European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook: What’s in a Number? March 2023

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

Contents

KEY TAKEAWAYS. .....................................................3 ECONOMY...................................................................3 CAPITAL MARKETS. ..................................................6 OFFICE. .......................................................................7 RETAIL.........................................................................8 LOGISTICS. ............................................................... 10 ALTERNATIVES. ........................................................ 11

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

INTRODUCTION

GDP (INDEX, 2019Q4=100)

In our latest outlook report, we focus our analysis on our base case scenario which we feel is the most probable scenario based on our modeling and read on market conditions. That said, we acknowledge we are making predictions during a period of heightened uncertainty. We assign a 50% chance to our baseline scenario, meaning that we believe there are even odds that the UK and euro area economies could perform better, or worse.

KEY TAKEAWAYS

• Economy: a mild recession in the UK and the euro area will occur in 2023. • Capital Markets: a turning point as higher interest rates percolate through markets. • Office: demand for high-quality office will intensify but will soften for lower grade space. • Logistics: vacancy to remain near record lows despite slight uptick. • Retail: the outward shift in yields across Europe will be relatively contained. • Alternatives: no longer niche, these assets are likely to outperform. Surprise Resilience The latest euro area real GDP figures surprised to the upside in the final quarter of 2022, with quarter-over quarter (QoQ) growth of 0.1%. With this data, the euro area avoids falling into a recession (for now). Country detail reveals that QoQ Germany’s economy declined (-0.2%) as did Italy’s (-0.1%), while Spain and France grew by 0.2% and 0.1% respectively. Ireland’s economy grew by 3.5%, which contributed 0.1 percentage points (pp) to overall euro area growth, without which, the euro area economy would have fallen into a mild recession. We expect downward revisions in the second and third releases. Too much emphasis is being placed on the final quarter numbers to determine whether the euro area will fall into a recession. Whether growth remains flat or is revised down, the underlying truth is that growth for the euro area and the UK has been subdued.

Source: Cushman & Wakefield Research, Eurostat, Moody’s Analytics *Forecasts refer to C&W Baseline Scenario – January 2023

Cushman & Wakefield’s baseline assumes a mild recession in the UK and the euro area. For 2023, real GDP will grow by 0.4% in the euro area and by -0.3% for the UK. But it will be a tail of two halves, with both economy’s contracting H1 and then beginning to recover in H2 as the headwinds fade. The UK - First in, Last Out The UK economy has recorded very little growth since the first quarter of 2022; furthermore, in the fourth quarter the UK economy was still 0.8% below pre-pandemic levels. This is in contrast with the economies of the euro area and the U.S., which are 2.4% and 5.2% above pre-pandemic levels, respectively, as of year-end 2022. The UK will only return to its pre-pandemic output level by third quarter 2024, according to our baseline. There are four main reasons why the UK’s economic growth has lagged its European counterparts, both before the pandemic and through it. Higher energy prices: the UK has experienced relatively higher energy prices, partly because operating costs of energy suppliers are higher. Suppliers therefore have smaller profit margins and are less able to absorb increased costs, such as those associated with fuel, labour and maintenance relative to other markets. Government subsidies are also smaller in the UK. Lastly, the UK does not have a lot of gas storage capacity and is more dependent upon the spot market where there is greater volatility in prices. As result of higher energy prices the UK has experienced higher inflation than the euro area denting consumer spending. Labour shortages: In the UK, there is still an elevated number of people outside of workforce (either unemployed or employed). In economics this

ECONOMY

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

ECONOMY

is referred to as economic inactivity 1 —the economic inactivity rate in the UK averaged 36.8% as of fourth quarter 2022 versus 35.9% in fourth quarter 2019. This contrasts with 25.2% in the euro area, which is down from 26.1% in fourth quarter 2019. Higher interest rates: the Bank of England (BoE) has raised interest rates faster and higher relative to the European Central Bank (ECB). Since the end of 2021, the BoE increased its policy rate by 390 basis points (bps), while the ECB did so by a lesser 250 bps. The BoE also started raising rates eight months ahead of the ECB. Brexit: Nearly two years after Brexit, economists have reached a consensus that Brexit has and will continue to impact the UK’s economic performance with the economy smaller by as much as 4%, according to the Office for Budget Responsibility.

Rate hikes are expected to weigh on growth more than inflation in 2023. This largely explains growth remaining well below potential 2 , with an expected euro area growth rate of 0.4% year-over-year (YoY) in 2023 and -0.3% YoY in the UK. For reference, the potential GDP growth rate 3 in the euro area is estimated to be around 1.2% and around 0.9% for the UK. The impacts of monetary policy on the real economy are often lagged. According to the ECB, a 100-bps increase in short-term interest rates reduces real output (the output gap as a percentage of GDP) by around 1 pp, with the maximum effect occurring five quarters after the rate hike. Therefore, with rate hikes totalling 350 bps between July 2022 and March 2023, real output is assumed to be 3.5% lower in H2 2023 for the euro area. The BoE started raising rates eight months ahead of the ECB and has since increased rates by 390 bps. With another 50-bps rate hike expected in March, real output is expected to be 4.4% lower than it would have been without rate hikes. The models used by the ECB also suggest a 100 bps rate increase will reduce inflation by 0.3-0.4 pp after five quarters. The current and projected increases in the policy rate are therefore expected to only reduce inflation by 1.5 pp over time. Monetary policy tightening is expected to have limited influence on controlling inflation, as global supply chain disruptions due to the Russia-Ukraine war and lingering pandemic bottlenecks have been driving increases to sustained price levels. In contrast to the U.S., euro area inflation is dominated by energy related price increases, which account for 30% of headline CPI growth. Similarly in the UK, energy accounts for 34% of inflation at present. Europe’s central banks are aiming to reduce additional demand-related inflationary pressures by tightening financial conditions. Inflation has indeed abated from its peak levels recorded in October 2022 for both the UK and euro area, and currently sits at 10.1% and 8.6% (January) YoY, respectively. Despite the recent easing in prices, we expect inflation to remain above target in 2023. The recent agreement among EU member states, which includes a cap on wholesale gas prices if they exceed €180 per megawatt hour for three days running, is a welcome relief. This follows Europe’s benchmark price for natural gas reaching €340 per megawatt hour in August—more than three times the current price and around 17 times the price prior to the pandemic. The cap is temporary and will be in place for a year. Nonetheless, this will help contribute to a more sustained fall in inflation throughout 2023. 2 The level of output which does not generate inflationary or deflationary pressures beyond a central bank’s target. 3 Potential GDP figures refer to OECD estimates.

INFLATION BANKS LATE TO FIGHTING INFLATION

Source: Cushman & Wakefield Research, Eurostat, Moody’s Analytics *Forecasts refer to C&W Baseline Scenario – January 2023

A Lackluster Recovery The near-term outlook looks brighter than many expected six months ago. This is largely due to the improvement in Europe’s energy picture. Natural gas prices have fallen by 85% from their peak in August 2022 and Brent Crude prices have also come down sharply. Despite the fall in energy prices, inflation remains elevated at 8.6% y/y in the euro area as of January. Moreover, unemployment remains low across most of Europe which is keeping pressure on wages. With inflation still running hot, we expect central banks will continue to tighten policy rates during the winter, before stopping this spring. Terminal rates will settle at 3.5% in the euro area and 4.5% for the UK, provided inflation returns close to target (2%), as expected. Further interest rate hikes could remain a possibility if there are fresh signs that inflation would remain elevated.

1 Economic inactivity refers to people outside the labour force (employed + unemployed).

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

ECONOMY

However, despite the overall rate of inflation slowing for the euro area and the UK, food price inflation remains very high. Food price inflation was 16.3% YoY in January in the euro area and 16.7% YoY in the UK. Food and non-alcoholic beverages make up a large proportion of consumption baskets across the euro area. For example, food accounts for around 20% in Italy and 22% in Spain, thus food prices will remain a source of inflationary pressure for the first half of 2023. Higher, Stickier Underlying Inflation? A downside risk associated with inflation could stem from tight labour markets. High inflation accompanied with tight labour markets keeps wage inflation elevated, potentially causing a “wage price spiral,” where inflation leads to higher wage growth and fuels even higher inflation. While most agree that a wage-price spiral is not happening now, the fear is that it could occur should inflation expectations de-anchor. In line with this view, wage growth across the euro area and the UK is slowing, moderating in the fourth quarter for the UK (5.9% from 6.2%) and slowing in the third quarter in the euro area (2.9% from 3.8%). Wage growth has averaged 2.7% for the UK and 1.9% for the euro area over 2015-2019. A robust labour market is one of the key factors that will keep the recession relatively mild across the euro area and the UK. However, labour markets tend to be a lagging indicator, which is why we expect the impact of the mild recession to begin showing in the labour markets in H2 2023. Job vacancies are leading indicators to labour market developments and recent data indicates that the market is cooling. The number of job vacancies in the UK has fallen for six consecutive quarters in

the third quarter (-6.1%), while the growth in job vacancies has eased from 3.2% to 3.1% in the euro area. Although job vacancies remain above pre pandemic levels, these are early signs of the job market abating. The weakening activity toward the end of 2022 is likely to start showing up in labour market numbers by H2 2023. Bond Yields on a Better Footing Last year was not a particularly good year for sovereign bond yields. Bond markets witnessed one of the sharpest selloffs on record, triggered by high inflation and a series of interest rate increases. Longer-term sovereign bond yields have been acutely sensitive to interest rate changes at the short end as well as forward guidance issued by central banks, as policymakers shifted their entire focus to taming inflation rather than supporting markets. Following a turbulent year, we believe bond yields will start off 2023 on a better footing. Inflation is beginning to ease, with markets anticipating interest rates to peak in the coming months. Challenges are still ahead, particularly as economic activity is expected to remain low. Despite the interest rate hikes to come, bond yields are expected to finish the year only marginally higher than in 2022. Any recession, albeit mild, poses a challenge for both occupiers and investors. But our view is that with disruption comes opportunity. The repricing seen across financial and real estate markets in H2 2022 has improved prospects for returns in the coming months. Of course, all real estate is intensely local, and there will be certain sectors and geographies that will outperform and others that will underperform. In the year ahead, occupiers of real estate and investors are likely to be rewarded as growth begins to gather momentum.

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

CAPITAL MARKETS

2022 INVESTMENT VOLUMES BY COUNTRY (% SHARE)

Reset, New Reality 2022 had a positive start, the European economy was growing, and investment volumes were at high levels: first quarter volumes were 33% above the five-year average (2017-2021) and 39% above 2021 levels in Europe. As Russia’s invasion of Ukraine began taking its toll, pressure on energy and commodity prices mounted, aggravating the already post-lockdown inflationary environment. Central banks began reacting by tightening monetary policy, which resulted in higher interest rates and higher debt costs.

Rest of Europe 5%

CEE 4%

Semi-Core 13%

UK 26%

Nordics 14%

Germany 16%

MONTHLY INVESTMENT VOLUMES (€ BILLIONS)

BENELUX 9%

France 13%

Source: MSCI Real Capital Analytics, Cushman & Wakefield Research

As we enter 2023, commercial real estate is still undergoing a period of price discovery. Lower liquidity is a natural result of these periods of market uncertainty. Sellers are reluctant to sell at discount and tend to hold on to their assets until they have a clearer view of the outlook, uncertainty subsides or a forced sale is required, which happens in limited cases. Buyers want to reflect the ongoing repricing as financing costs increase. This results in a mismatch between buyers and sellers, which tends to reduce the deal count. In Q4 2022, the number of active buyers and sellers fell to the lowest level since 2013. Market fundamentals are still performing relatively well, therefore the correction in capital values—which are down 9% since June 2022—is a consequence of yields moving out significantly from record-low levels. All sectors will witness a correction in yields over the first half of this year. Polarisation in prime and secondary property assets will continue with average yields expected to rise further than prime. In the short term, we expect investment volumes to remain moderate, picking up later in the year once interest rates stabilise.

Source: MSCI Real Capital Analytics, Cushman & Wakefield Research

As economic uncertainty and confidence about the outlook worsened throughout 2022, transaction volumes followed suit, posting significant declines in the second half of the year. The fourth quarter was particularly slow, recording the lowest volume of the year overall. Typically, the fourth quarter is the most active, as there is tremendous seasonality in investment activity. Transaction volumes were down across all property sectors in 2022, registering a 25% decline overall. The most impacted sectors were logistics and residential, which had stronger performances throughout the pandemic and recorded unsustainable levels of activity in late 2021. Declines in investment volumes in Germany and Sweden were starkest, falling by 50% compared to the previous year. As it typically does, the UK accounted for the largest share of total European investment, at over €70 billion, though volumes still fell by 15% and 61% for the year and fourth quarter, respectively. The Central London office market recorded its second slowest quarter on record, with deal volume even lower than during the depths of the 2008 global financial recession.

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

OFFICE

DEMAND & VACANCY RATE

A…B…C…D…ESG Labour markets across the region ended 2022 on a positive note. The euro area unemployment rate held at an all-time low of 6.6% in December 2022, whilst employment growth is forecasted to be 2.2% for the year, despite some signs of cooling. Office employment also grew in 2022, with annual growth expected to be around 3.1%, which equates to 800,000 new jobs. Office employment growth was strongest in Finland, the Netherlands and Austria, with ICT, professional and legal, and scientific research subsectors driving headline figures.

EURO AREA EMPLOYMENT (YOY % CHG)

Total Employment

Office-based Employment

4.0

The latest revised EU-wide initiative of tasking all non-residential buildings to perform to a minimum EPC level of F by 2027, and improving to a rating of E by 2030, should encourage more green occupier and investor repositioning, especially with the increasing number of countries looking to address sustainability and overachieve on the EU minimum requirement. The Netherlands and the UK are active examples. Further insight can be found in our recent report, Obsolescence Equals Opportunity. Europe’s progress toward decarbonising office stock and transitioning toward net-zero by 2050 could also give rise to green opportunities at the other end of the office spectrum. The non-Grade-A availability ratio falling by 11 bps QoQ in fourth quarter 2022 may be an early indication for value-add potential and opportunities known as brown discounts amid the current phase of re-pricing. Rising financing and construction costs, along with the structural ramifications of hybrid and remote working remain key challenges for the office sector in the short term. But Europe’s commitment to decarbonization and monetary policy suggests strategic repositioning and repurposing of offices, which poses as much opportunity as does the risk of obsolescence. Source: Cushman & Wakefield Research *Net Absorption and Vacancy data refer to Europe [43 markets], 4-quarter rolling.

Forecast

3.0

2.0

1.0

0.0 YoY % chg

-1.0

-2.0

2018

2019

2020

2021

2022

Source: Eurostat, Moody’s Analytics *2022 Employment growth rates are C&W baseline forecasts.

The relationship between office-based employment and office demand remains tested and has become more decoupled in the wake of hybrid and remote working. However, the office sector registered positive net absorption of 3.5 million square metres (sqm) in 2022, led by Paris (Western Crescent), Copenhagen and Madrid. Despite the outperformance of office-related jobs during the pandemic recovery, the office vacancy rate in Europe still hovers around 8% as of fourth quarter 2022 (unchanged from fourth quarter 2021) and is still 200 bps above the pre-pandemic rate of 6%. However, there are encouraging signs that Grade-A, prime-office vacancy will peak in 2023, as the shift toward hybrid and remote working has largely taken place across most markets. As a result, demand for high-quality offices (with high amenities and desirable locations) will remain strong. Fundamentals, like leasing and rental growth, in such high-quality offices are expected to outperform, as occupiers focus on employee well being and experience, and as they hone in on ESG credentials. Grade-A availability, as a share of total availability in H2 2022, fell by 0.8% compared to H2 2021 on a six-month moving average basis. Prime office rents across Europe and the UK averaged a 5.4% increase in fourth quarter 2022 compared to fourth quarter 2021. Source: Eurostat, Moody’s Analytics, Cushman & Wakefield Research *2022 Employment growth rates are C&W baseline forecasts.

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

RETAIL

TURNOVER IN DURABLE CONSUMER GOODS (INDEX)

Cautiously Optimistic Recessions tend to accelerate emerging trends, forcing structural changes to occur sooner than they otherwise would. This was true during the pandemic recession, when the growth of e-commerce accelerated, resulting in a decline in brick-and mortar retail activity. Growth in e-commerce across Europe accelerated during the enforcement of restrictions and lockdowns, but the reality is that the e-commerce market across certain parts of Europe is fragmented and underdeveloped. The UK and Germany have more mature and established e-commerce markets, with high online penetration rates, at 81% and 77% respectively. In other parts of Europe, the e-commerce revolution is only just beginning; Spain and Hungary, for example, have online penetration rates of 43.5% and 36.5%, respectively. Since the pandemic, growth in e-commerce has somewhat normalised. Consumer behaviour during the pandemic does not match behaviours during past recessions. After lockdown rules lifted across Europe, spending on consumer durables recovered very quickly. Typically, durable goods only rebound once the recession is over. Demand for services fell further than durable goods, largely due to the government interventions in place shutting large parts of the service sector. As of today, demand for durables is beginning to ease, particularly as those transactions were large, one-off purchases. In contrast, demand for services is picking up, which will help insulate the retail demand outlook. To better understand the impending recession’s impact on retail, we first need to understand that not all recessions are the same, and this recession is very different from nearly all previous recessions. Typically, an increase in the unemployment rate (of 30 bps within three months) is an important indicator that the economy is already in a recession. However, during the pandemic recession, furlough plans put in place by policymakers prevented mass job losses. According to the IMF, these job retention strategies helped maintain the euro area’s low unemployment rate, keeping roughly 4 million extra workers employed. Without the interventions, the unemployment rate across the euro area would have been 2.5 pp higher. In our baseline scenario, we expect the unemployment rate to peak at 7.2% in the euro area in 2024 before it begins to trend down. Although the uptick in unemployment is relatively contained, the cause of this recession is tied to the decline in consumer spending power caused by high levels of inflation and more recently, tighter financial conditions.

TURNOVER IN NON-DURABLE CONSUMER GOODS (INDEX)

2008 GFC 2011 Euro Debt Crisis 2020 COVID-19 Recession

110

100

90

80

Index (100=start of recession)

70

1 2 3 4 5 6 7 8 9 10 11 12

Months after start of recession

TURNOVER IN SERVICES (INDEX)

2008 GFC 2011 Euro Debt Crisis 2020 COVID-19 Recession

110

100

90

80

Index (100=start of recession)

70

1 2 3 4 5 6 7 8 9 10 11 12

Months after start of recession

Source: Cushman & Wakefield Research, Eurostat, Moody’s Analytics

The European retail sector has faced several challenges lately. Consumer sentiment has been on a downward trend since September 2021. The consumer confidence index was worse in the summer of 2022 (-28.7) than during the height of the pandemic (in April 2020, -24.8). The European Commission flash estimate showed a slight improvement in consumer

confidence, to -20.9 in January from -22.1 in December, but it remains near record lows.

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

RETAIL

The slight improvement in confidence has not been reflected in the latest retail sales figures yet, although confidence is not strongly correlated with actual spending outcomes. Retail sales in the euro area fell by 1.1% in the fourth quarter, which follows a decline of 0.5% in the previous quarter. A detailed breakdown reveals that sales fell for nearly all items, except fuel. Sales of food and drink suffered the largest decline, an indication of high food price inflation beginning to bite. Looking ahead, H1 2023 will not be any different, with a mild recession keeping consumer spending in check. Consumers will be grappling with the squeeze on real incomes, higher interest rates, and still-elevated levels of inflation. As we expect inflation to fall substantially in H2 2023 (allowing real wage growth to resume), consumer confidence, and subsequently consumer spending, is expected to improve.

The retail sector has been constantly evolving over the last half-century, with many retailers already having undertaken significant cost cutting and painful adjustments, particularly during the early years of e-commerce penetration and more recently, during the pandemic. This, in effect, will help the sector withstand the upcoming recession, and why we call for retail vacancy to tick up slightly in 2023 before starting to trend down gradually from 2024. We believe that after a brief correction in prime rental levels of 0.2% in 2022 and stability in 2023, a recovery in leasing activity will take hold, translating into positive rental growth and averaging 2.1% across Europe in 2024. For investors, the impact of the outward shift in yields across Europe will be relatively contained, as retail yields were comparatively higher than other sectors prior to recent movements in interest rates. European prime retail yields have been above 4% on average for the past 10 quarters, compared to sub-4% yields seen across office and logistics. From Q2 to Q4 2022, retail yields moved out by 29 bps, a smaller outward movement compared to other sectors. Thus, some of the existing spread has and will continue to absorb larger debt costs. We only call for a 65-bps expansion in yields from 2021 in total—the lowest of all sectors.

PRIME HIGH STREET RETAIL RENTS (YOY % CHG)

Q4 21 Q4 22

Budapest Berlin Frankfurt Warsaw London (Bond St) Paris Stockholm Zurich Brussels Munich Rome Amsterdam Lisbon London (Oxford St) Prague London (Regent St) Madrid Barcelona Milan Dublin

-20 -15 -10 -5 0 5 10 15 20

YoY % chg

Source: Cushman & Wakefield Research

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

LOGISTICS

Leader of the Pack The uncertain economic environment had little impact on logistics demand during the first half of 2022. Ultimately however, the rise in debt costs, uncertainty surrounding the economic outlook and inflation, and the concomitant slowdow YoY in consumer spending caught up. The trade surplus in Germany, for example, fell to €80 billion in 2022, down by more than half compared to 2021 (€175), largely due to high energy prices. Imports fell 6.1% in December, which also indicates the pullback in spending and the result of deteriorating real purchasing power. This softening of demand has a natural effect on improving supply chains—the China-EU container freight index fell around 80% in February 2023 from the peak in January 2022. This had an impact on take-up for the sector across Europe, with take-up settling at 8.6 million sqm, representing a 29.8% decline over the previous year and -2.1% compared to the previous quarter. GLOBAL SUPPLY CHAIN STRESS INDEX VS. GERMAN IMPORTS

Although there is a significant amount of uncertainty around the geopolitical landscape, global supply chain pressure continues to provide relief. The global supply chain stress index fell from its peak of 4.31 in December to 0.95 in January 2023, but it remains above its pre-pandemic level. In addition, the re opening of China’s economy will further improve the flows of some key products of cross-border trade, especially in machinery, vehicles and other manufactured goods. Against this backdrop, we expect demand and take up to moderate in the short term before picking up in H2 2023, as more clarity emerges around the consumer outlook. Even with moderation, occupier demand will remain robust and should continue to come in above pre-pandemic levels in the coming years. The search for prime logistics buildings that are strategically located, near transport hubs and well connected to the road network will intensify as occupiers strive for operational- and cost-efficiency in a challenging economic environment. However, constrained availability of space, driven by the lack or delay to supply, will mean occupiers will consider secondary buildings and alternative locations. Up 40 bps in the fourth quarter of 2022, the vacancy rate for the sector is sitting at a level of 3.8%. It remains very low compared to historical levels and should continue to support above-average rental growth in the sector.

Global Supply Chain Stress Index German Imports (RHS)

5.0

20 30 40

4.0

3.0

-30 -20 -10 0 10

2.0

1.0

VACANCY RATE BY COUNTRY (%)

YoY % chg

0.0

Q42020 Q42021 Q42022

-1.0

0 1 2 3 4 5 6 7 8

Index (S.D. from Average)

Jul-17

Jul-21

Jul-18

Jul-19

Jul-22

Jan-17

Jan-21

Jan-18

Jul-20

Jan-19

Jan-22

Jan-23

Jan-20

Source: Deutsche Bundesbank, Federal Reserve Bank of New York, Moody’s Analytics *Index refers to standard deviations from average value.

%

Despite this fall in the second half of the year, leasing activity was still strong—25% above its five-year average of 30 million sqm—and we expect this trend to continue, albeit below the record highs recorded in recent years. In a normal, non-pandemic economy, these record volumes would be viewed largely as unsustainable, because some e-commerce demand was pulled forward as operators had to scale sooner and faster than they otherwise would have. The past few years have been exceptional for logistics, with the sector taking advantage of the shifts in demand patterns, technological advances and businesses altering business models.

UK

Italy

Spain

France

Poland

Ireland

Hungary

Netherlands

Czech Republic

Source: Cushman & Wakefield Research

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

LOGISTICS

ALTERNATIVES

No Longer Niche The alternative sector, which includes healthcare, life sciences, co-living, later living, hotels, purpose-built student accommodation (PBSA), and built-to-rent (BTR) has fared better than the traditional sectors within real estate. Investor interest in alternatives continues to rise, with the level of investment reaching €58 billion in the last five years.

The strong rental growth momentum witnessed in recent quarters continued in fourth quarter 2022, with prime rents across our European market coverage up 3.7% QoQ and 14.5% YoY. Gains varied widely across the region. The Czech Republic (34%), Poland (28%), the UK (18%), Germany (18%) and France (17%) recorded the largest YoY rental growth. We continue to forecast a deceleration in rental growth in the short term, with a 3.9% and 2.2% rental increase in 2023 and 2024. In the medium term, rent pressure is expected to ease slightly, averaging 1.7% from 2025-2026. It is important to note that, despite a slowdown in annual rent growth, loss to lease adjustments will continue to force occupiers to pencil in substantial rent increases on maturing leases. For investors, this will support a very strong NOI growth outlook. The logistics sector registered the greatest re pricing, with yields moving out by 90 bps on average in the second half of the year alone. This was due to the stretched pricing conditions that led spreads to 10-year government bond yields to compress to just 204 bps at its nadir in second quarter 2022 (versus the 2015-2019 average of 476 bps). We believe that the re-pricing in the sector was front loaded, despite further adjustments still to come in early 2023. In other words, most of the adjustment is in the rearview mirror. Investor interest in the logistics sector is not expected to dissipate, as the sector continues to attract large amounts of capital. Investment toward the sector represented 18% of overall volume in 2020-2022, compared to 11% average over the five years prior to the pandemic.

INVESTMENT BY SECTOR (% SHARE)

Office Retail

Industrial

Other Residential

Alternatives

20% 30% 40% 50% 60% 70% 80% 90% 100%

€3bn

€16bn

0% 10%

2012

2022

Source: MSCI Real Capital Analytics, Cushman & Wakefield Research

The alternatives sector is attractive to investors because it is less correlated with economic growth and therefore offers investors the portfolio diversification they need, particularly during uncertain times. The sector also presents inflation and performance hedging characteristics, which are particularly attractive to investors in the present high-inflation environment. Opportunities within the sector that are linked with underlying structural trends, such as demographics and urbanisation are poised to do particularly well, even during a mild recession.

POPULATION BY AGE GROUP (% SHARE OF POPULATION)

Source: Eurostat, Moody’s Analytics estimated

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

ALTERNATIVES

In Europe and indeed much of the globe, the biggest demographic trend is the ageing population. According to the European Commission, the number of people aged 65 years or older in the euro area will increase reaching 129.8 million by 2050. The consistently low birth rates and higher life expectancy are having a significant impact on the population profile across several countries within the euro area. The median age in Germany (46 years) and Italy (46.7 years), for example, is considerably higher than in the rest of Europe. A knock-on effect of this demographic trend is that the working-age population will start shrinking, as a large number retire from the labour force. According to the European Commission, the euro area lost 3.5 million people in the working-age population between 2015 2020, and by 2050, those numbers are expected to further shrink by 35 million. However, this assumes there will not be significant changes in immigration policy and trends. As an asset class, therefore, the later life living sector is an increasingly strategic investment opportunity. The broader multifamily and residential space has also gained more interest among investors in recent years. No longer seen as the niche or alternative sector, this asset type was historically under-represented among CRE investors in Europe. Mortgage rates have been rising sharply across the euro area, pushing up housing costs for homeowners. Furthermore, higher mortgage rates and home price appreciation are eroding affordability and demand. According to Eurostat, 70% of the population in the euro area own their home. This varies drastically by country; home ownership is low in Germany (50%) and even lower in Switzerland (42.4%). Over 80% of the population own homes in Romania, Hungary, Croatia and Poland. As a result, these markets have seen significant house price growth; in third quarter 2022, house prices increased YoY by over 20% in Hungary and Croatia and by 15% in Poland and Romania. The European multifamily and rental housing markets have become increasingly attractive for large investors as they seek safer assets. The low risk-return profile, ability to provide stable income streams and strong capital growth are among the reasons why the sector has outperformed all other real estate sectors. MSCI total returns for residential assets have averaged 8.1% over the past 10 years (2012-2021); in contrast, all property returns have averaged 7.4%. Additionally, with land being scarce—only 2.9% of land in the euro area is used for residential housing—and affordability combined with the increasingly institutionalised nature of the housing markets continuing to be issues, the build to-rent (BTR) sector is emerging and likely in its early days as an asset class.

Another strand of the alternative sector that is on a fast-growth trajectory is life sciences. Ageing populations and the pandemic have spurred an acceleration in public and private investment. As the sector continues to grow, it is beginning to attract more capital. Requirements for advancements in the medical field have evolved, and so too have the requirements for real estate to accommodate those advancements, including lab and manufacturing spaces, as well as office space. Demand will continue to outstrip supply, especially for lab space, pushing up rents and values. A lack of investment options has also driven many investors up the risk curve, seeking value add, development and repurposing stock as the fundamentals for the life sciences occupier markets are expected to remain strong and stable over the long term. The pandemic also became the catalyst for the growth of data centres, as work, play and shopping shifted online. According to Eurostat, the share of households across the euro area with internet access increased to 93% in 2022, up from 72% in 2011. Among the working-age population (aged 16 to 74), 68% ordered or bought goods or services online, an increase from 54% in 2017. Furthermore, 41% of businesses across the euro area were using some form of cloud storage in 2021. The dependency on connectivity, technology and data storage propelled the demand for data centres across Europe. Last year was a year of mixed fortunes for the sector, as a combination of high inflation, rising interest rates and the reduction of the tech sector all had an impact on the operational aspect of data centres. In addition, concerns about power availability for future development threatened to halt new developments. Despite regulatory challenges and an increased focus on sustainability, investment in data centres and infrastructure will remain strong. London and Frankfurt remain the largest data centre markets in Europe. As the need for data centres grows, development is now overflowing into secondary and tertiary markets such as Germany, where projects outside of the prime market of Frankfurt have started in Berlin and Munich. Read more in our latest Data Centre Market report.

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CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

EURO AREA FORECAST TABLE

2020

2021

2022

2023

2024

2025

Euro Area Economy Real GDP Total Employment

-6.3% -2,618 -292 8.3% 0.3% 0.0% -0.2%

5.3%

3.5%

0.4% -266

2.0%

2.1% 249 307 7.1% 2.0% 2.0% 2.8% 3.4% 1.7% 1.7% 4.8% 6.4% 1.4% 3.6% 4.9% 8.5% 2.4% 2.4% 4.5% 6.9%

3,803 1,160

2,287

232 313 7.1% 2.7% 2.5% 3.0% 3.6% $74.1

Office-using Employment

798

241

Unemployment Rate

7.1% 2.6% 0.0% 0.2% 0.6%

6.6% 8.4% 1.8% 3.0% 4.3%

7.1% 6.2% 3.5% 3.3% 4.1%

CPI Inflation

ECB Policy Rate

10-Year Govt. Bond Yield

BAA Corporate Bond

0.5%

Brent Crude

$45.2

$79.7

$88.7

$85.4

$71.7

Prime Office Sector Rental Growth Capital Value Growth

-0.1%

1.6% 6.4% 3.7%

5.6%

1.1%

1.4%

1.2%

-7.8%

-11.2%

1.1%

Yield

3.9%

4.2%

4.7%

4.8% 5.8%

Total (Unelevered) Return Prime Industrial Sector Rental Growth

4.4% 10.1%

-2.8%

-5.7%

2.1%

3.7%

12.6% -3.6%

3.4%

1.8% 1.8% 5.0% 6.8% 1.9% 1.8% 4.5% 6.3%

Capital Value Growth

11.7% 21.6%

-5.3%

Yield

4.6%

3.9%

4.5% 1.7%

5.0%

Total (Unelevered) Return

15.6% 25.2%

-1.8%

Prime Retail* Sector Rental Growth Capital Value Growth

-10.7% -18.5%

-1.5% 0.4% 3.8% 2.9%

-0.2% -7.0%

-0.1%

-10.0%

Yield

3.8%

4.1%

4.5%

Total (Unelevered) Return

-15.0%

-2.8%

-5.6%

Source: European Commission: Eurostat, European Central Bank, Moody’s Investor Services, Cushman & Wakefield Research Forecasts based on Cushman & Wakefield forecasts as of January 2023.

*Prime High Street

13

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

UK FORECAST TABLE

2020

2021

2022

2023

2024

2025

UK Economy Real GDP

-11.0%

7.6% 836 246 4.0% 2.6% 0.1% 0.9% 1.5%

4.1% 774 271 3.7% 9.0% 2.8% 3.6% 5.2%

-0.3%

1.0%

1.3%

Total Employment

-507

63 64

79 61

67 66

Office-using Employment

27

Unemployment Rate

5.2% 0.9%

4.2% 7.1% 4.5% 4.0% 5.4%

4.3% 3.3% 3.0% 3.7% 4.7% $71.2 2.5% 2.5% 5.6% 8.0%

4.4% 2.1% 2.3% 3.3% 4.4% 2.0% 2.0% 5.6% 7.6% 2.8% 4.7% 5.4%

CPI Inflation

BoE Policy Rate

0.1%

10-Year Govt. Bond Yield

0.3%

BAA Corporate Bond

1.1%

Brent Crude

$45.2

$79.7

$88.7

$83.7

$69.0

Prime Office Sector Rental Growth Capital Value Growth

1.0%

4.1%

4.6%

0.9%

-0.2% 10.7%

-14.5%

-2.9% 5.6% 4.3% 4.9% 2.0% 5.5% 6.1%

Yield

4.7%

4.4%

5.4%

Total (Unelevered) Return Prime Industiral Sector Rental Growth

4.3% 15.2%

-9.8%

6.5% 12.1% 10.9% 34.5%

18.2%

3.2% 3.2% 5.5%

Capital Value Growth

-12.7%

Yield

4.7%

3.9%

5.3%

Total (Unelevered) Return

15.5% 38.3%

-7.9%

8.7% 10.1%

Prime Retail* Sector Rental Growth Capital Value Growth

-16.1%

-9.6%

-0.3% -4.5% 5.8% 0.5%

0.4%

2.8% 2.8% 5.9% 8.7%

2.8% 2.8% 5.9% 8.7%

-26.8% -15.5%

-3.9% 5.9% 3.0%

Yield

5.2%

5.5%

Total (Unelevered) Return

-23.5%

-8.3%

Source: U.K. Office for National Statistics (ONS), Bank of England, Moody’s Investor Services, Cushman & Wakefield Research Forecasts based on Cushman & Wakefield forecasts as of January 2023.

*Prime High Street

14

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

March 2023

Authors:

Sukhdeep Dhillon Head of EMEA Forecasting sukhdeep.dhillon@cushwake.com

Stephen Wan Senior Research Analyst stephen.wan@cushwake.com

Guilherme Neves Senior Research Analyst guilherme.neves@eur.cushwake.com

Rebecca Rockey Global Head of Forecasting rebecca.rockey@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 52,000 employees in over 400 offices and approximately 60 countries. In 2022, the firm had revenue of $10.1 billion across core services of Property, facilities and project management, Leasing, Capital markets, and Valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

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