What Real Estate Finance trends are we seeing in 2023 and what can we expect going forwards?

Now that we are entering Q4 of 2023 we reflect on the common REF trends we are seeing in the UK, Europe and the US. We consider what common trends the rest of 2023 may bring.

Deal volume

The first half of 2023 undoubtedly saw fewer real estate finance transactions compared to the previous year. In the US, it is estimated that commercial real estate investment volume has fallen by as much as 57% year over year.1 In a recent press release BNP Paribas Real Estate has forecast that investment in UK commercial property will fall to £41bn for 2023 due to successive base rate hikes. With rising interest rates increasing the cost of borrowing, and inflation leading to higher construction costs, many borrowers held off from taking on new finance. Equally, falling property values and economic uncertainty made lenders cautious.

Many borrowers have turned to mezzanine debt to plug funding gaps. Mezzanine debt is not typically secured by real estate assets, and is therefore ideal for borrowers who have existing charges over such assets. Similarly, preferred equity funds are rapidly forming to provide bespoke solutions to ease the debt market strain on borrower capital stacks.

The picture across the US, Europe and the UK has been similar in terms of repressed deal volumes. In Germany, for example, the deal volume for real estate transactions has decreased significantly. Compared to the previous year, it has decreased by more than half to the level of 2012. This and rising interest rates have led to an unusually high number of insolvencies among project developers. Given this backdrop, banks are currently hesitant to provide new financing.

The remainder of 2023 promises to bring more real estate finance transactions. Borrowers cannot continually postpone development plans, refinances will be looming, and lenders have a build-up of capital to deploy. It seems a correction of the market is inevitable, possibly in 2023 and continuing into 2024, which will undoubtedly bring opportunities for some.BNP Paribas Real Estate forecasts that investment in UK commercial property will bounce back by 15 % in 2024 to hit the £47bn mark, as interest rates are expected to drop in Q2 of next year.

Asset classes

In the first half of 2023 certain asset classes attracted more investor attention than others. With the increasingly digitalized nature of society, there has been a concomitant rise in demand for data centres. The growth of AI will inevitably increase the amount of data which is transferred and stored every day.

The hotel industry is showing signs of a strong recovery, for example it is reported that transaction activity in this sector was near 4.1 billion euros in Europe for Q1 2023.3 While the US hotel industry continues to lead in cap rate trends relative to other major US asset classes, luxury assets and extended-stay hotels are the segments currently yielding the most favourable returns.4

Real estate investment within the US life sciences sector is equally strong, with investment having increased in 2022 by 86.1% globally as compared to 2010.5

However, demand for office space remains muted. Research suggests that in the UK, office occupancy rates are at just 35.9%6, with this trend being reflected across the globe. Investors remain cautious about investing in office space. Notably, legislation has been passed in the UK and in various US states to make office to residential conversions easier. However, the high cost of conversions means that demand to acquire office space remains low.

Due to climbing construction costs and interest rates, both Germany and the UK are seeing a decrease in the volume of residential construction. As there is a significant shortage of rental properties, especially in major cities, it is expected that, following a consolidation of construction prices, lending and construction activity in the residential sector will increase next year or the year after.


The remainder of 2023 is likely to demonstrate a continued increase in ESG-linked investment. With the real estate industry being responsible for approximately 40% of annual global CO2 emissions6, it is undeniable that sustainability should be prioritised. The introduction of the EU Sustainable Finance Disclosure Regulation in 2021, and the forthcoming Sustainability Disclosure Requirements expected in Q4 in the UK are examples of this commitment to a greener lending landscape. Both measures aim to promote the transparency of ESG measures, reducing greenwashing and enabling investors to have greater clarity over the sustainability of their assets.

In the US, tax incentives relating to the installation of renewable energy systems are also signs of an increased interest in ESG. August 16 2023 was the first anniversary of the Inflation Reduction Act, which has resulted in 80+ new or expanded electric (EV) component or assembly plants, and solar energy investments generating solar power for 12 million additional homes.7

The focus on ESG has started to filter through into UK lending terms. Typical provisions include margin ratchets linked to ESG targets which are measured by ratings such as BREEAM. The BREEAM Refurbishment and Fit Out rating involves meeting criteria in relation to reduction of carbon emissions, design durability, biodiversity protection and more.

The same also applies to Germany and the EU in general. Especially in relation to refurbishment of buildings and new developments, the focus of bank financing is on the reduction of carbon emissions, replacement of heating systems and sustainability certifications as well as taxonomy compliance. A combination of bank financing and government subsidies is not uncommon.

Moving forwards

We expect the final quarter of 2023 and next year to bring more real estate finance transactions, with a continued increase in focus on ESG. Data centres, hotels, and life sciences will continue to be the key industries to watch for potential sustained growth.  However, as low-cost debt continues to mature in a high interest rate environment, we expect to see a rise in strategic defaults in ageing office buildings and other asset classes experiencing similar decreases in occupancy rates.



Authored by Paula Inglis, Sabine Reimann, Josh  Savage, Stella Bliss, Ingrid Stables, and May Burke.

1  https://architecture2030.org/why-the-building-sector/
7 Real Estate Market Update: Summer 2023  | Houlihan Lokey


This website is operated by Hogan Lovells International LLP, whose registered office is at Atlantic House, Holborn Viaduct, London, EC1A 2FG. For further details of Hogan Lovells International LLP and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2024 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.