GDP growth has decelerated both in Norway and internationally, but the central banks and market participants don’t seem to agree on the likely path ahead. While the central banks expect soft landings, market participants seem to expect recession. In any case, there is probably limited downside potential for longer-term interest rates. While the office rental market has remained strong into Q1 of this year, office rents are likely close to peaking, in our view. The CRE transaction market is slow, but we believe liquidity will return through the course of the year.

Introduction

Financial markets have been turbulent over the past 6 months with considerable volatility in share prices, market interest rates and credit spreads. Policy rates both in Norway, the eurozone and the US have increased further and are currently at their highest since the GFC. The uncertainty arising with the bank collapses in the US and Europe has subsided lately and credit spreads have decreased somewhat. The outlook for GDP, employment and inflation is hard to predict, and while the central banks in the US, the eurozone and Norway expect soft landings and persistent inflation for their economies, the inverted yield curves suggest market participants expect recession. The central banks consequently forecast policy rates to increase further and remain relatively high throughout next year.

Markets participants, on the other hand, expect policy rates to fall faster. Should the market view prevail, longer-term interest rates will likely fall only modestly from today’s levels. However, if the central banks have called it correctly, longer-term interest rates will likely remain around current levels.

The sharp rise in activity in the Norwegian economy last year contributed to a robust office market with very low vacancy rates and unexpectedly high rent increases. The strong rental growth has continued into Q1 of this year, but office rents are now close to peaking, in our view. Ahead, overall employment growth is expected to decelerate, but typical office occupations normally fare better than total employment. Due to a tight supply side in the office rental market, we believe the office vacancy rate will increase only moderately over the next couple of years.

Den høye aktivitetsveksten vi har hatt i norsk økonomi inntil nylig har bidratt til et brennhett kontormarked med svært lav arealledighet og uvanlig høy leieprisvekst. Selv om etterspørselen etter kontorareal skulle kjøle seg ned framover, antar vi at arealledigheten vil bli holdt nede av historisk lav tilførsel av nytt areal. Sammen med høy vekst i KPI, venter vi at lav arealledighet vil bidra til å støtte oppunder veksten i kontorleie til neste år.

Activity in the transaction market for commercial property is affected by the uncertain interest rate prospects, and many investors are biding their time. There has been a slow start to the year, and we expect the transaction volume of 2023 to decrease compared to last year. However, through the course of the year we expect more clarity around interest rates and corporate earnings and for liquidity in the transaction market to pick up as a result.