Recovery will be slow. Datacentres and logistics the best assets

The headwinds affecting the commercial real estate market are likely to result in a substantially slower recovery than that observed after the global financial crisis. However, the market is entering a phase with numerous opportunities for those with the capital, patience, agility and expertise to provide financial solutions to both lenders and borrowers. "From a sector perspective, we believe investors should focus on assets with high penetration of digitisation and decarbonisation, targeting sectors such as data centres and logistics." These are the conclusions of "Facing the music", Pmico's latest outlook on commercial real estate.

As a $1.5 trillion wall of loan maturities will come down worldwide in the next two years, the implications will be profound. In an environment of high interest rates, financing costs and cap rates will remain challenging. Lenders and borrowers will be forced to 'face the music' (facing the music): 'in the near term,' Pimco analysts explain, 'we anticipate further declines in appraised valuations and price indices, making loan extensions even more difficult to rationalise'.

There is also a geopolitical risk. Conflicts in Ukraine and the Middle East, tensions between the US and China and this year's important elections create further uncertainty. Added to this are growing concerns about climate change, which directly affect investment and real estate development.

The outlook is a synthesis of listening to more than 300 investment professionals who manage nearly $190 billion in assets across a broad spectrum of risk profiles in the global public and private equity and real estate debt markets.

The boom in artificial intelligence has triggered a global race towards data centres and the green energy to power them, and has also introduced large risks for commercial real estate. In the long term, artificial intelligence could reduce the need for office space, decrease demand for student housing, lower urban population density, and make long-term leases and secondary locations less attractive.In the coming years, data centres will play a key role in investors' portfolios. They are critical infrastructures that offer investors a way to benefit from the growth of AI as AI platform providers without having to bet on the technology's ultimate winners.