Challenges in the Commercial Real Estate Market: What’s Behind the Low Transaction Volume, and How Can We Move Forward?

In recent times, the commercial real estate market has faced numerous challenges, one of the most significant being the substantial pricing differences between sellers and buyers. While a 25-50 basis point difference was once a basis for negotiation, it's now common to see disparities of 100 basis points or more. The high-interest rate environment has adversely affected the real estate sector, with investors only considering new opportunities if they come with significant risk premiums. However, most opportunistic offers remain informal, with only verbal indications rather than written proposals.

Market uncertainty, the lack of transactions—resulting in a lack of reliable benchmarks—and shifts in the economic landscape all contribute to the stagnation of the transactional market. How can the market move past this stalemate, and what solutions could help kick-start activity again?

Lack of Transactions

One of the biggest challenges in the commercial real estate market, particularly in the office segment, is the absence of transactions. This creates significant difficulties for market participants, as there are no reliable comparable data points available. Sellers strive to avoid undervaluing their properties and insist on prices close to their valuations, while buyers are looking for higher yields, unique locations, or special features. Moreover, neither side feels a strong compulsion to sell or buy.

Although there have been completed and ongoing transactions in the retail, industrial-logistics, and hotel segments, the pool of available properties is limited, and pricing gaps persist here as well.

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The Role of Domestic and Regional Investors

In recent years, domestic investors have dominated Hungary's commercial real estate market, but they are increasingly evaluating opportunities on a regional scale today. In many cases, they favor foreign acquisitions, which offer portfolio diversification for them but result in stagnation for the domestic market. This situation is unlikely to change until domestic yields reach levels attractive to investors.

The Role of Valuers: Stability and Risk Management

Valuers play a crucial role in the real estate market, as investors regularly reassess their portfolios based on available data and trends, and valuations are a requirement for financing from banks. However, valuations often take a conservative approach, which slows down market dynamics. As a result, significant discrepancies can arise between appraised values and current market prices. On the one hand, this provides stability for managing sudden economic shocks, but on the other hand, it makes it harder to find common ground during transaction negotiations.

High Interest Rates and Financing Costs

The current high-interest environment further complicates the real estate market. Buyers face significantly higher financing costs, which raises yield expectations. Although interest rates have begun to decline, the change is slow, and market participants are still waiting. The effects of interest rate cuts may soon become apparent, improving investor and lender sentiment.

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Economic Recovery: Optimism on the Horizon?

If interest rates continue to improve and the anticipated economic recovery takes place, the real estate market may overcome its current stagnation. Most market participants agree that the lowest point has already been reached, and there is a cautious optimism among investors. The biggest question is when the market will begin to recover, with global economic trends and positive geopolitical developments playing a key role in this shift. If market participants can adapt to the changing conditions, transaction volumes could increase.

Conclusion

The current state of the commercial real estate market presents many challenges, but the potential for recovery is present if interest rates improve, investor optimism grows, and economic recovery begins. Bridging the pricing gap between sellers and buyers and accelerating market dynamics will be essential to increasing transaction volumes.

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