Netherlands Real Estate Market Outlook 2023

Onwards to a year of opportunities

After a necessary thaw in the first half of the year, 2023 will offer especially interesting opportunities for the observant real estate investor. The movement towards a healthier, balanced market – with fairer prices, risks and returns – is under way. The higher interest rates mean yields are increasing, making real estate an interesting investment product once again, for any portfolio.

The key for investors is to shake off the lingering after-effects and take stock of the situation: what does the playing field look like now, and what does that mean for their company, assets and revenues? They will then need to look around for opportunities. Many investors are still hesitant, so it’s a case of first come, first served. This is the moment to buy real estate at a great price! And that’s a rosy outlook that deserves optimism.

Uncertain market calls for creative measures

Expectations for the housing market this year are both uncertain and conservative. While the number of households in the Netherlands continues to grow, rising home prices are an obstacle to many new construction projects. As a consequence, the potential of this market is evaporating – not only due to declining revenues, but also to high land prices and rising construction costs which are also wreaking havoc for developers. We are on the verge of reaching an impasse.

To prevent any further decline in construction output, the market is calling for creative and countercyclical measures to be taken this year. This will enable optimal use of investors’ investment capacity, which will help to absorb some of the decreased demand in the private housing market. In this regard, flexibility in the programming of new construction projects is essential and will help to keep the business case profitable and developers motivated.

Increasing vacancies, except at the top end of the market

By 2022, it became clear that hybrid working had garnered wide acceptance, and that companies would permanently need less business space. The demand for office buildings is declining and vacancies are increasing. In particular, lower quality premises are proving difficult to let. By comparison, Class A offices are expected to be even more in demand during 2023.

After all, more and more companies are opting for quality, accessibility and sustainability. Motivated by the ‘war on talent’, their ESG strategy and increased energy costs, they are competing for the most modern offices. New construction and renovation play an important role in meeting the demand for quality, but the number of ongoing new construction projects is stalling. High financing costs, high construction costs and sharply declining capital values are creating considerable barriers.

Despite the many investment opportunities available on the office market, 2023 will be a quiet year. The price realignment simply needs time to sink in. Momentum will return the moment financing interest rates and exit yields have stabilised, and the effect of this resonates throughout the market.

Greater volume as a solution for continued growth

The growth in online purchasing in recent years has led to a chain reaction in market developments. On- and reshoring have increased in popularity due to the uncertainty created by vulnerable supply chains, which in turn has led to the continued growth of Dutch manufacturing activities since the pandemic. This is a positive development, but the demand for logistics real estate is also continuing to increase. And that is the crux of the matter: there is not enough supply to meet the demand.

Vacancy rates are historically low and rents are high, and the market is becoming skewed. The development pipeline for this year is also limited. Increasing construction costs and a shortage of land are an obstacle to new logistics real estate. Of the locations that are being built, around 70% are already pre-leased.

Even so, we believe there are opportunities to be had. By developing/redeveloping locations, we can increase their sustainability and efficiency, which is good news for both landlords and investors. We can also build upwards or downwards in order to create volume without increasing the footprint of buildings. This will help to keep the logistics sector running and we will retain precious space for other purposes, such as housing.

Sober outlook, although in line with natural cycle

In 2022, we saw spending increase despite historically low consumer confidence: there was much saving, and low unemployment brought financial security. However, now that the economic prosperity has come to a halt and consumers have less to spend, they are more inclined to keep hold of their purse strings. This means that some retailers are finding themselves in increasingly dire straits, partly due to their own rising staffing, rental and energy costs.

The outlook for 2023 is therefore sober at the local level, and bankruptcies and vacancies will be inevitable. Still, this is all part of a healthy market cycle: desirable locations become vacant, which creates opportunities for other entrepreneurs. At the same time, a large group of new retailers is performing very well, including supermarkets or retailers with a successful omnichannel strategy. As a result, the occupier market is much more solid than it was a few years ago, and much of the retail sector still has mainly bright prospects.

The first half of 2023 will be fairly quiet, with the market still recovering from the drop in transactions that started towards the end of 2022. The industry will only recover once the impact of the current economic situation on consumer spending and financing options is clear. Investors need to know where they stand. Momentum is therefore not expected to be restored until the second half of the year.