EMERGING TRENDS IN REAL ESTATE - 2021 GLOBAL OUTLOOK - PWC
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2021 Global outlook
EMERGING TRENDS
IN REAL ESTATE
®
Front cover image: Cycling in the city, Japan (Getty Images) Image: People social distancing at a park, US (Getty Images)
Contents
2 Executive
summary
4 On the road
to recovery
26 Dealing with
decarbonisation
40 Sponsoring
organisations
Do I believe that the office is
dead? No. Do I believe that
most firms will be back in the
office that they occupied prior
to the pandemic? I do. I do
41 Interview
participants
think, though, that there will be
some downward pressure on the
amount of space they need.
US investment manager,
Global Emerging Trends in Real Estate 2021
Emerging Trends in Real Estate® Global Outlook 2021 1
Executive summary
“The shape of things to come depends on harnessing the More than a year after the outbreak of
virus spread and the effectiveness of the policy response. COVID-19, the real estate industry is
Whilst we hope that we are through the worst, we’re not still getting to grips with the daunting
twin challenge of a cyclical downturn
out of the woods yet.”
juxtaposed with the long-term
consequences from the disruption to the
European CIO,
Global Emerging Trends in Real Estate 2021 way people live and work.
Regional and sectoral variations to the
impact on real estate are inevitable.
But there is nonetheless a clear global
narrative of COVID-19 as an accelerator
of existing trends such as digitalisation,
dispersed working and online shopping
while hugely reinforcing the industry’s
environmental, social and governance
(ESG) agenda.
The industry leaders canvassed for
Global Emerging Trends are hopeful of
a consumer-spending-led economic
recovery feeding through into an uptick
in real estate business in the second half
of 2021. But much will depend on the
rollout of the vaccine and an easing of
lockdown restrictions.
Against that caveat, the consensus
view is that Asia Pacific is leading the
recovery, partly because the region’s
major economies went into the pandemic
in better shape, relative to most Western
economies. They are also deemed to have
managed the crisis with more of a sure
touch so far, which is a key factor in global
investors increasing their allocations of
capital to the region.
There is also broad acknowledgement
that the unprecedented levels of fiscal and
monetary stimulus supporting the global
economy come with their own threats to
market volatility. The emergence of stock
market bubbles and renewed inflationary
pressure in the US and Europe are much
bigger concerns for real estate leaders
today than during the regional Emerging
Trends research last year.
Image: Empty riverwalk during COVID-19 pandemic, Chicago, US (Getty Images)
2 Emerging Trends in Real Estate® Global Outlook 2021
Despite the risk of greater volatility, Europe see investing in housing — social, Though decarbonisation and climate
the extraordinarily loose monetary affordable and private rented — as change have been rising up the agenda
environment is keeping interest rates low fulfilling a basic need in society and for years, it is only in the past 18 months
for the time being and accordingly making as such very much part of their ESG that these issues have moved to the
the yield spread for real estate over agenda. Interviewees in all three regions foreground of the industry’s thinking.
other asset classes hugely compelling also see overwhelmingly favourable So far, the pressure is coming from the
to investors. Most industry leaders supply-demand dynamics, which make providers of finance and the biggest
interviewed for this report believe the housing a prudent defensive play for the tenants. There is, though, the expectation
inherent attraction of real estate income foreseeable future. that governments will ramp up regulation
is even stronger this year than in pre- in the coming years.
COVID times. The outlook for the office sector is
altogether more difficult to predict, More companies than ever before
By contrast, lenders are expected to given that sentiment here is influenced are putting in place strategies with
adopt a far more cautious approach to by such varied forces for change: the decarbonisation at the heart of the way
real estate this year and next compared rise of remote working, the increasing they do business, accepting the challenge
with equity investors — but also concern for the health and wellbeing of that will define the future of humanity while
compared with their approach to the employees and the eroded appeal of long managing downside risk and realising
asset class during the first lockdowns of commutes in big cities. profits along the way.
a year ago. While banks were generally
supportive of business at the outset — As the interviewees point out, these issues The sense of urgency here is long
invariably at the behest of governments do not resonate so much in Asia Pacific. overdue. Real estate is in its infancy when
and central banks — industry leaders But in North America and Europe they will it comes to decarbonisation, and even
attest to tougher lending criteria since the have a negative impact on leasing activity now many people are still ignoring the
second lockdowns in the autumn. There this year and next as large occupiers far-reaching consequences of carbon
is a wide expectation that distressed delay corporate decisions or commit to a emissions from buildings. The interviews
debt will increase once the government greater reliance on remote working. Yet indicate a big knowledge gap still — not
support packages end although it is many interviewees believe that companies enough data are being collected on how
considered unlikely to match the levels and their employees will eventually much energy buildings use during both
of distress seen after the 2008 global want to return to the office albeit in more construction and operation.
financial crisis. of a “hybrid” working model than in pre-
COVID times. There remains a daunting amount
Given this pressure on occupier markets, of complexity in the development,
industry leaders already report “a In any event, the need for more flexible ownership and management of real
bifurcation in pricing” between in-favour space is inevitable. From an investor- estate, which makes coming up with
sectors like logistics that have provided perspective, therefore, industry leaders an effective strategy difficult even for
stable income during the pandemic and predict a polarisation between perceived the largest companies. Executing the
those sectors that have been hardest hit, high-quality buildings — modern and strategy is more difficult again, requiring
such as hospitality and parts of retail. adaptable — and outdated and inflexible developers, owners, occupiers and all
secondary stock that is likely to suffer other stakeholders that make up the real
Logistics has been a startling success from a marked decline in demand. estate value chain to work together with
across all three regions, driven by surging the same goals in mind.
e-commerce. Sustained investor demand It is clear from the interviews, however,
is widely expected to fuel further cap rate that the industry is looking beyond As the leaders we have interviewed
compression this year, and that divides occupancies and returns and is starting to conclude, if real estate is to play its part
opinion. For some it evokes the asset address its wider responsibilities. in reversing climate change then there will
bubble concerns in equities; for others it need to be some form of collective action
reflects a structural, long-term change. There is no better example of that — a far greater level of collaboration
than the work being undertaken around than the industry has seen before — to
Residential is also in favour for its the impact of carbon emissions from address the complexity of decarbonising
stable income but there are additional the built environment, which we explore the built environment.
attractions. Industry players in the US and further in Chapter 2.
Emerging Trends in Real Estate® Global Outlook 2021 3
Chapter 1
On the road to recovery
“We’re in an extraordinarily loose monetary policy environment that’s keeping
rates low; you can borrow at remarkable costs. So even though cap rates are
under pressure and low in some of the favoured sectors, you can get great
debt that helps offset that. But one of the risks out there is that the economic
recovery gets stalled somehow.”
Global investment manager,
Global Emerging Trends in Real Estate 2021
Image: Takeshita Street, Tokyo, Japan
(Getty Images)
4 Emerging Trends in Real Estate® Global Outlook 2021
More than a year after the “We’re not in the standard economic As a number of interviewees point out,
outbreak of COVID-19, cycle,” says one interviewee. “We’re in China and other parts of Asia have
something that was a health and social already seen retail sales boosted in
real estate leaders are still
crisis above all, secondarily economic recent months by “revenge spending”
coming to terms with the
and, so far, has not yet become a — now part of the lexicon of COVID-19.
enormity of the immediate financial system crisis. So, we can’t use Asian and Western economies
economic fallout from the the same language that we use in other are very different, but as one US
pandemic and the far-reaching circumstances. The sharpness, perhaps interviewee suggests, it is reasonable
consequences for how people the shortness of the downturn and the to anticipate something of the same
live, work and interact with the rebound, will be very different than what “exuberance” returning.
built environment. we have experienced previously.”
Summing up the pro-growth argument,
As all the leaders canvassed for this The International Monetary Fund a US player says: “Generally speaking,
Global edition of Emerging Trends (IMF) says the global economy shrank we’re expecting an economic recovery,
testify, COVID-19 as an accelerator by 4.4 percent in 2020 — the worst made possible by the vaccine and the
of such trends as working from decline since the Great Depression of confidence that that will bring. There are
home and online shopping has been the 1930s — but in January predicted vast amounts of savings — 25 percent
the main narrative for the industry global growth of 5.5 percent in 2021 savings rates in some countries, the
across the world. although the headline number masks US is at something close to 15 percent.
wide variation across countries, regions Some of that will stay in bank accounts,
At the same time, the health crisis and and sectors. but some of it will get spent and that will
the prolonged lockdowns are serving to stimulate economic growth.”
question some of the received wisdom There is broad agreement in real estate
around the built environment, not least circles that Asia Pacific is already Everyone, however, acknowledges
the previously accepted move towards leading the way, greatly helped by the the uncertainty that all assumptions
densification of the bigger cities of the assured management of the pandemic here rely on a successful rollout of the
US and Europe. More importantly, the in many countries across the region. vaccine in 2021. That prospect is in
pandemic has massively reinforced the At the forefront is China, which was itself “fraught with risk”, one interviewee
environmental, social and governance the only major economy to grow last observes. “We know that there are
(ESG) agenda. year. As interviewees acknowledge, variants circulating which might evade
this is a key reason behind increasing vaccines. The vaccine rollout itself is
These represent big, long-term allocations of capital to Asia Pacific — faster in certain countries than people
challenges to real estate, which like all another accelerating trend. “I would had assumed, but globally it’s slower
other industries is also trying to keep say that the region as a whole is likely than perhaps everyone had hoped.
business going in the here and now. At to outperform the rest of the world for And it could quite easily go in an
a simple level, the industry is hoping the foreseeable future,” says one global unexpectedly negative direction. Or,
for a boost to investment in the second investment manager. alternatively, other pandemics could
half of 2021 as the rollout of the vaccine emerge in the future. I think we all need
gathers pace around the world and Another widespread industry to be alive to that.”
economic output cranks up once again. expectation is that much of the
The problem is that this is a crisis like impetus for growth worldwide will
no other. come from the freeing up of personal
savings accrued over the past year —
essentially acting as a spur to renewed
consumer spending.
Emerging Trends in Real Estate® Global Outlook 2021 5
Chapter 1: On the road to recovery
The high cost of “In the US in particular, we have an “There will be lots of people who
asset pricing bubble that’s not in real discover that their job doesn’t come
economic stimulus estate per se — I don’t think we’re back when the economy recovers. In
leading this,” says a US investment that regard, recession and rebound
There are other serious concerns. manager. “But if you just look at the isn’t the right way to look at it because
Many of them revolve around the multiples of companies that trade in it assumes that you’re going back to
ramifications of the unprecedented level these different indices, I do think that the way it was before. That’s not what’s
of fiscal and monetary stimulus — as it there is a real risk of an asset pricing going to happen here.”
affects investment today but also what bubble resetting, and that would have a
happens when it finally ends? The IMF very material impact on real estate.” Governments are so focused on ending
estimates that direct fiscal support the pandemic there is something of a
for businesses, employees and the Last year, the property industry in many policy vacuum when it comes to the
unemployed during the pandemic now Western markets voiced its concerns mid-to-long-term recovery. Resetting
exceeds US$12 trillion. With quantitative about security of income given the non- the economy also means addressing
easing (QE) on top, governments and payment of commercial and residential structural disruption to the way we live
central banks have shelled out a total rents – in certain markets, government- and work, which in turn means wide-
of $24 trillion of stimulus to “put a floor approved non-payment of rents. As ranging consequences for how the
under the world economy”. lockdowns have continued, investors industry deals with real estate, from
and lenders are now also asking what new building regulations to changes in
One consequence is that the debt will happen to corporate occupiers once zoning flexibility for the repurposing of
total for governments, companies the government support stops? There is redundant assets. The interviews reveal
and households across the world has a feeling of inevitability that distressed an industry that is alive to the fact that
reached an all-time high of US$281 debt – real estate and corporate – will stimulus will need to be repaid, health
trillion, or more than 355 percent of increase at that point (see page 10). and wellbeing and ESG regulations
global GDP, according to the Institute And then there is the likely spike in will be tightened. But this comes at
of International Finance. job losses and subsequent negative considerable cost, and lead-times are
economic impact. significant for innovation to occur and
The alarm bells have started ringing changes to be implemented into supply
because the massive amounts of QE “What I worry about most as we lines. The vaccine alone will not take
have helped fuel the recent stock look into 2021 is the structural away the pain of impending reforms.
market peaks in the US, Japan, unemployment COVID has created,
Germany and France, raising unsettling not so much because of the recession
questions about a disconnect between but because it has dislocated a
corporate earnings and share prices. number of industries, particularly retail
and leisure,” says one global player.
There will be lots of people
who discover that their job
doesn’t come back when
the economy recovers.
In that regard, recession
and rebound isn’t the right
way to look at it because it
assumes that you’re going
back to the way it was
before. That’s not what’s
Image: Corso Venezia street during COVID-19 outbreak, Milan, Italy (Getty Images) going to happen here.
6 Emerging Trends in Real Estate® Global Outlook 2021
Real estate keeps Figure 1-1 Global real estate capital flows 2007–2020
attracting capital $bn
1100
With higher national debt burdens 1000
resulting from the stimulus and support 900
programmes, governments and central
banks are expected to maintain low 800
interest rates this year as they try to 700
keep the public finances stable. Against
that backdrop, they are likely to tolerate 600
higher rates of inflation, and already, 500
there are signs of inflationary pressure
400
in the US and the Eurozone as well as
fears that it could get out of control or 300
at least spark greater volatility in the
200
markets. As it stands now, the revised
inflation target for both the US and 100
Eurozone is 2 percent in 2021, a level at
0
which the industry believes real estate 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
can still produce acceptable returns.
EMEA Asia Pacific Americas
It is no surprise, therefore, that many Source: Real Capital Analytics
Volume YOY change
industry leaders across all regions are %
convinced that real estate will benefit 75
from a lower for even longer interest
50
rate environment. But even with the
possibility of a rise in rates next year 25
or beyond, they believe that the yield
0
spread over other asset classes
would still prove hugely persuasive -25
to investors. If anything, the inherent -50
attraction of real estate income appears
-75
stronger now than in pre-COVID times.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
There is “this tectonic shift of capital Global Capital Trends charts exclude development sites unless otherwise stated
that’s coming our way”, says one global
investment manager, adding: “What will Source: Real Capital Analytics
come out of this is that real estate will
be looked at not as an alternative but as
an essential investment component of According to another global player, the According to Real Capital Analytics
anyone’s portfolio because it’s got the pandemic has mixed up the cyclical and (RCA), global trading of income-
return along with an inflation hedge.” structural changes to real estate in such producing properties fell by as much as
a profound way as to challenge the 29 percent to US$759.4 billion in 2020,
That is a common view, but not established tenets around investment which was generally expected although
everyone is convinced that the weight of in a benign monetary environment. interestingly not as sharp a decline in
capital targeting real estate necessarily “Human behaviour changes, artificially volumes as in the 2008 Global Financial
precludes greater market volatility. low interest rates, incredible stimulus, Crisis (GFC). The figures also signal an
each one of them individually, and improvement in many markets by the
then collectively, is introducing a level year end as vaccination programmes
of volatility that I haven’t seen in my started in some countries, which
career. Honestly, I don’t know anyone reflects the cautious optimism for 2021
who knows where the thing is going, it’s among most interviewees for Global
so off the board.” Emerging Trends.
Emerging Trends in Real Estate® Global Outlook 2021 7
Chapter 1: On the road to recovery
Behind the headline numbers it is “I believe certain assets will create cap
clear that many investors are diverting rate compression. I don’t think it’s a
capital into residential, logistics and bubble because investors are being
I believe certain assets data centres — in other words, those more discerning around how they’re
will create cap rate sectors where the security of income is putting capital to work,” says another
widely judged to be robust. As another US interviewee. “But I also think you
compression. I don’t think long-established trend, the shift of have to have better information and
it’s a bubble because capital into “beds and sheds” has been be more knowledgeable. And that will
turbo-charged during the pandemic. be the big change in the future of real
investors are being more Logistics, in particular, accounted for estate because it’s been very opaque.”
discerning around how 21 percent of global market activity
they’re putting capital in 2020 compared with a long-term One global player, however, strikes a
average of 13 percent. And yet, strong note of caution: real estate investors
to work. as its income appears to be, a few and fund managers are “broadly
interviewees acknowledge that this is way too optimistic across the board”
one hot sector where there is “hesitancy although “it’s very hard to play
around pricing”. contrarian” when so much capital needs
to be deployed. “Transaction volumes
Opinion is mixed about whether the will recover, and risk will be back on,”
asset bubble in equities may yet this interviewee concludes. “But what’s
spread to real estate generally, not going to happen is, in five years from
least because the structural impact now, depending on what you bought
of the pandemic on such mainstream and what you paid for it, there’s going
sectors as offices and retail is expected to be a bigger dispersion in outcomes.
to result in lower values for poorer or There’s going to be big winners and big
outdated stock. losers coming out of it.”
“We see a real bifurcation between the Whatever their stance on pricing, the
in-favour sectors that are trading as if industry leaders agree on one thing
there wasn’t a recession and then the when it comes to the deployment of
out-of-favour sectors where the bid-ask capital: there is ultimately less margin
spread is so wide that assets aren’t for error this year than there was before
trading,” one US interviewee says. the outbreak of COVID-19.
Image: Shanghai Tower, Shanghai World Financial Center
and Jinmao Tower, Shanghai, China (Getty Images)
8 Emerging Trends in Real Estate® Global Outlook 2021Real estate’s
ESG agenda
Daunting though the financial
challenges are for the industry,
the pandemic has highlighted its
broadening role and responsibilities.
We examine the escalating issues
around decarbonisation of the built
environment in Chapter 2, but the “S Image: Cycling in riverside park, Seoul, South Korea (Getty Images)
component” of ESG has also become
equally important to both investors and
users of real estate over the past year.
Nowhere is this more apparent than Four-fifths of respondents to the
in the US, where social unrest and European survey believe that demand
protests across the country last year for impact investments in real estate
have clearly left a deep impression will increase over the next five years. We are reminded that we
on respondents to Emerging Trends And participants are addressing it now:
are part of a community
United States and Canada. While 58 percent say incorporating social
implicitly acknowledging that the impact or social value contributions and that we have social
industry has done too little in the past, in their portfolios will increase in obligations. Remember
over 70 percent of respondents believe importance in 2021.
that real estate can address and help
that the underlying
end systemic racism. Such a shift It is also evident from the US and capital is in many cases,
in sentiment ranges from promoting European surveys that the provision insurance companies and
diversity, equity and inclusion within the of affordable housing has become
industry itself to doing more to develop more of an industry concern over the pension funds. It would
under-served communities. last few years. COVID-19 and rising be unconscionable for
unemployment have only reinforced
them and the managers
According to Emerging Trends Europe the problems around housing supply
and ULI’s report Zooming in on the while adding fresh impetus to the of that capital to look
“S” in ESG: A Road Map to Social industry’s response. at things just from an
Value, real estate practitioners have a
strong interest in developing a better As one European industry leader
enforcement of contracts
understanding of social value: how it interviewed for Global Emerging point of view, and damn
fits with their fiduciary responsibilities, Trends concludes, “the ESG agenda- the consequences.
and how to measure, manage, and stakeholder vision has become
report on social value creation. much more significant” as a result of
Alongside this interest has come the COVID-19. “We are reminded that we
rise of impact investing — investing are part of a community and that we
with the intention of tackling social or have social obligations. Remember that
environmental challenges or both while the underlying capital is in many cases,
generating a financial return. This is a insurance companies and pension
growing area of opportunity rather than funds. It would be unconscionable
a tick-box sideline. for them and the managers of that
capital to look at things just from an
enforcement of contracts point of view,
and damn the consequences.”
Emerging Trends in Real Estate® Global Outlook 2021 9Chapter 1: On the road to recovery
Image: Business district, Paris, France (Getty Images)
Debt and distress —
difficult times ahead
Lenders are expected to adopt a Industry leaders canvassed for Global In Europe during the first lockdown, it
far more cautious approach to real Emerging Trends point out that the was evident that individual governments
estate in 2021 compared with their banking system is much stronger now as well as the European Central Bank
equity investor counterparts – but also than in the dark days of the GFC. As instructed the banking sector to adopt
compared with their approach to the one interviewee says: “The level of an “accommodating” stance towards
asset class during the first lockdowns experience – therefore the lack of panic corporate customers. With fiscal
of a year ago. – that I’m observing in the workout of support and low interest rates as well,
the existing situations is much, much many corporate occupiers have been
Though high-profile examples of higher. The borrowers themselves are able to stay afloat as a result.
distress in retail and hospitality have less levered.”
been among the unfortunate corporate
legacies of the pandemic, in most Such an “accommodating” approach to
cases these were already struggling finance has translated into relatively few
businesses tipped over the edge by forced sellers of distressed property
the pandemic. assets so far. According to Real Capital
Analytics, sales out of distress totalled The level of experience
Until now, banks have been supportive less than 2 percent of total investment – therefore the lack of
of business overall since the outbreak activity in 2020 for both the US and
of COVID-19, and in many countries Europe — again negligible when
panic – that I’m observing
the economic impact in terms of measured against the levels seen in the in the workout of the
bankruptcies has been moderate. immediate aftermath of the GFC. existing situations is
In the US, for example, PwC’s latest This is one reason why, according to much, much higher. The
Turnaround and Restructuring Outlook most industry players, “there hasn’t borrowers themselves are
report shows that the number of been the price capitulation” across real
Chapter 11 filings with liabilities of more estate that many feared at the outset of
less levered.
than US$10 million grew by 16.5 percent the pandemic. Says one US interviewee:
in 2020 — a relatively modest increase “Lenders have been more reasonable
given the disruption to business last in working with borrowers. It’s not
year. While that volume was the highest that they’re being nice so much, it’s
level for several years, it was well below they’re trying to minimise their losses
the levels during and after the GFC of by helping their borrowers get to the
2007 to 2009. other side.”
10 Emerging Trends in Real Estate® Global Outlook 2021More financial distress As many industry leaders point out,
even if businesses are otherwise well
facing the occupiers run, the current shortfalls of customers
and cash will make it hard, if not The regulators have
But everyone interviewed for this report
acknowledges that banks are unlikely to
impossible for some, to make it through
made it very difficult
the next few months.
be so supportive once the full economic for the banks, in terms
impact becomes clearer. In Europe,
industry leaders already report a far
“The regulators have made it very of capital allocation, to
difficult for the banks, in terms of
stricter approach by the banking sector. capital allocation, to underwrite any
underwrite any credit
credit risk where everything’s going risk where everything’s
As the banks tighten their lending
criteria, the signs are that real estate
to be fine once the vaccine comes but going to be fine once the
there’s zero cash-flow today,” says one
investors are turning in greater numbers European interviewee. vaccine comes but there’s
to debt as a less risky way of exposure zero cash-flow today.
to real estate, just as they did following Others point out that major additional
the GFC. “Many traditional lenders demands on banks’ capital have
have been pulling back dramatically emerged over the past year, such as
during this pandemic crisis,” says one long-term infrastructure projects that
global player, “and that’s opening up have stalled, missed their financial
very significant opportunities for non- milestones and require re-financing
bank lenders.” or re-structuring. All of this may end
up with the banks becoming more
However, a serious — and unanswered discerning when it comes to their more
— question faces all lenders in vulnerable borrowers.
assessing the tenants in the buildings
they finance. How many tenants have PwC’s US research signals “more
effectively taken on government-backed financial distress ahead of us
borrowings that they could not have than we’ve seen in the past year”,
been able to secure on their own before highlighting retail as the sector most
COVID-19, and certainly cannot now? at risk. There were more than 8,000
brick-and-mortar store closures in the
At the same time, in all regions there US during 2020, a figure PwC estimates
are companies that have bolstered could eventually approach 25,000.
liquidity through the raising of “cushion
capital” but must now manage higher In a separate study on the UK, PwC
debt service and more levered balance tells a similar story: the closure in 2020
sheets in the face of continued of over 17,500 stores, hospitality and
uncertainty and the possibility of further leisure venues. Even allowing for 7,665
lockdowns. In Asia, a growing number openings, there was a net loss of 9,877
of companies are resorting to sale- outlets — largely in shopping centres —
and-leaseback transactions with their which was the worst annual decline in
property assets to raise working capital. more than a decade. “We’re still waiting
to see the full impact of COVID-19
on store closures,” says PwC’s Store
Openings and Closures – 2021 report.
Emerging Trends in Real Estate® Global Outlook 2021 11Chapter 1: On the road to recovery
The US and European industry leaders And in Australia, where the economic
interviewed for Global Emerging Trends impact has been most acute,
also anticipate continuing distress for the greater market transparency
retail, as well as for leisure and the there is likely to open up more I think that the private
business travel side of hospitality. In the buying prospects.
equity guys who believe
US, the retail misery has already led to
bankruptcies involving some specialist Buying opportunities in one form or it’s their God-given
mall real estate investment trusts, a another are expected to emerge across right to buy at massive
trend that is expected to continue. all three regions. As all interviewees
agree, distress will be more of an issue
discounts are going to
Though much of Asia Pacific has for real estate later in 2021 — and be disappointed. We will
endured the same retail and hospitality very likely in 2022 — than it was last see more distress but not
challenges, the narrative around year. But as bad as it will be for the
distress is more specific to individual companies concerned, the widespread nearly as much as they
markets. In China, for instance, view is that distress is unlikely to would like.
the interviews indicate a liquidity become the pre-eminent force in real
squeeze for smaller, residential estate investment it was for several
developers although they are not years after the GFC.
expected to present opportunities for
international capital. As one interviewee puts it: “I think that
the private equity guys who believe it’s
By contrast in India, as Emerging their God-given right to buy at massive
Trends Asia Pacific outlines, an discounts are going to be disappointed.
implosion of local non-bank finance We will see more distress but not nearly
companies has created opportunities as much as they would like.”
for foreign private equity funds.
Image: Friedrichstrasse, Berlin, Germany
(Getty Images)
12 Emerging Trends in Real Estate® Global Outlook 2021Accelerating trends in
a pandemic — by sector
The pace of economic If there is a consensus on offices, it A European interviewee points out that
recovery from the pandemic is from a capital markets perspective away from the major Continental cities
– that investors will want to go with “there are plenty of markets where the
may vary from country to
perceived high-quality buildings – office utilisation rate is 80-90 percent”,
country, but the interviews for
modern and adaptable – but secondary suggesting the impact of the pandemic
the three regional Emerging stock is likely to suffer from a marked is lower than widely assumed. “There’s
Trends reports and for Global decline in demand. also lots of precedent. When we have
Emerging Trends reveal looked at Amsterdam, most of the
that the sector issues and The pandemic has undeniably given Nordics, big portions of the Germanic
preferences are remarkably remote working a boost and, as one markets, where there is a history of
similar across the world. investment manager puts it, “we’re work from home, nobody talks about
not going to go back to how we were it. It was already integrated into the
with everybody working in the office all way we worked, and the office didn’t
Offices the time”. At least, that’s the US and disappear. It is just used differently.”
European narrative. In Asia, the story is
somewhat different. One global player goes further: “We
The future of work and how it affects
think it’s dangerous to extrapolate from
the office sector are arguably the most
As the interviews make clear, the the bottom of a pandemic crisis and
fascinating unknowns in real estate as
region’s major cities, such as Hong lazily assume that everyone’s going to
corporate occupiers continue to focus
Kong and Tokyo, are very densely continue to work from home forever. As
on managing through the pandemic
populated and average living spaces time goes on, people will realise that
rather than taking long-term decisions.
tend to be relatively small and unsuited companies based on teamwork and
to working from home. collaboration will find it hard to grow
Though the early, extreme “end of the
their business.”
office” pronouncements have subsided,
“Culturally, many Asian companies just
COVID-19 nonetheless means that
expect their employees to be in the Yet everyone acknowledges that the
owning and managing an office building
office and will continue to operate that industry is facing difficult judgement
is a far more challenging proposition
way,” says one regional player. “There calls right now. “Trying to underwrite
than before – especially around the
will be some changes to the way offices demand in the interim, or short-
health and wellbeing of occupiers.
operate, especially among multinational term, with remote working is super-
occupiers. But I think it’ll be less of an challenging without any definition yet as
From an investor’s viewpoint, the future
impact than it is in Western Europe and to what demand will be from the tenant
of offices is complicated by what one
North America.” perspective. That’s the big unknown,”
US player refers to as the “capital
says a US interviewee.
intensity” of these buildings compared
In fact, many of the industry leaders
with assets in other real estate sectors.
from the US and Europe stress the
In other words, offices are expensive
importance to businesses of the
to run and only going to get more
“creative combustion” that occurs
expensive at a difficult time when the
when employees collaborate in an
quality and resilience of income is all-
office setting. It is evident that they are
important to investors.
also drawing on their own experience.
“We know that there’s creativity that’s
required for investment strategy
development at a complex time like this.
That just doesn’t happen on a Zoom
call,” says a US investment manager.
Emerging Trends in Real Estate® Global Outlook 2021 13Chapter 1: On the road to recovery
Image: Empty shopping mall parking lot due to the coronavirus quarantine, US (Getty Images)
Logistics Retail
Much of the physical retail sector
There will be really Logistics is seen as “a winner in every
had been hit by online sales for years
region”, driven to record levels of
interesting opportunities investment by surging e-commerce.
anyway before things got even worse
after the outbreak of COVID-19, albeit
in retail actually. It’s going Most industry players see this as a
essential and convenience shopping
structural, not cyclical, trend. But there
to be a contrarian play, are nonetheless concerns expressed by
have proved to be notable exceptions.
but at some point prices some over pricing.
The structural refocus of retail continues
will fall to a level which is while the overall trading outlook for
“One way of mitigating against risk is
way below replacement not necessarily following the herd into
2021 remains bleak in the US, parts of
cost in many cases, when the asset classes that are attracting
Europe and Asia Pacific.
assets can be acquired the most attention, such as big box
And yet investors are already on the
logistics,” says one global player.
and repositioned. “Some of those prices are being bid up
lookout for “oversold retail”. Says
one: “There will be really interesting
to unsupportable prices, and in some
opportunities in retail actually. It’s going
cases for not very good quality assets.”
to be a contrarian play, but at some
point prices will fall to a level which is
way below replacement cost in many
cases, when assets can be acquired
and repositioned either to more usable
retail formats or something completely
different, which might be residential or
urban logistics.”
14 Emerging Trends in Real Estate® Global Outlook 2021Hospitality Housing
Favourable supply-demand dynamics
In no other sector has COVID-19 had
have led investors across all three Business travel is not
such a sudden and devastating impact
as it has in hospitality. Many hotels regions to increase their allocations to going to come back
residential for years, but COVID-19 has
have seen occupancy and income fall
clearly accelerated this trend. It is seen
anytime soon to where
to a fraction of pre-pandemic levels,
posing a serious economic risk to as a defensive rebalancing of portfolios, it was, which is going
operators, but also cities that are but equally important, the industry is to impact hotels and all
also addressing the need in society for
heavily reliant on tourism.
more affordable housing.
the restaurants and food
Not surprisingly, in 2020 investor
and beverage revenue
activity fell to levels not seen since the “Residential is an enormous, untapped associated with it. And
sector that in many countries is just
GFC and yet some interviewees say that
embryonic,” says one global investment there may not be the
this year they have already completed
“discounted” hotel deals. manager. “We’ve seen what’s happened obvious alternative use for
in North America over the last 40 years,
where it’s become a major investable
some of those properties
Unlike retail, the slump in leisure
tourism is mostly cyclical, which is seen
asset class for institutions. The same to convert them to
as a factor in its favour although some
thing has happened in Japan. But in apartments, just given
many other parts of the developed
forecasts suggest that international
world, it hasn’t really begun.”
the reverse urbanisation
travel and tourism will not return to pre-
pandemic levels until 2025.
dynamics that we’re
Life sciences seeing play out.
Much still depends on the rollout of
the vaccine and the relaxing of travel COVID-19 has put life sciences under
restrictions but the consensus is that, the spotlight, and it is clearly of growing
as one US player says, leisure-related importance to real estate investors in
hospitality “is going to rebound pretty the US and Europe although, so far, the
quickly when things open up”. trend is less obvious in Asia Pacific.
The corporate side of hospitality It is one of those sectors “where
is far more uncertain. One US we have the greatest conviction as
interviewee cautions: “Business travel an investor”, says a US investment
is not going to come back anytime manager. “As a result of the pandemic
soon to where it was, which is going to … we’ve accelerated our focus on
impact hotels and all the restaurants investing into those very demographic
and food and beverage revenue or demand-driven opportunities as we
associated with it. And there may not see them.”
be the obvious alternative use for some
of those properties to convert them
to apartments, just given the reverse
urbanisation dynamics that we’re
seeing play out.”
Emerging Trends in Real Estate® Global Outlook 2021 15Chapter 1: On the road to recovery
United States
Investment volumes slumped by a third
Figure 1–2 Importance of issues for real estate in 2021
to US$405.4 billion in 2020, according
to Real Capital Analytics, but the stark Economic/financial issues
year-end total masks encouraging signs Job and income growth 4.54
of a pick-up in transaction activity in the Capital availability 3.87
more resilient property sectors during Interest rates and cost of capital 3.81
the final quarter. Global economic growth 3.62
Qualified labor availability 3.55
This upturn in investment has come State and local taxes 3.42
Federal tax levels 3.27
despite the political turbulence before
Tariffs/Trade conflicts 3.21
and after the election of President
Inflation 2.90
Biden. As one interviewee observes:
Currency strength 2.42
“Investors are somehow able to
compartmentalize the world of politics Social/political issues
and government from the world of Epidemics/Pandemics 4.49
business. The stock market may be the Political landscape 4.05
best indicator of this, but I think the real Housing costs and availability 3.99
State and local budget shortfalls 3.85
estate industry is similar.”
Income inequality 3.54
Racial inequality 3.34
Though the early data for 2021 indicate
Immigration 3.33
a fall in deal activity, industry leaders
Federal budget deficit 3.24
canvassed for this report nonetheless 3.14
Global conflict
express “a sense of relief” that there Global warming/sustainability 3.05
is “more predictability” for the US Rising education costs 3.02
economy following the election. “It’s a Terrorism 2.74
little easier to build conviction around
an investment strategy,” says one. Real estate/development issues
Construction labor costs 4.01
Construction material costs 3.97
There are still concerns over the lasting
Construction labor availability 3.90
debt burden from the sheer scale
Tenant leasing and retention costs 3.82
of President Biden’s US$1.9 trillion 3.76
Land costs
stimulus package — 10 percent of US Property taxes 3.69
GDP — but most see it as a necessary State and local regulations 3.62
“bridge to the other side of COVID”. Total operating costs 3.59
Infrastructure/transportation 3.46
NIMBYism 3.38
Health related policies 3.31
Municipal service cuts 3.20
Environment and sustainability requirements 3.16
Wellness/health features 3.11
Risks from extreme weather 2.89
0 1 2 3 4 5
1 = No importance 2 = Little importance 3 = Moderate importance
4 = Considerable importance 5 = Great importance
Source: Emerging Trends in Real Estate United States and Canada
16 Emerging Trends in Real Estate® Global Outlook 2021Figure 1–3 Emerging Trends barometer 2021
5
There’s a nice putting
4 together of building
blocks for us to be a less
3 carbon-intensive society,
and a smarter, more
2
productive one.
1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Buy Sell Hold
1 = abysmal 2 = poor 3 = fair 4 = good 5 = excellent
Source: Emerging Trends in Real Estate United States and Canada
Note: Based on US respondents only
There is also support for the Biden Retail, however, remains under a heavy
administration’s proposed infrastructure cloud, with COVID-19 accelerating the
programme and the fact that it is shift from bricks and mortar stores to
pro-environment, albeit with broad online sales. US shopping malls were
acknowledgement that the US is the first to suffer years ago and are
lagging other parts of the world on clearly still bearing the brunt of this
both counts. “There’s a nice putting difficult transition although most US
together of building blocks for us to be players believe the best malls will adapt
a less carbon-intensive society, and a successfully. “The mall space needs to
smarter, more productive one,” says be rethought,” says one. “There will be
one interviewee. an opportunity in that space, whether
it’s redevelopment as residential,
In the meantime, the logistics, distribution or other uses. And then I
industrial cold storage, data centre, believe there will be a time – probably
medical office, life sciences and not in the short term – when there’s
suburban housing sectors have shown going to be this consolidation where
extraordinary resilience over the past retail will do very well. But it’s hard
year. Values for logistics properties, to say because I think 25 percent of
in particular, have held up and are the thousand malls that are out there
expected to increase in 2021. today are likely to be gone in the next 12
to 24 months.”
By contrast, senior living has endured
historic low occupancy rates during the The short-term outlook for US offices,
pandemic although this is seen as a meanwhile, is hard to untangle from the
temporary decline. As in every region, move to widespread remote working
hospitality has been badly hit during and the demographic-based suburban
the crisis although interviewees point growth, especially in the Sunbelt
out that deals are being done – heavily markets. Though COVID-19 has called
discounted pricing is evidently tempting into question the appeal of big cities the
some investors back to this sector. world over, the “population shift to the
suburbs”, as one interviewee puts it, is
much more of a US trend.
Emerging Trends in Real Estate® Global Outlook 2021 17Chapter 1: On the road to recovery
According to one US investment This interviewee adds: “I think there’s
manager, a likely consequence of this something for every risk profile. You
trend is that “we will see outpaced, can execute strategies now and should.
stronger demand growth for office Let’s ignore the richly priced sectors for We’re seeing persistence
space, in particular, in the secondary a second and just say, what recessions
of demand for some
markets than in our global city markets do is to reprice property types, reprice
over the next three to five years”. locations, and therefore you can buy suburban strategies. But
certain places on depressed rents, you the arguments in favour of
Yet no-one is writing off the gateway can get better terms from the seller or
markets of Boston, Los Angeles, joint venture with the seller, perhaps you
the gateway cities are still
New York City, San Francisco and keep them in. There are opportunities quite compelling. They
Washington. “We’re seeing persistence that recession make possible.” tend to bounce back.
of demand for some suburban
strategies. But the arguments in favour
of the gateway cities are still quite
compelling. They tend to bounce back,”
says another US player.
Image: Medical Business Building, Scottsdale,
Arizona, US (Getty Images)
18 Emerging Trends in Real Estate® Global Outlook 2021Europe
Huge volumes of quantitative easing
Figure 1–4 Social-political issues in 2021
(QE) and record low interest rates
continue to help European real estate
overcome the negative economic
effects of COVID-19. Epidemics/pandemics 25
41 47 8 4 %
“What’s interesting is that capital values International political instability
and rents have not tracked with GDP
29 50 11 9 1 %
in this crisis in the way that we’ve seen
historically. It’s quite unusual and it’s Environmental issues
largely driven by the QE factor,” says 22 43 18 15 2 %
one industry leader. Social equity/inequality
17 45 20 16 2 %
It is one reason why office values and
rents have held up remarkably well European political instability
as the industry comes to terms with 14 48 17 18 3 %
remote working and the debate around
Housing affordability
just how office property will be used in
17 43 24 14 2 %
future. Against that uncertainty, overall
take-up has slumped to its lowest level National political instability
since the since the 2008 global financial 19 31 16 23 11 %
crisis (GFC) with little respite anticipated
Termination of government support packages
in 2021 as major corporate occupiers
12 38 26 20 4 %
cut back on costs or delay decisions.
Yet Berlin and Paris lead Emerging Mass migration
Trends Europe’s ranking of overall 9 30 27 27 7 %
investment and development prospects
for cities in 2021, just as they did 0 Very concerned
10 20 30Somewhat 40 concerned
50 60Neither/nor
70 80 90 100
pre-COVID. Not very concerned Not at all concerned
Source: Emerging Trends in Real Estate Europe 2021
As it turns out, prime office yields
in Berlin and Paris are widely
acknowledged to have seen
compression during the pandemic
while pricing has held steady in London These pandemic-related challenges
despite the early post-Brexit loss this are informing the industry debate — as
year of financial services business to yet unresolved — around urbanisation,
the European Union. densification and where future What’s interesting is
opportunities lie. “The reality of it is that that capital values and
However, interviewees note that the statistics on urbanisation are pretty
London and Paris are struggling compelling,” says one interviewee.
rents have not tracked
disproportionately with some of the “London and Paris have had a bigger with GDP in this crisis in
pandemic’s side effects compared with impact from COVID. But fundamentally, the way that we’ve seen
smaller competing cities. Aside from the smaller cities like Copenhagen,
collapse in foreign tourism, both these Hamburg, Munich, are all still growing.” historically. It’s quite
big capitals have a high dependence unusual and it’s largely
on public transport and therefore the driven by the QE factor.
not entirely appealing prospect of
long, crowded commutes to work once
lockdown is over. They also have the
social distancing issues of higher office
densities per employee.
Emerging Trends in Real Estate® Global Outlook 2021 19Chapter 1: On the road to recovery
The industry is also examining how
Figure 1–5 European business environment in 2021
European governments are handling
the pandemic, which in Germany’s case
had helped boost real estate investment
before its Christian Democratic Business issues
Union–led coalition government European economic growth 25
imposed a hard lockdown from mid-
41 49 5 4 1 %
December. “Germany was open for
business for most of 2020,” says one Business interruption
investment manager. 40 41 7 10 2 %
Global economic growth
That domestic freedom of movement
35 52 6 6 1 %
undoubtedly helped Germany retain
its position as Europe’s most active Health and wellbeing of staff
country market for investment last year, 24 46 15 13 2 %
albeit its €66.7 billion total volume was Business liquidity issues
23 percent down from 2019, according
16 46 16 17 5 %
to Real Capital Analytics (RCA).
Sudden shifts in consumer demand
Europe’s overall transaction volume for 17 46 17 17 3 %
2020 fell 27 percent to €254.9 billion.
Cybersecurity
Beneath the headline numbers it is clear
13 41 23 19 4 %
that southern European markets, such
as Spain and Portugal, that depend Digital transformation
more on foreign investors, particularly 13 28 30 22 7 %
from the US, have been faring worse
Deglobalisation
than those with a strong domestic
capital base. 9 31 30 24 6 %
Currency volatility
With COVID-19 reinforcing so many real 8 27 26 30 9 %
estate trends, one of the most notable
Interest rate movements
examples is the increasing allocation
of capital into “beds and sheds”, which 7 21 20 37 15 %
was already significant in Europe. RCA Inflation
says apartment and logistics investment
6 23 25 33 13 %
accounted for a record 37 percent of all
European transaction activity in 2020, Very concerned Somewhat concerned Neither/nor
which for the first time was greater than 0 Not very
10 20
concerned
30 40 50
Not at all concerned
60 70 80 90 100
the amount spent on offices.
Source: Emerging Trends in Real Estate Europe 2021
20 Emerging Trends in Real Estate® Global Outlook 2021Interviewees suggest that the “We’ll be very selective about where
pandemic has made the investment we take risk, across all sectors,” says
rationale for logistics in Europe even one investment manager, “but in the
more compelling than before, and living sector demand outstrips supply We’ll be very selective
not just reliant on the loose monetary pretty much across all European
about where we take risk,
environment. “I think that that’s an geographies. And, we haven’t
example of where there has been been building enough residential across all sectors.
a structural shift,” says one, “and accommodation for the demand since
it’s responding to the needs of the the GFC, and even before the GFC.”
occupier. That’s so important for
any sustainable investment and it is For the short term, the industry
often underrated.” hopes for an upturn in investment in
the second half of 2021, but much
Meanwhile, the European real estate depends on the vaccine rollout and
industry sees investing in housing — the continuing government policy
social, affordable and private rented — responses to the pandemic, not least
as fulfilling a basic need in society but in Germany following its September
also as a prudent defensive play at a election. With Chancellor Angela
time of economic uncertainty. Germany, Merkel not standing for office after
Denmark and the UK have all seen four consecutive terms, this so-called
strong investor demand for housing “super election year” may yet test
over the past year. There is, however, Germany’s position as Europe’s safe
pandemic-related caution attached to haven for capital.
student accommodation, retirement
housing and co-living, at least for 2021.
Image: Student apartment building, Leeds, UK (Getty Images)
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