Difficult times for construction and real estate companies

Vienna (OTS) – Paris / Vienna, March 13, 2024 – The construction and real estate sectors are among the most cyclical sectors. They react sensitively to changes in the labor market, price developments in raw materials and, above all, to the interest rate environment and the availability of credit. “These are difficult times for construction and real estate companies. The industry is struggling with complex challenges from raw material prices to interest rate developments to volatile demand and labor shortages. We do not expect the situation to improve in 2024“, says Dagmar Koch, Country Manager Coface Austria. The housing construction market faces a double constraint: on both the supply and demand sides. The rise in interest rates has led to a dramatic drop in demand as households cannot afford to buy homes, especially as home prices have also increased. Added to this is a global labor shortage, which European companies cite as the biggest challenge for the construction sector from 2021 to the end of 2023. This is also true in the United States, where the number of construction job openings is nearly 30 percent higher than before the pandemic, and in Japan, where 60 percent of construction companies reported a labor shortage, according to a 2022 survey. These initial supply-side problems, together with the rapid rise in interest rates over the last two years, have caused construction costs to rise at all levels: material prices have risen, wage pressures have intensified and financing costs have skyrocketed. High interest rates pose challenges for commercial real estate companies.

Commercial real estate companies, operating primarily in non-residential segments such as industrial, office and retail, have been particularly sensitive to the difficulties of recent years. The retail sector is challenged by the lockdowns and the acceleration of e-commerce. The office segment is still adapting to the hybrid working world. This leads to a lower and changing demand for workspaces. At 20.2 percent in the first quarter of 2023, the office vacancy rate in the USA was the highest it has been in more than 15 years and in Europe it was back to the 2016 level at 7.5 percent.

Building permits are falling, especially in residential construction

The number of building permits for private residential construction has been declining since mid-2021, and building permits for commercial construction have been declining since the fourth quarter of 2021. “The decline is practically continuous. Stabilization can be seen – if at all – in commercial construction. Private housing construction is in free fall“, emphasizes Koch. Building permits for private residential construction in the third quarter of 2023 were 49 percent below the permits in the third quarter of 2020. In 2020, 22,669 apartments were approved and 11,463 permits were issued in 2023. In commercial construction, permits fell 23 percent over the same period.

Challenge of high interest rates

High interest rates pose various challenges for real estate companies. The most immediate impact is a slowdown in both the number of real estate transactions and their overall value. The volume of commercial real estate transactions in Europe more than halved last year and is at its lowest level since 2010. Added to this are interest costs, which have risen rapidly over the past two years.

Although property prices have adjusted somewhat to higher interest rates, they remained high in 2023 due to ongoing supply constraints. This is caused by potential sellers’ unwillingness to budge from their low mortgage rates or sell at a lower price. 2024 is likely to mark a turning point in this dynamic, with prices forecast to decline in most advanced economies (34 percent in Germany, 31 percent in Japan).

Price reduction of up to 50 percent

At the same time, the difficult situation in commercial real estate is forcing some companies to take drastic measures such as selling assets. By 2024, commercial property prices have already fallen by 25 percent from their peak. There have even been cases of prominent buildings being sold at a discount of more than 50 percent, highlighting the difficult position some companies find themselves in given the current economic climate. “For 2024, we expect a year with ambivalent prospects, which could be positively influenced by the expected decline in key interest rates. However, taking into account the complex challenges facing the industry, the forecasts remain moderate“, emphasizes Koch and continues: “Given that some of the existing debt has already been financed at fixed interest rates and the credit margins for new loans are at their lowest level in over a decade, the urgent question arises: are the forecast interest rate cuts sufficient and will they come in a timely manner to support a market that is showing signs of weakness?“

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With 75 years of experience and the densest international network, Coface is a major credit insurer, partner in corporate risk management and in the global economy. With the aim of becoming the most agile credit insurer in the world, Coface supports 50,000 customers in building and dynamically developing businesses. The products and services protect companies in national and international business and help them make credit decisions. In 2022, Coface was active in 100 countries with around 4,720 employees and achieved sales of approximately 1.81 billion euros.

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Carina KISS: +43/1/515 54-510 – carina.kiss@coface.com