Returns for European Property Fell as Office Weakened

Total returns for the EUR 280 billion of commercial real estate tracked by the MSCI Europe Quarterly Property Index deteriorated at the end of 2023, as falling office values dragged down the all-property performance. It was one of the worst calendar years on record for European property, with the rapid shift to higher interest rates causing an ongoing revaluation and a withdrawal of investment capital.

Quarterly total returns for Q4 2023 weakened to -2.1%, for an annualized return of -4.7% in 2023, compared to -2.8% for 2022. The office sector remains under pressure, with capital values down 5.0% on the quarter and 13.9% on the year. A slowdown of this magnitude is on par with the loss of value recorded in 2009 amid the global financial crisis. However, one main difference between then and now is the decoupling of office and industrial property. In 2009, these two property types moved in concert, but the changing fortunes of office and industrial since the pandemic means performance has diverged. European industrial property returned -2.1% for 2023, whereas office returns were down -10.9%. Transaction data shows 2023 was the worst year on record for the number of European office sales, with core German markets particularly weak.

Europe’s hotel market emerged with the best performance in 2023: Annualized returns shifted back into positive territory for the first time since September 2022, reflecting the rebound in tourist travel. Transaction activity for hotels also held up relatively well in 2023, with volume down 18% year over year versus a 46% decline for the European property market as a whole.