effectively.

We look forward to sharing the Treo Q4 and 2025 insights and perspectives.

Sources and references

1. Savills | Spotlight: European Office Outlook – Q2 2024 b) Euro area annual inflation down to 2.2% – Eurostat (europa.eu)
2. Avison Young – Market Report d) https://www.mckinsey.com/industries/retail/our-insights/reimagining-the-role-of-physical-stores-in-an-omnichannel-distribution-network e) CBRE Healthcare Real Estate Report JLL Healthcare Real Estate Outlook f) Realty Trust Group Healthcare g) Real Estate Insights JLL European Healthcare Real Estate Interface