The COVID-19 pandemic impacted nearly every industry in some way, but real estate underwent its own very unique transformation. Many office buildings have sat empty and seem almost obsolete while most workplaces shifted to work-from-home models, and many plan to stay that way or create hybrid workforce plans. Throw in the global supply chain issues, labor shortages, and inflation, and there are certainly economic risks for the sector. But the economy has steadily been recovering while the most serious times of the pandemic appear to be subsiding.
GDP in the United States has fully bounced back from the 2020 pandemic-induced recession. This is good news for the real estate sector’s recovery. Coupled with low interest rates, strong economic growth will be very encouraging for commercial real estate. GDP is expected to grow by a strong 4.6% in 2022.
Plus, the Infrastructure Investment and Jobs Act includes $550 billion in spending on physical infrastructure over the next 10 years. This could bolster commercial real estate in 2022 as new projects begin and long-term productivity improves. Local markets could see new areas of development, with better infrastructure supporting local business growth. Yet, the bill also has some implications for tax code, which could cause some risk for commercial real estate. The biggest changes are:
- A 3.8% net investment income tax expansion (to cover rent and capital gains)
- Surtaxes on individuals with an adjusted gross income above $10 million
- Tax perks for clean energy infrastructure and building retrofitting
So, what is on the horizon for the real estate industry? The pandemic put a bright spotlight on flexibility. In only a year and a half, trends in real estate have soared beyond the timeframes that many expected would take years. Rapid change is the new normal.
- Restaurants are making their temporary outdoor dining rooms permanent.
- Workplaces are updating infrastructure to accommodate remote workforces, and the employers who want to see people back in the office are being forced to improve their facilities to make people want to be there.
- Consumers now demand that their experiences between a retail store and its online presence is more seamless. For this reason, retailers now need to ensure that their e-commerce capabilities can meet customer demand when it comes to delivery, pick up, or simply ease of purchase.
The Work-From-Home Transformation
The office sector saw the steepest drop in sales transactions compared to before the pandemic. Major investors scaled back their holdings of office assets or were almost completely sidelined. Many companies want their staff to come back to the office, but so much has changed. Management has learned that most employees can be quite productive working remotely. And those that prefer to keep working from home can easily find another job that allows them to do so. This means that a large number of employers are going to need to lease less space per worker in the future. Tenant preferences are also changing. Many prefer newer facilities that are more sanitary thanks to improved ventilation, touchless technologies, and flexible floorplans. Hybrid workforces (that accommodate both remote and in-office workers) are also becoming more common. CBRE’s 2021 Occupier Sentiment Survey indicated that 87% of large companies plan to implement a hybrid work plan. Office spaces that offer enhanced amenities that focus on connection and wellness will be more popular.
The Return of Retail
The retail sector was massively disrupted during the pandemic, but is now in recovery. Existing retail space has become more efficient. Sales per square foot have improved because of a lack of new store construction and rising retail sales. Malls, while suffering, are seeing shoppers return, reporting double-digit sales growth. Meanwhile, investors are looking at retail’s attractive yields compared to other asset classes. Retail businesses are seeing record levels of venture capital investment. Also, real estate investment trusts (REITs) have increased acquisitions, and grocery-anchored centers drew $5 billion in investment activity in the US in Q3 2021. Grocery-based e-commerce is expected to grow by more than 20% in 2022 and double by 2025. This means grocery-anchored shopping centers will be the darling of retail investment moving forward.
As debt liquidity for retail bounces back, the buyer pool will grow. Other popular assets for retail investors include properties anchored by quick-serve restaurants, drug stores, banks, and smaller, single-tenant freestanding sites. Recent trading volume for such assets has been higher than the long-term quarterly average. Drive-thrus are seeing new design formats with more lanes to accommodate a new era of mobile ordering and pick up, while indoor dining areas become smaller.
Unfortunately, record heat, devastating wildfires, massive flooding, tornados, and other more serious weather disasters have proven that climate change can no longer be ignored. And this is critical for the real estate sector because it is one of the world’s biggest contributors to greenhouse gasses. Buildings contribute to more than 40% of global energy use and carbon emissions. While environmental, social, and governance (ESG) values are being touted more and more by industry execs, many are not yet willing to invest in the long-term returns of these policies. However, as younger generations reshape values around climate issues, we can expect to see more implementation of performance-based standards, more demand for efficient buildings, increased retrofits, and revised zoning codes.
Deal-making in real estate has made a huge comeback since 2020, especially in the US. Real estate investment capital, both foreign and domestic, is soaring. Investment activity in 2022 is expected to surpass pre-pandemic highs, and cap rates should remain stable or compress slightly amidst elevated investor demand and abundant capital, regardless of interest rates. When the stock market is fluctuating, investors often choose real estate to balance their portfolios. Buyers are snatching up record levels of both housing and industrial assets, at the same time that there is a mad dash for alternative properties such as studio spaces, storage facilities, and data centers. These types of investments typically offer better returns and lower risk. Total investment volume for 2022 is forecast to grow 5-10% above 2021 levels—on track to nearly equal pre-pandemic volumes of 2019. Additionally, more foreign capital is expected to target US assets this year as restrictions ease.
The pandemic accelerated property technology innovation in many ways. Experiences are more virtual, no-touch, and less face-to-face. Many real estate companies have shifted their entire leasing and renewal processes to be online. And even as the pandemic appears to be finally waning, demands regarding new ways of communicating, health transparency issues, and ESG metrics are here to stay. Some properties are sharing air and water quality data with tenants through apps. And some companies are using data regarding climate risk to steer investments into lower-risk regions. There is an abundant amount of innovation expected in the proptech space in the coming years. Data and automation are already being utilized to make better decisions and design better spaces.
Industrial & Logistics
This segment of the real estate sector kept up momentum during the pandemic because e-commerce took off to new levels. In 2022, we can expect to see a bit of a slowdown in e-commerce as the retail and service sectors attract more spending. The good news is that this will give supply chains a breather to catch up with demand. Third-party logistics operators will continue to dominate the sector. Additionally, more companies will be looking more toward onshore manufacturing. Demand for manufacturing facilities will rise in the Midwest and Southeast markets. The states of Arizona, Florida, and Texas are expected to be 2022’s top growth markets for manufacturing real estate. This is due to population growth, available property, and business incentives.
The Return of Downtown
This year we can also expect to see the increasing return of business and tourism travel. Such a revival will be good for city centers and will result in a much-needed boost for the hotel and food & beverage sectors. As a result, this will stimulate a return to the office and a more normal, pre-pandemic level of downtown vibrancy.
The Life Sciences Effect
The life sciences space will continue to have an impact on key office markets in the US. Advances in biotech and record levels of venture capital are resulting in record construction for life sciences laboratories. As of Q3 2021, there were 23.6 million square feet of construction underway in the 12 premier life sciences markets. Laboratory rental prices are also at record highs in the top life sciences regions of Boston-Cambridge, San Francisco, and San Diego, with new development activity continuing to spread to emerging areas such as Pittsburgh, Houston, and Salt Lake City.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.
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