For the past three or four years, collapsing real estate investment volumes have grabbed the headlines. But it is the collapse in new development that is set to define the sector for the next few years, according to one of the world’s largest property companies. 

After a period in which it was doing a lot more buying than building, $92B global real estate giant Hines is shifting toward development as the best way to make a profit in the current market. 

“Investors will go into a particular part of the cycle thinking that their capital needs a return — and I think development is going to generate a very attractive return going forward,” Hines Managing Partner and co-Head of Investment Management Alfonso Munk told Bisnow in an interview. 

Development in multiple sectors is now starting to make financial sense, Munk said, and Hines is looking to get building on assets in sectors and locations where a “scarcity advantage” has emerged over the past few years. 

There are some sectors where development continued to barrel along — California industrial and Sun Belt multifamily, for instance — but it is hard to overstate just how comprehensively new real estate development has dropped off around the world. 

U.S. industrial development is down generally by 60% since its 2022 peak, according to data from Cushman & Wakefield. London office development has halved since 2023, Deloitte’s annual Crane Survey showed. In Europe, investment into multifamily development has fallen 20% in three years from an already low base, JLL showed. European residential construction is at a 20-year low, the brokerage said. 

The list of such stats is nearly endless. A dramatic uptick in the cost of materials and labor since 2022 drove up the cost of development around the world. Inflation, which hadn’t been a factor in most major economies for decades, led to a spike in interest rates, which drove up the cost of finance for developers that borrowed to build, Munk added. 

For the past few years, rents did not keep pace with the rising cost of construction and money; thus, development became unviable. New construction plummeted. 

But that is now beginning to change, Munk said. The cost of finance has stabilized. While base rates remain elevated in countries like the U.S. and UK, the interest rate margins being offered by lenders are low by historic standards because of competition between a growing number of debt providers. And those lenders are getting comfortable with development again. 

At the same time, development cost growth has slowed, even if prices are unlikely to fall, Munk said. In spite of the prolonged war in Iran, the fact that China’s pivot to renewable energy has reduced its dependence on fossil fuels means the price of oil has not risen as much as feared. 

But most importantly, the immutable law of supply and demand means that in markets where supply has been suppressed and demand has remained constant, rents have started to increase — first for the very best properties, then for the next tier down as occupiers upgrade out of older, obsolete buildings. 

The trend of occupiers upgrading is most visible in office buildings in the central business districts of cities like London, New York and Paris, but it is equally prevalent in sectors like industrial.

“After two and a half to three years, income is beginning to catch up,” Munk said. “So the rents that you get are now justifying conversions, redevelopments, ground-up development and the creation of new products.”

Multifamily rents have risen by an average of 5% on a Europe-wide basis, data from JLL showed. After years in the doldrums, retail is experiencing a renaissance, with rents jumping by about 5% last year in UK retail parks and about 3% last year in U.S. grocery-anchored retail, according to CBRE. 

Munk said Hines is now looking to build in markets where it sees a “scarcity advantage” — a combination of historic low supply, consistent demand and a reset in land or asset prices that allows it to buy at a basis that makes development profitable again. 

He said its favored themes are residential development, particularly in Europe, where supply and demand are particularly out of kilter, with Nordic countries like Sweden looking particularly attractive. 

Industrial is also on the agenda, given the amount of obsolete assets that require improvements and the continued demand driver of e-commerce and manufacturing. 

Data centers, of course, are also in the mix, but Hines is taking the route of buying land and securing power and planning permission for them rather than building the digital infrastructure itself. That gives it the opportunity to profit from its development skill set while keeping risk in check, Munk said. 

But there are opportunities for development in many different sectors. A recent Hines research paper concluded that execution capability will be a more important factor for generating returns in the current market than in the last cycle.

Hines' recent deals that highlight the push for more development include the purchase of four residential development sites capable of accommodating 1,000 housing units in Prince William County near Washington, D.C., and the purchase of a 30K SF office building in central Paris, which it will redevelop.

Development is a long-term business, Munk said, and by the time rents have risen to a point where development is viable, the opportunity to make a profit may well be gone — others will have spotted the opportunity and moved first. In that sense, there is a certain element of hitting go before the picture is truly clear, but having teams in 30 countries backed by a large research capability gives the company conviction, he said. 

"It's an art, honestly, because that's where you also make mistakes. You anticipate something that is going to happen, it doesn’t,” he said.

“But right now, we're seeing those development profits pencil, or about to pencil. It’s a really good entry point.”