Despite geopolitical uncertainty, rising interest rates and soaring inflation, Piper DLAReal estate executives are as confident as they were last year, and more, in the annual confidence survey.
Respondents, which included corporate clients and other senior commercial real estate executives, were asked to rate their confidence in the real estate market over the next 12 months on a scale of 1 to 10. , with a score of 6 to 10 considered optimistic. In 2021, 74% of respondents had answers in the 6-10 part of the confidence scale. This year, 73% of respondents were optimistic, but a higher percentage of respondents (33% vs. 16%) rated their feelings in the 8-10 part of the scale. In contrast, 21% of respondents were optimistic in 2020.
“Bulls have become more bullish in this survey compared to previous surveys,” John Sullivan, president of DLA Piper’s US real estate practice and co-chairman of its global real estate practice, told CPE.
The company’s annual State of the Global Real Estate Market Survey was released exclusively at CPE today and will be officially released tomorrow at the company’s 17th Annual Global Real Estate Summit in Chicago.
Real estate transaction volume rebounded resoundingly in 2021. Transactions not only surpassed 2020, when the market was virtually flat, but also exceeded pre-pandemic levels. This survey would seem to indicate that the momentum is continuing.
It should be noted, however, that market conditions have changed somewhat since DLA Piper polled respondents in mid-February and mid-March. If the same respondents were polled today, opinions might be a little different.
“Interest rate increases were generally priced in by the market, but what wasn’t expected was the severity of the war in Ukraine and the rate at which inflation rose,” Sullivan noted.
But interest rates are still historically low, and although inflation may hold back development due to rising costs, there is a downside to inflation for commercial property as property owners may increase rents to keep up with inflation, Sullivan noted.
To look upward
Respondents cited “abundance of capital” as the main reason for their confidence, followed by strong real estate fundamentals; the US economic outlook; continued deployment of vaccines, boosters and treatments against COVID-19; other issues (in open comments, respondents cited the repurposing of regional malls, technology, volatility leading to opportunity and revived tourism); growing international tensions with Russia and China; non-US real estate investments; and favorable interest rates.
“It would be better to think of the strength of the fundamentals as the first thing people point to, as opposed to the amount of capital, but the amount of capital is critically important,” Sullivan said. “They are obviously related.”
The top reasons for lack of confidence were ‘other’ (respondents cited rising international tensions in their free-form comments), followed by interest rates and inflation, the long-term effects of working at home, the continued impact of the pandemic and ongoing social unrest.
Hybrid work and southern migration
Not surprisingly, respondents believe that inflation (84%) and interest rate changes (76%) will have the biggest impacts on commercial real estate. Seventy-two percent think e-commerce will have an impact.
The second most influential trend, according to the survey results, is “the redesign/reinvention of offices and other commercial spaces”. Sixty-one percent said it would have an impact over the next 12 months.
Additionally, in response to another question on this topic, 47% of respondents predict that 50% of workers will be back in the office consistently within a year, and 43% believe that 75% of workers will be back in the office. Only 2% of respondents think the offices will be 100% occupied.
Additionally, about 20% predict job vacancies will never return to pre-pandemic levels, and 28% said suburban offices were likely or very likely to return to pre-pandemic levels over the next few years. next 12 months, compared to just 15% expecting city offices to return to pre-pandemic levels within a year.
“It’s not that much of a surprise, but the message that seems to come out of this is that there will be long-term impacts as a result of all the working from home,” Sullivan said.
However, it’s a bit early to say for sure whether the changes in office behavior will be permanent, Sullivan noted, and it can be dangerous to generalize about offices, because new office buildings today have a clear advantage over older buildings.
Forty-four percent of respondents said “labour migration from densely populated city centers” would impact the next year. This aligns with what Sullivan described as the “quite dramatic” shift in investor interest in what were generally considered secondary towns, particularly those in Sun Belt towns.
“It was always the gateway cities,” Sullivan said. “It was New York, San Francisco, Los Angeles and Boston. All the traditional cities were at the top of the list and now you have Austin, Raleigh-Durham, Nashville, Phoenix and Miami as the top cities.
A surprise to Sullivan was that ESG did not appear as a more pressing priority in the survey results. Forty-four percent of respondents said ESG would have an impact, but only a third said ESG would move from a secondary goal to a primary goal.
“For almost all of our institutional clients, this is a very important thing,” Sullivan said. “Maybe that’s a bit how we phrased it in the survey. But I would have thought it was a bit higher.
The emerging life sciences
Industrial (66%) and multi-family (57%) properties remain the types of properties that investors believe offer the best risk-adjusted returns over the next 12 months. Other leaders on the top performers list were life sciences (56%), data centers (45%) and industrials/manufacturing excluding logistics, warehousing and logistics. cold storage (38%).
While life sciences’ placement on the list isn’t remarkable, Sullivan noted, the real estate sector’s growth over the past two years has been.
Capital Fueled Trust
The relationship between the amount of real estate capital and confidence in the market is not an easy one. Real estate has become a very important asset class for institutions, as evidenced by the increase in transactions, both in number and size. At the same time, the quality of participating capital has strengthened the asset class.
“Real estate, in general, hasn’t been overbuilt,” Sullivan said. “There are exceptions but, in general, he has not been over-indebted. This has been a big change over the past 20 years. Previously there were smaller players and higher leverage and of course more volatility.
Private equity, according to respondents, will continue to be the most active type of investor.
Respondents also believe non-U.S. investment in U.S. commercial real estate will increase, rising 14% from 2021 projections.
“When you have global instability, it often leads to an increase in places that are considered safe havens,” Sullivan said. “The United States, despite our challenges, is still considered the No. 1 refuge.”