Vacancy rates in commercial real estate are increasing, and loan costs are eating into profits. What used to be an advantage—high leverage—has quickly turned into a burden, experts say. Here’s who they see as the winners and losers in the second half of the year.
Eduard Sorokin, Head of the Office and Retail Division at Uus Maa Commercial Real Estate, and Rait Riim, Head of Real Estate Investments at LHV Pension Funds, give their outlook on H2 2023, outlining the market dynamics and giving actionable advice.
Who are the winners and losers in commercial real estate in H2 2023?
Eduard Sorokin, Uus Maa Commercial Real Estate:
The motto for 2023 is: “Cash is God!” The biggest winners in H2 are the same as in H1—well-capitalized investors with clear vision and liquidity. These investors skillfully use the help of advisors for property selection and financial modelling.
The biggest losers are over-leveraged property owners with low-quality assets and high vacancy rates.
The economy remains in decline, vacancies are growing, and rising loan costs are squeezing profits. In this phase, you can’t rely on luck—you need to assess how resilient your property portfolio is. This applies both to real estate companies and other businesses owning real estate.
The old truth still applies: success doesn’t go to the smartest or strongest, but to those who adapt best.
If a critical assessment reveals warning signs, it might be time to rethink your real estate holdings. Several companies with solid fundamentals are using sale-and-leaseback strategies—selling their properties and leasing them back to free up capital for their core operations. With competitors facing liquidity issues, this can be a strategic advantage. A bit of creativity, consultation, and courage can turn current headwinds into opportunity.
Rait Riim, LHV Pension Funds:
Commercial real estate investments are capital-intensive, and are usually heavily financed with debt. The last decade of cheap loans encouraged maximum leverage to boost returns. But rising interest rates have flipped the equation—what once boosted returns is now weighing down investments. In some cases, rental income can’t even cover loan payments. The biggest loser in H2: over-leveraged investors.
Developers might also take a hit. Land prices spiked in 2021, construction costs in 2022, and loan costs in 2023. These three components have significantly raised development budgets beyond initial expectations. While rental prices have increased somewhat, the rise hasn’t matched the pace of cost inflation.
The biggest winners? Well-capitalized investors ready to act. LHV Pension Funds plans to be among them. We found property prices at the top of the cycle too expensive and invested less than we would have liked over the past four years. As a result, we’ve preserved capital and are now positioned to acquire long-term, income-generating office, retail, and logistics properties in this new market reality.
Äripäev / Siim Sultson
