Higher-than-expected core inflation means interest rates are now set to be higher for longer and we still think the economy will enter a mild recession later this year. That’s not a great backdrop for commercial property and yields will need to rise further. That said, the magnitude of the yield correction last year means the worst is now behind us. We think all-property equivalent yields will see a rise of around 50bps this year. Rental growth has held up better than expected and we think rents will avoid a fall at the all-property level this year, largely driven by industrial. That means total returns will come in at -1.2% in 2023, before an economic recovery and a fall in yields help returns average 8% p.a. over 2024-27. Offices face significant structural challenges as the impact of hybrid working feeds through, and will see relatively weak rental growth and returns. But thanks to its higher income return, retail will outperform.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services