(Bloomberg) -- The deep freeze that’s gripped Europe’s real estate markets since borrowing costs jumped worsened at the start of the year as deals plunged to their lowest levels since 2011. 

The first-quarter total of €34.5 billion ($37 billion) was down 26% compared with already subdued levels a year earlier, according to data compiled by MSCI Real Assets. That marked a seventh straight quarterly decline as uncertainty about the timing of interest rate cuts continues to drive a wedge between buyers’ and sellers’ price expectations.

Office properties — the largest part of the commercial real estate market — led the declines in the first quarter, with volumes down 45%. The figures for Paris were particularly bleak. It recorded its worst ever quarter for offices sales, with just eight deals for a combined value of less than €500 million, the data show.

Higher interest rates have caused a sharp correction in European real estate, exacerbated by shifting working patterns and growing environmental demands that are weighing particularly hard on older office buildings. But with rates expected to come down within months now that inflation is cooling, many would-be sellers are holding on in the hope that prices start to recover soon. 

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“After a very slow 2023, there were hopes that European property investment would start to pick up in the first quarter of 2024,” said Tom Leahy, MSCI head of real assets research. “But the continued and sometimes painful readjustment to the end of historically low interest rates means the market remains a difficult place in which to transact.”

While most sellers clung to their backward looking book values and resisted price cuts, some had no choice due to maturing loans or fund expiries. That gradually created enough transactional evidence to force values lower, raising expectations that the market would soon find a floor and volumes might start to rise. 

But uncertainty about the timing of rate cuts has prolonged the mismatched expectations, with some vendors now more confident that prices will bounce back even as bids continue to reflect elevated borrowing costs. MSCI modeling found there’s still a 20% gap between asking prices for London offices and the values completed deals have achieved. 

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