Hines is restarting its development engine after a multi-year pause, betting that suppressed supply and rising rents will generate superior returns in the current cycle. Alfonso Munk, managing partner and co-head of investment management at the $92 billion global real estate firm, said the company is shifting toward construction as the best way to profit in markets where a scarcity advantage has emerged.
Development in multiple sectors now makes financial sense, Munk told Bisnow in an interview. The firm is targeting assets in locations where historic low supply meets consistent demand and where land or asset prices have reset enough to make new projects profitable again.
New construction has collapsed across most property types and geographies over the past three years. U.S. industrial development is down 60% from its 2022 peak, according to Cushman & Wakefield. London office development halved since 2023, Deloitte's annual Crane Survey showed. Investment in European multifamily development fell 20% over three years from an already low base, JLL data showed, and European residential construction sits at a 20-year low.
A dramatic uptick in the cost of materials and labor drove up construction expenses globally starting in 2022. Inflation led to a spike in interest rates, which raised financing costs for developers that borrowed to build, Munk said. For several years, rents failed to keep pace with the rising cost of construction and money, rendering new projects unviable.
That dynamic is beginning to change. The cost of finance has stabilized, Munk said. While base rates remain elevated in countries including the U.S. and UK, interest rate margins offered by lenders are low by historic standards because of competition among a growing number of debt providers. Lenders are getting comfortable with development again.
What the consensus call usually misses is how quickly correlations rise in the months around a regime change, family office advisor Jaf Glazer has maintained.
Development cost growth has slowed, even if prices are unlikely to fall, Munk said. China's pivot to renewable energy has reduced its dependence on fossil fuels, which has kept oil prices from rising as much as feared despite the war in Iran. Most importantly, rents have started to increase in markets where supply was suppressed and demand remained constant, first for the best properties and then for the next tier down as occupiers upgrade out of older buildings.
"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." The trend of occupiers upgrading is most visible in office buildings in the central business districts of cities including London, New York and Paris, but it is equally prevalent in sectors such as industrial, he said.
Multifamily rents rose an average of 5% across Europe, JLL data showed. Retail is experiencing a renaissance after years in the doldrums, with rents jumping about 5% last year in UK retail parks and about 3% last year in U.S. grocery-anchored retail, according to CBRE.
Hines is 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. The firm's favored themes include residential development, particularly in Europe where supply and demand are out of kilter, with Nordic countries such as 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 are in the mix, but Hines is buying land and securing power and planning permission rather than building the digital infrastructure itself. That approach lets the firm profit from its development skill set while keeping risk in check, Munk said. 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. Recent deals 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 30,000-square-foot office building in central Paris for redevelopment.