The transaction market: Commercial real estate

This summer, we're talking to various industry profiles to take the pulse of the business world. First up is Andreas Dall Frøseth, transaction advisor at DNB Næringsmegling.

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The transaction market for commercial properties fell by almost 50% in 2023, how do you think it will develop in 2024 and 2025?

The transaction volume last year was down 67% from the peak year of 2021, but we believe that the bottom has passed. At the time of writing, we have registered transactions for approximately NOK 37 billion, which is far ahead of last year. When we look at the transactions that have been completed, it is the upper part of the market that has taken off. We have registered 11 billion transactions so far this year, which is on a par with the record year 2021 at the same time. Transactions with property values of more than SEK 1 billion account for more than 70% of the transaction volume so far this year. In comparison, the proportion has averaged around 40% over the past five years. The number of transactions is still far behind the best years.

We expect an increase in activity in the market throughout the year and next year. There are a number of players who have capital and a desire to make purchases. However, we do not expect to reach the same level as when the key interest rate was 0% any time soon.

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Are there any cities that have a distinctly positive development so far in 2024?

The biggest increase has been in Trondheim, but this is entirely due to EC Dahl's purchase of Entra's properties in the city for just under NOK 6.5 billion. The clear tendency in the market so far this year is that "flight to safety" is driving capital to Greater Oslo. Despite the aforementioned sale of Entra, 57% of the purchases have involved Oslo properties if measured in NOK.

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Which segments have seen the most activity so far?

Office is the largest segment, as it usually is. This would also be the case if you disregard the Entratransaction, which is by far the largest of the year. In other words, unlike many other countries, we're not experiencing any great fear of home offices in Norway. This is also reflected in a strong rental market, where in Trondheim in particular we are experiencing good interest in the rental mandates we have, and that there is low vacancy in the city. After offices, warehousing and logistics is the second largest segment, as it has been in recent years.

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The syndicate market halved in 2023, how do you think this will develop in the future?

Syndicates account for just under a third of purchases. This is a few percentage points below the peak years, but they still constitute a significant buyer group. What we have seen is a major shift towards a large proportion of syndicates now consisting of club deals with few professional players on the ownership side. We will probably continue to see this type of set-up in the future, while syndicates with a large number of owners are few and far between at the moment. This is probably related to the current financing market, where syndicates with dispersed ownership often achieve poorer terms, making it difficult to deliver good enough returns to investors.

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DNB Næringsmegling is a leading player in sustainable property management, how do you feel the focus on sustainability has developed in recent years?

We find that professional investors are more aware of sustainability strategies and, as a result, have a clear understanding of investment needs related to improving the environmental profile of properties - this also applies to local players. There is also an increased focus in the transactions that are carried out, which is partly linked to stricter requirements for energy labeling in connection with the financing of new purchases. However, there are still players who do not have sustainability at the top of their agenda, and we believe that in the long term this may trigger some transactions, as current owners are unable or unwilling to implement the necessary environmental measures and thus choose to sell the property.

If we look at the rental market, tenants are often very aggressive in their statements and surveys, but the willingness to pay for environmentally friendly solutions is still perceived to be moderate.

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Which value drivers will be key for property owners to focus on in the years to come?

We believe there are several drivers that property owners should focus on in the years ahead. One thing that stands out is making effective investments in environmental profile. In other words, thinking about energy classes and certification when you first have to make investments. We are coming from many years of low and falling interest rates, where solid returns were often achieved by simply owning the properties while yield requirements fell. The coming years will demand more from investors. There is probably also a lot to be gained from good management for many, as we see that the less professional property owners are not necessarily as good at ensuring that they have updated lease contract templates, additional agreements for extensions, etc. In addition, it is important to have good management of the operation of the property so that you are attractive to tenants in terms of the total cost of a lease.

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What is your best tip for completing a successful transaction?

I believe that preparation is the key to a successful transaction. Marketing and finding the right buyer is one thing, but we have recently experienced that the due diligence phases of transactions are becoming longer and more comprehensive. To ensure that these are as concrete and effective as possible, sellers should spend the time prior to selling a property reviewing the documentation that is often the subject of due diligence to ensure that everything is in order. When you have made such preparations, you also minimize the chance that there will be renegotiations or that the seller will withdraw as a result of findings in DD. Using the right data room solutions (e.g. ENVE) to ensure efficient document processing is also important to ensure a good and safe DD process.

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The South or Norway?

The South, more specifically Croatia 🏖️️

Hiking or boating?

Boat trip 🚤

Shellfish or barbecue?

This one is a little more tricky, but good barbecue food is rarely wrong 🌽