Overheated describes a market condition in which prices and demand increase rapidly to levels that are no longer supported by underlying economic fundamentals.
In its latest market assessment, the IPEC Group identifies certain industrial and logistics segments in the CEE Region as overheated, as acquisition prices have risen faster than sustainable rental growth and tenant demand.
Context
An overheated market describes a situation where demand for real estate – particularly industrial and logistics assets – significantly exceeds available supply. This imbalance results in sharply rising acquisition prices, compressed capitalization rates, and increasingly speculative market behavior. Such conditions are typically not supported by fundamentals such as sustainable rental growth, real tenant absorption, occupancy stability, or long-term cost-of-capital assumptions.
Typical Market Characteristics:
• Price Expansion: Rapid increases in asset values that exceed inflation, wage growth, and long-term historical averages.
• Supply-Demand Disparity: Strong investor demand and accelerated development activity while tenant absorption lags behind new supply.
• Cap Rate Compression: Capitalization rates decline to historically low levels as investors accept lower yields amid heightened competition.
• Financing Environment: Favorable debt conditions and abundant liquidity encourage leverage and speculative underwriting.
• Oversupply: Elevated development activity leads to excess inventory, putting downward pressure on rents and occupancy rates over time.
Investment Implications:
In an overheated market, acquisition discipline becomes critical. Buyers should avoid overpaying based on momentum-driven enthusiasm, ensure acquisitions meet strict underwriting criteria independent of market sentiment, and maintain conservative leverage ratios to withstand potential corrections. Properties with long-term, credit-worthy tenants and below-market rents offer relative safety, while speculative development or newly delivered space carries elevated risk.