Real estate titans are looking for clues in Cannes for the market's comeback.

The global real estate industry is searching for reasons to be optimistic during its largest downturn in the last decade, with developers and investors discussing the prospects for recovery - just not right now. This week, the MIPIM real estate conference is taking place in Cannes on the French Riviera against the backdrop of falling commercial real estate (CRE) prices, and developers are contemplating what to do with offices that have been vacated due to the pandemic.

An expected 20,000 investors, developers, and agents have started to arrive, with delegates gathering around miniature models of planned developments and meeting clients on yachts chartered by the company. Many are busy discussing market implications, while others are trying to close deals. Several of the largest real estate investors, including American giants LaSalle, Greystar, Hines, and Federated Hermes, as well as France's AEW and Germany's Patrizia, told Reuters that they are seeing the first signs of a revival in deals.

But some also expressed a note of caution. "There is a lot of hot air along the Croisette," said Philippe La Pierre, head of the European division of LaSalle Investment Management, referring to the beach promenade in Cannes. "So you'll have to navigate it very carefully."

The rise in borrowed funds and empty offices has led to many real estate investments becoming unprofitable, although sectors like data centers and logistics are holding up much better. In the fourth quarter of 2023, European commercial property values fell by 13.9% compared to the previous year, marking the largest decline since the global financial crisis of 2009, according to MSCI Real Assets data. La Pierre believes that 30% of European office spaces are likely outdated. Prices in American cities have also dropped significantly, as vacancy rates in places like San Francisco and Los Angeles approach 30%. Instead of realizing losses, investors are sitting on the sidelines.

Commercial real estate transactions in Europe more than halved to 166 billion euros ($181 billion) in 2023, and it was the worst year for office sales ever, said MSCI, which has been collecting data since 2007.

Despite this, some investors believe that a turnaround is near if central banks start lowering interest rates, reducing companies' debt obligations. "Overall, there is a renewed sense of confidence and enthusiasm about the upcoming year," said James Seppala, head of real estate in Europe for the world's largest commercial real estate owner, Blackstone, ahead of the event. "We have been active in recent months and will continue to be active," he added.

A major test for the improving mood will be MIPIM itself. Investors and real estate agents have been noting deals at the annual fair since 1990, but there were few last year. "The worst market is no longer unsellable," said José Pellicer, head of investment strategy at M&G Real Estate.

Europe has been the least affected by clear signs of financial distress in the real estate sector compared to the US and China, but sharp sell-offs have occurred among credit-exposed banks in Germany and Sweden.

So far, banks have not been affected. Major banks have remained relatively unscathed for now. According to Morgan Stanley, large European banks have reduced lending for commercial real estate. This could put lighter alternative lenders, such as asset managers and insurers, in a more vulnerable position. According to the Bayes Business School, they already account for about 20-30% of commercial real estate loans in Europe. Whether the decline in office prices will expand into a broader crisis will partly depend on whether banks and developers can avoid losses until borrowing rates decrease or demand returns.

Some lenders are once again employing the "extend and pretend" tactic on defaulted loans, a popular strategy after the financial crisis of 2007-09, to avoid selling properties. "You extend and pretend simply because even if you were to foreclose, you probably wouldn't be able to sell the asset in the current market," said Mathew Crowther, managing director at PGIM Real Estate, to investors ahead of MIPIM. Property prices may be closer to the bottom in markets like the UK, where prices have adjusted more quickly, but further declines are expected, such as in Germany.

Rob Wilkinson, CEO of French investor AEW, expects office prices in Germany to fall an additional 10% in the first half of this year. "Last year was one of the hardest years to raise capital," said Selena Olsson, director of real estate client solutions at Federated Hermes in Cannes. But she said investor interest is returning, especially from West Asia and Asia-Pacific. "I have more hope than last year."