69% of experts believe commercial real estate transactions will bounce back to pre-pandemic levels in 2022, according to Kroll report

LONDON – 15^th December 2021: Duff & Phelps, A Kroll Business, the world’s premier provider of valuation, governance, risk and transparency solutions, has published its latest commercial real estate report.

Key points from report:

76% say they are more optimistic about the future of the commercial real estate sector now than in March 2020
Nearly one in five (18%) cited inflation as the biggest risk to the commercial real estate market in 2022
Almost three-quarters (73%) say that the pandemic has made sustainability more important to investors

The research shows that nearly seven in 10 real estate professionals (69%) expect commercial real estate transactional levels to return to their pre-pandemic state by the end of 2022.

The report surveyed opinions from 179 commercial real estate professionals from around the globe to find out how different sub-sectors across the commercial real estate industry are emerging from the pandemic. Close to half of these respondents (46%) are from the UK, and the rest are from Europe (27%), the U.S. (17%) and a range of other countries (10%).

Broadly, the report found that market optimism has increased markedly since 2020. More than three-quarters of respondents say they are either slightly (45%) or much more optimistic (31%) about the future of the real estate sector compared with the onset of the pandemic in March 2020.

The 2020 survey found that nearly four out of 10 respondents (39%) expected property valuations to drop 5%-10%, and almost a third (31%) feared an even greater negative impact. In contrast, the 2021 survey found that only 41% of respondents expect the pandemic to have a negative impact on valuations in 2022, with 50% saying that it will have little or no impact on asset values, and 9% suggesting it could have a positive impact.

Despite this optimism, respondents also reported that there are still challenges facing the market. When asked about the biggest risk to the market in the coming year, most respondents identified a slow recovery from COVID-19 (41%) in 2022 as the biggest threat to commercial real estate in their region. This was followed by inflation, which was cited by almost a fifth of respondents (18%) as the biggest threat. Inflation was an even more significant worry for UK respondents, with 26% citing it as the greatest threat.

John Slade, Chairman of the Real Estate Advisory Group at Duff & Phelps, commented:

“The pandemic has had an incredible impact on the commercial real estate industry, but thanks to the ongoing rollout of vaccine programmes worldwide, the outlook is starting to brighten. Even with the emergence of new virus variants, the industry is significantly more optimistic about the future than it was last year.

“While concerns about the immediate impact of the pandemic on commercial real estate are beginning to lessen, there are still serious worries about the ongoing economic impact of the virus and how that might affect the market. In the UK, there is a growing unease about the pace of economic recovery and especially the threat posed by rising inflation.”

Just as in 2020, respondents highlighted the sector-specific impact of COVID-19. The pandemic has emphasised the importance of supply chains and 40% of those surveyed in 2021 believed logistics real estate will emerge as the best-performing sector in the long run. This was followed by residential (24%) and life sciences/medical property (21%).

In contrast, just 1% said that hospitality and hotels would emerge as the strongest sector from the crisis. While office space fared only slightly better at 3%, general opinions on the future of the office were more optimistic. Despite the rise of remote working, 61% of respondents think that average office occupancy levels will only decrease by between 1%-10% in 2022 and 14% predicted that occupancy would return to pre-COVID-19 levels. Just a quarter of respondents (25%) predicted that occupancy would decrease by more than 10%.

The pandemic has also impacted environmental attitudes. Seventy-three percent of those surveyed believe that sustainability is more important now than before the pandemic, while just 4% say it is now less important. When asked how important sustainability is to the demand for real estate, a majority (51%) now say it’s crucial, another 43% say it’s important, even if not a deal-breaker, and only 6% say it has little effect on their decision-making.

Ross Prindle, Managing Director and Global Head of the Real Estate Advisory Group at Duff & Phelps, commented:

“COVID-19 has affected the real estate industry greatly but due to the availability of vaccines and the lifting of restrictions, the U.S. real estate market has seen a tremendous upswing in transaction activity in 2021. This activity has been primarily related to the acquisition of industrial and logistics properties, data centres and multifamily properties.

“Office properties, senior housing and retail properties that are not grocery related have not seen the activity that the other sectors have seen due to uncertainty regarding future pandemic restrictions, as well as the likely need for less office space thanks to hybrid work in office and work at home policies of many businesses. It is our thought that this activity will continue in earnest as long as the variants do not prove to be harmful to the public, and activity in 2022 will exceed 2021 in these key sectors.”

Slade concluded:

“The unique nature of the pandemic means that some sectors, such as hospitality have been hit especially hard, while others, such as logistics have actually outperformed everyone’s expectations. Ongoing long-term supply chain issues may well mean that logistics continues to perform extremely well for quite some time. The rapid growth in online retail and the limited investment in this sector compared to others has created booming demand, while supply remains limited. This is likely to continue to inflate prices and provide more foundation for the intrinsic land value, which underwrites the residuals of these investments.

“The pandemic has also forced us to reconsider our future on a more global level, providing a sobering reminder of our own vulnerability, as well as the power of governments to affect real change to our day to day lives. This has played a part in bringing sustainability to the fore. With the growing focus and action on climate change, the demand and need for sustainability is likely to produce a substantial positive gap in pricing for the best sustainable assets.

“COP26 has dominated the recent news agenda and the response to climate change from governments and businesses may well define the coming years. Sustainability is only going to become more crucial to every industry and commercial real estate is certainly not an exception.”

Kindly shared by Duff & Phelps

Main photo courtesy of Pixabay