With transitory inflation behind us, ‘higher for longer’ is now doing the rounds. While policy rates have most-likely peaked, central banks have gone to great lengths to convince markets that they are not cutting soon, and investors are finally taking note.

The question is whether higher for longer ultimately proves transitory. History suggests it will, but a fast about-turn is predicated on something going bang in the global economy, fundamentally shifting the narrative on growth and inflation.

In the meantime, according to the IMF, the ‘likelihood of a soft landing has increased.’ Households, corporations, and the transparent parts of the financial system are generally in good financial health. Labour markets are showing few signs of rolling over, supporting a recovery in real wage growth which should prop-up household consumption.

There are however plenty of vulnerabilities in the global economy, and given the historical precedent, we are perhaps embarking on a period of peak anxiety that makes it very difficult for investors to make long term decisions. But get through the next 6 months, and we may yet be able to say that the worst is behind us.

Office
Around US$32 billion in office transactions were closed in the third quarter of this year, representing a near 59% decline in comparison with the same period last year. To give this some context, it was the weakest outturn since Q3 2009, when the global economy was gripped by the global financial crisis.

Institutional investors are net sellers of offices this year for the first time since 2017, as negative sentiment in the US permeates through the rest of the world. Unfavourable market conditions continues to favour a wait-and-see strategy, while uncertainty over the future viability of the office makes it hard to be confident of an exit strategy.

But there is plenty of nuance in the market, and the right office, in the right location, will continue to deliver strong returns. A flight to quality from occupiers has continued to support growth in prime rents in many markets. Capital values are a function of both rents and yields, something that is often lost in the conversation.

Global prime office yields, Q3 2023 (as at end-September)

Source: Savills Research. See Methodology for more details.

Logistics
Nearly US$40 billion of logistics transactions completed in the third quarter of this year, representing a greater than 40% decline on Q3 2022. However, base effects are important to consider in the logistics market, with both occupational and investment activity on somewhat of a come down from the last two years. Comparisons with 2019 are probably more appropriate, being the last ‘normal’ year to benchmark activity levels, and provides for a more balanced perspective.

This is not to say that the sector does not face some challenges; on the occupational side, for example, from too much supply onboarding and softer demand, and on the capital markets side, from the high cost of borrowing.

But the prevailing narrative remains one of a normalising market; the logistics market can be characterised as one of short term pain, long term gain, with investors continuing to buy into the structural drivers of growth around e-commerce and evolving supply chains.

Global prime logistics yields, Q3 2023 (as at end-September)

Source: Savills Research. See Methodology for more details.

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