Outlook for 2024 by EDC Poul Erik Bech

NOVEMBER | 2023

OUTLOOK for 2024

Large market survey among Danish investors, tenants and companies on expectations for the commercial property market

International Poul Erik Bech International associate 1

10 Content

14 20

Page 3 Outlook for 2024

4 Facts about the respondents 6 Market prices 8 Market rent 10 Vacancy 12 Inflation 13 Interest rates 14 Financing 16 Investment 19 To own or rent? 20 Relocation 24 Sustainability 29 Background

Download the report in Danish here: www.edc.dk/erhverv/forventninger2024

Sign up on our digital news at: www.ejendomsnyheder.dk Do you have any questions for the report? Contact EDC Poul Erik Bech marketingerhverv@edc.dk - +45 5858 8564

Outlook for 2024 There is still uncertainty among investors in relation to high interest rates, which continue to affect the desire to invest. Uncertainty and reticence among investors seem to continue into 2024. This is shown by EDC Poul Erik Bech’s annual market survey on the expectations for the coming year’s development on the commercial property market, which has been carried out for the ninth year in a row.

Interest rates as the biggest concern As something new, this year’s survey asks what the investors expect to be the largest challenge for the real estate market. Here, there is a large majority of respondents who point to the interest rate. Just under 68% believe that interest rates will represent the most significant challenge for the property market in the coming year. In general, there is great uncertainty about the development of the interest rate in 2024. 30% expect the interest rate to fall, 28% expect it to rise, while the remaining 42% expect an unchanged interest rate.

EDC Poul Erik Bech has once again conducted a large market survey, where we focus sharply on the expectations for the coming year. This year, more than 1,600 investors, tenants and companies have given their views. At a time where there are not many positive winds blowing over the property market, it is interesting to hear what investors and companies expect from the development. Therefore, a big thank you to those who took the time to answer the survey. You can read more about the background of our Expectations Survey 2024 on page 29. In general, the expectations for 2024 among investors, tenants and companies can be compared in a number of respects with the expectations for 2023, where overall there was also no great desire to invest. Across the four property types: Residential rental properties, office properties, warehouse/logistics properties and retail properties, there are generally more negative than positive expectations of market prices and vacancy.

As the second largest challenge, more than 15% of the respondents answer that uncertainty about price and distance between buyer and seller are most significant. According to the investors, number three on the list of challenges is the preliminary property valuations, which just under 12% of the respondents point to. Sustainability is still not the main focus ESG has become a more and more prominent factor in the real estate market, which is why we have increasingly asked about this theme for the past four years. The answers show that more people focus on the importance of sustainability, but this is far from everyone. It is surprising that there has not been a more positive development in the proportion of investors who believe that sustainability plays a role in their investment strategy. We expect that this is because there have been several more tangible challenges, such as financing, inflation and regulation, so it is still our expectation that sustainability will play a larger role next year. In any case, several are forced to deal with it from tenants and credit providers before property owners will also be subject to rules on ESG regulation.

Two property types stand out Although there are more who expect falling than rising market prices, there are two property types that stand out as being the ones that investors have the most confidence in. These are residential rental properties, where the majority expect unchanged or rising prices. 16% expect rising property prices. Although this may not sound like much, it is an increase of 9 percentage points compared to last year. Similarly, there are 40% who expect the market rent of residential rental properties to rise. Warehouse and logistics properties are the second property type that stands out in our Expectations Survey. Here, the majority responds that they expect unchanged or rising prices, of which 22% expect rising market prices, which is an increase compared to last year. Warehouse and logistics properties are also the segment with the largest share of respondents expecting rising market rents.

At EDC Poul Erik Bech, we greet all the good initiatives on ESG and look forward to the industry finding common solutions that can make ESG more tangible for all of us.

Facts about the respondents Do you invest in properties that are not for own use?

Among the 1,618 respondents who completed the survey, 59% answered that they invest in properties that are not for their own use. This is roughly the same level as last year’s survey, where 63% answered the same. 28% of the respondents comes from Copenhagen or the Copenhagen area. Central Jutland, South/West Zealand and West/South Jutland follow suit with 13%, 11% and 11% respectively, while 1% of respondents live abroad. 40% of the respondents work in a sole proprietorship, while 44% work in a business with up to 25 employees. They thus make up the majority of respondents, which agrees with the figures from Statistics Denmark, which show a clear majority of small and medium-sized enterprises in Denmark. 5% of respondents come from companies with 500+ employees. With the high number of respondents from all over the country, who represent companies of all sizes, the survey provides good conditions for assessing how investors, tenants and companies predict the outlook for the commercial property market in 2024.

How large is your company?

1 employee:

40%

2-25 employees:

44%

26-100 employees:

101-500 employees:

500+ employees:

The company’s location

Copenhagen 14% Greater Copenhagen 14% Central Jutland 13% South/West Zealand 11% West/South Jutland 11% North Zealand 10% Aarhus 10% North Jutland 5% Aalborg 4% Odense 3% Funen 3% Abroad 1%

4% Aalborg/ Vendsyssel

Viborg

10%

Aarhus

Herning

Silkeborg

Vejle

Hillerød Roskilde

Esbjerg Kolding

Slagelse Næstved

Odense Aabenraa Sønderborg

Herlev Copenhagen

Taastrup Køge

14%

Market Prices Expectations for Market Price Developments in 2024 Respondents in the survey generally have a more positive view of market price developments than last year’s expectations but are still a bit behind the expectations for 2022, which, however, reflected the general tailwind in the real estate market.

Like the other segments, commercial lands have been severely impacted by rising interest rates combined with very high construction costs. However, respondents are more positive about land prices in 2024, with 13% expecting higher market prices compared to only 4% in the last survey.

The highest trust in rising prices is found in the warehouse/ logistics real estate segment. Here, 22% of the respondents expect market prices to rise, which is an improvement compared to last year.

Residential rental properties

Residential rental properties have been the most sought-after segment in the market for many years, and it seems that investors are a bit more positive about the segment, as there has been an increase in the proportion who expect rising prices compared to last year’s responses. Investors are still somewhat hesitant about the office segment. Here, only 7% expect market prices to rise, while 59% of respondents expect falling prices. In general, it is slightly more positive than last year. The same applies to retail properties, where 71% of respondents expect prices to fall, which is actually an improvement compared to last year, while only 5% expect rising prices. Thus, again this year, the retail segment is where the fewest expect rising prices.

Office properties

Retail properties

Warehouse-/logistics properties

Commercial lands

Market Rent Expectations for Market rent development in 2024 The Market rent is expected to be less likely to increase than in previous years, which is probably due to inflation coming down to a significantly lower level. Within residential rental properties, warehouse/logistics properties, and office properties, there is an expectation that the rent will be at a stable level.

For warehouse/logistics properties, 29% expect an increasing market rent, which aligns with last year’s expectations. However, significantly more expect it to be at the level of 2023. 53% expect the rent for office properties to be stable, but unlike residential rental and warehouse/logistics properties, more expect the market rent to be falling than rising.

Residential rental properties are the segment in which respondents have the most confidence. 40% respond that they expect an increasing market rent in 2024, while only 12% expect the market rent to fall.

The retail segment is unsurprisingly the segment where the fewest expect an increasing market rent. Only 9% of respondents expect the market rent to rise in 2024 compared to 14% in expectations for 2023. On the other hand, 56% expect a falling market rent on retail properties in 2024.

Residential rental properties

Office properties

Warehouse- /logistics properties

Retail properties

Vacancy Rate Expectations for the vacancy rate development in 2024 Overall, the expectations for the development of vacancy rates in 2024 are very similar to those for 2023, where expectations of an increasing vacancy rate were more significant than those who expected a decreasing vacancy rate.

the number of new dwellings will decrease due to fewer construction projects being initiated. There will be a temporary saturation in some areas of the country, but the demographic development and composition will continuously necessitate more dwellings.

The most notable expectation is that the vacancy rate within residential rental properties will increase by 10 percentage points, from 20% to 30%. This is somewhat surprising, as it is generally expected in the industry that

Expectations for the development of vacancy rates from 2023 to 2024 are status quo within office, warehouse/logistics, and retail properties.

Residential rental properties

Office properties

Warehouse- /logistics properties

Retail properties

Inflation Expectations for the Development of Inflation in 2024 Due to the high inflation, it is not surprising that only 14% expect rising inflation in 2024. 54% expect that the inflation will decrease in 2024. Thus, it is not surprising that only 8% of the respondents mention inflation as the most significant challenge for the real estate market in the coming year.

32% unchanged

54%

14%

falling

rising

Does the current development in inflation affect your long-term inflation target?

Interest Rates Expectations for the Development of Interest Rates in 2024 Interest rates are a significant challenge this year, and therefore, it is not surprising that the respondents point to interest rates as the most significant challenge for the real estate market in 2024. 68% of the respondents identify interest rates as the most challenging aspect of the real estate market in the coming year. Like economists, the respondents also have mixed expectations regarding whether interest rates will fall, rise, or remain unchanged in 2024. Generally, there is also an expectation among economists that if interest rates fall, it will likely be a minor adjustment rather than a significant drop in rates. Therefore, more economists believe that interest rates will remain unchanged in 2024. Respondents expect a similar scenario, with 42% indicating that interest rates will remain unchanged in 2024. 30% expect interest rates to fall during 2024, while 28% believe interest rates will rise. Comparing this with last year’s survey results, there has been a significant change. Here, 60% of respondents expected interest rates to rise in 2023.

42% unchanged

30% falling

28% rising

Financing How do you perceive the opportunities to obtain financing for real estate investments in the coming year? Overall, fewer respondents expect it will be more challenging to obtain financing for real estate investments in the coming year compared to their expectations for 2023. Last year, 78% responded that they expected obtaining financing for real estate investments in 2023 would become more challenging. This year, it has dropped to 58%.

The slight decrease in expectations for financing opportunities is likely due to investors adapting to the new conditions. This is also supported by the fact that only 4% of the respondents expect it to be easier going forward, which is the same trend we have seen in recent years. It is a significant difference compared to expectations for 2020, 2021, and 2022, when only 30-36% expected more difficult financing conditions.

What type of financing do you typically use for your real estate investments? The distribution of financing methods is at the same level as last year, with a slight increase in the proportion of self-finances.

Has the recent development in interest rates affected your perspective regarding choosing financing for your real estate investments? Interestingly, 53% mention that the development in interest rates has led them to change their strategy regarding financing. And even more interesting is that property owners have different perspectives on which type of loan they should choose.

Are you considering using alternative financing sources other than mortgage credit and banks in the coming year? When traditional financing options become more difficult, new opportunities typically arise. However, Denmark remains very traditional, so most do not consider finding alternative financing sources other than banks and mortgage credit. Still, a third are considering other options. Therefore, a market in the financing area for real estate investors may open up in the coming years if the commercial property lending market continues to be tightened.

Investment Where do you invest geographically today?

What profile of properties do you invest in? After a significant drop from 2022 to 2023 for both core properties and value-added properties, both property profiles are back to the same level as in 2022. Conversely, there has been an increase in the percentage of those investing in opportunistic properties compared to 2023.

The responses could indicate that investors have become more willing to take risks or have been pushed to turn to properties with a higher rate of return to make the financing work.

Do you plan to spend more/less money on real estate investments in the coming year? expect to invest more money in the real estate market than less money. Expectations should be seen in light of a somewhat low overall transaction volume in the market.

28% of respondents expect to spend more money, which is an improvement compared to last year. However, the level is still far from the levels in 2020, 2021, and 2022. Opposite to last year’s survey, it is worth noting that more people

Investment What types of properties are potential investments for you in the coming year? general, housing fills a significant place on the list, whereas mixed residential/commercial properties and land for residential construction are next on the list, while warehouse and logistics properties are in 4th place.

Like in previous years, residential rental properties are the most popular property type when looking at potential investments. Like last year, 80% of respondents say they see residential rental properties as a potential investment. In

What areas do you expect to invest in the coming year?

Own or rent? Do you own or rent the primary premises you use? We always ask our respondents whether they would prefer to rent instead of own or vice versa. Historically, a reasonably large proportion of the respondents consider switching. Several companies have used an Asset-light strategy over the years, and 37% also responded that they are considering selling their premises and living in rented accommodation instead. Conversely, 42% of those who live in rented accommodation are considering buying.

Would you consider selling your premises to rent something instead?

Would you consider buying something instead of renting?

BUY • SALE • RENT • ADVICE FIND YOUR REAL ESTATE CONTACT ON THE BACKSIDE

Moving plans Do you expect to spend more/less money on commercial premises? There has been little change regarding whether companies expect to spend more or less money on commercial premises. Since 2020, when a complete 49% of the respondents expected to spend more money on commercial premises,

the percentage has fallen significantly. This is most likely due to the uncertainty of recent years with the Corona pandemic, the war in Ukraine, and the high-interest rates, rising inflation, higher construction costs, etc.

Do you expect changes in your needs of premises? 29% expect to move within the coming years, which is in line with the responses from the surveys of recent years. This also supports the notion that the rental market is operating reasonably, and although a slightly higher vacancy rate is expected, there is still activity in rental transactions around the country.

Reasons for changing needs in premises It continues to be a need for more space, rather than too much space, that is the primary reason for the need to move. This is likely a consequence of Danish companies generally performing well and a highly employed labor market. Compared to last year, there hasn’t been a sig-

nificant change in the reasons for premises needs. Most notably, there has been an increase in the current premises not having the right profile for the company, and that the company is looking for something more exclusive.

Moving plans Where would you like to move to?

What is most important to you when choosing premises? The price/rent, transportation time, and profile continue to be the highest priorities when choosing premises. 9% respond sustainability and 19% respond energy costs, which is surprising given the general focus in the market.

We expect the upcoming tightening of ESG legislation, especially for larger companies and financial institutions, will impact the choice of premises. Therefore, we recommend that all property owners start looking into ESG and the opportunities to improve their properties.

Sustainability Do you or your company have a policy that sustainability should play a role when choosing premises? More than 80% of the respondents do not have a policy that sustainability should play a role when choosing premises. However, 28% are considering it. Compared to last year, there has been no significant development.

Does sustainability play a role for you in your current investment strategy? Sustainability has gradually become a common topic in the real estate industry, so it may be somewhat surprising that there has been a decrease from 28% to 22% of respondents who say that sustainability plays a role for ideological and economic reasons. At the same time, respectively, 11% and 20% answered yes to sustainability playing a role in their current investment strategy for one reason or another.

However, there has also been a slight increase in the percentage of respondents who are still not considering sustainability. In total, 47% respond that sustainability does not play a role in their current investment strategy, either because it is not economically viable or because it is not part of their considerations.

Have you considered optimizing your property(properties) in terms of sustainability? The majority of respondents answer that they have either already optimized one or more of their properties in terms of sustainability or that they are considering it. 35% respond that they have already optimized one or more properties regarding sustainability.

Are you willing to pay more for a sustainable property where location, condition, and cash flow are the same?

Sustainability

To what extent do you believe tenants are willing to pay more for sustainable leases in … Office properties differ from the other three types of properties. A full 73% of respondents expect that tenants are willing to pay more for sustainable office leases. This can especially be attributed to the fact that companies are

aware that it can affect their reputation if they do not address sustainability. More and more companies are starting with ESG reporting, and here, sustainable offices play a role in the overall assessment.

Sustainability To what extent do you believe that future property tax or other property-related fees will be influenced by the property’s sustainability, including, for example, the type of energy label? There is a strong belief that the property’s sustainability will influence property tax or other property-related fees in the future, as 91% of respondents believe this to a lesser, some, or greater extent. In 2024, we will have much more knowledge about its effects on individual property types and geographies in both positive and negative directions.

Willingness to pay more for a sustainable property in relation to Company Size It is pretty clear that the size of the company and the willingness to pay more for sustainability are closely embedded. 46% of respondents in a company with 1-25 employees answer that they believe sustainability does not affect

the price, while the answer is only 23% in companies with more than 100 employees. The most significant difference is found in ’Yes, 5-10%’, where 15% of respondents in a company with 1-25 employees say they are willing to pay more for a sustainable property, while 36% of respondents in companies with more than 100 employees answer the same.

Background of the survey For the ninth year, EDC Poul Erik Bech has conducted a comprehensive market survey, which sums up expectations for the commercial real estate market in the coming year. This year, the survey was conducted among over 1,600 investors, tenants, and companies.

The respondents come from professional investment companies, law offices, bank branches, logistics companies, retail stores, etc. An investor is defined as someone who invests in properties to get a return on the investment and not use it by themselves.

Since 2015, we at EDC Poul Erik Bech have conducted a survey on the expectations for the commercial real estate market for the coming year. The 2024 expectations survey is thus the ninth in the series, and once again, we are pleased that so many have chosen to respond to the survey. More than 1,600 investors, tenants, and companies completed the survey this year.

The survey is not an expression of EDC Poul Erik Bech’s own opinion on the market but the respondents’ expectations for the market. To some extent, we have continuously commented on the survey results with our views on the development.

9 years of a similar survey thus provide the opportunity to compare this year’s conclusions with responses from previous surveys, especially on answers where it makes sense. Sustainability has become a significant theme in the real estate industry, and therefore, you can find a separate section on respondents’ expectations for sustainability on pages 24-28 of the report. It is the fourth consecutive year that sustainability has been included in the survey.

In some of the questions, it has been possible to choose several answer options. Therefore, all graphs and diagrams do not add up to 100%.

The responses were collected from September 6 to October 8, 2023. Responses were gathered through EDC Poul Erik Bech’s extensive database of Danish companies, investors, and tenants. Additionally, during the collection period, we had social media campaigns targeting business people with executive profiles and individuals with interests and/or professional profiles in real estate investment.

Follow the development of the commercial real estate market in your local area Are you curious about how the commercial real estate market is developing locally, or are you looking for concrete data on vacancy rates, rent levels, yield requirements, or demographic conditions in relation to a construction project or your next real estate investment?

CityFact

CityFact collects all relevant market data into one analysis product distributed across 20 geographical areas. Choose the areas that interest you, and we will keep you informed about the developments in the area.

Follow the development on www.edc.dk/cityfact or scan here

Improve your decisions As an investor, it is crucial to approach an investment objectively. With analyses from EDC Poul Erik Bech, we provide you with the opportunity to do just that by ensuring that your investment is based on a solid data foundation. EDC Poul Erik Bech Research offers area-specific analyses for the entire country that can be tailored to your specific needs. Additionally, we provide in-depth analyses of population trends, housing supply, transaction volume, and more, which can help you as an investor to make the right decisions based on a solid knowledge foundation. If you have questions, you are more than welcome to contact us:

Joseph Alberti Head of Research

Niclas Holm Senior Research Analyst

joal@edc.dk +45 5858 7467

niho@edc.dk +45 5858 8784

2023 DIN BY

CITYFACT

2023

DANSK VERSION

Find all previous editions of Market Update and other EDC publications here:

edc.dk/erhverv/magasiner

›

CONTACT EDC Poul Erik Bech Zealand/Funen Copenhagen Herlev Taastrup Hillerød Roskilde Køge Næstved Slagelse Odense

+45 5858 8378 +45 5858 8376 +45 5858 8472 +45 5858 8377 +45 5858 8395 +45 5858 8379 +45 5858 8380 +45 5858 8396 +45 5858 8397

Jutland Kolding Aabenraa Sønderborg Esbjerg Vejle Aarhus Silkeborg Herning Viborg Aalborg Vendsyssel

+45 5858 8399 +45 5858 8425 +45 5858 8422 +45 5858 8398 +45 5858 8423 +45 5858 8670 +45 5858 8427 +45 5858 8567 +45 5858 8424 +45 5858 8449 +45 5858 8487

International +45 5858 8563 Research +45 5858 8564 Agriculture +45 5858 8574 Project +45 5858 8487 Capital Markets +45 5858 8572

Be the first to know when new properties come up for sale We have Denmark’s largest buyer/tenant register. If you haven’t found the right property yet, let us help you! Create your personal wish in our nationwide buyer/tenant register, and be the first to know when new properties come up for sale. We screen all properties for you and only show you the properties that match your wishes.

International Poul Erik Bech International associate 32