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Real estate deals insights: 2021 midyear outlook

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2:40

What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Real estate embraces innovation

While the pandemic recovery is still in progress and uncertainties exist, real estate has reemerged as a stronger, more innovative sector and has continued to attract global and domestic capital. Real assets play a critical role in the social, demographic and economic shifts brought about by COVID-19 and the industry has met the pandemic-induced challenges head on. Emerging from the global health crisis, the sector has embraced innovation and flexibility in the use cases across various subsectors and has also focused on supporting broader environmental, social and governance (ESG) trends and societal shifts. Real assets continue to play an exciting role in the evolution of daily life and provide robust investment opportunities across multiple subsectors.


Capital deployment anticipated to increase

Much of the nation is readying itself to return to the office (at least partly), go out to shop and dine with friends, and, particularly over the summer months, take that long awaited vacation, if they haven’t already. These behavioral shifts after more than a year of time largely spent quarantining are likely to help spur increased investment in the commercial real estate industry.

Despite year-to-date transaction value as of April 2021 trailing the same period in 2019 and 2020 by 8% and 12%, respectively, investor demand remains strong. Notably, Preqin reports a total of $225.6 billion of dry powder held by private real estate funds targeting investments in North America as of June 2021. With a backdrop of improving fundamentals — over 558,000 jobs added in May, a sharp rebound of consumer spending and a willingness to travel — capital deployment will likely increase across all subsectors. 


Sub-sector outlook

Return to work and hybrid models take shape

As more cities open up, many employees are returning to the office but not necessarily to the same space, location or with the same frequency. As companies adopt varying degrees of hybrid models, landlords and tenants are adapting to shifting demands. Building owners, while not discounting asking rents, may continue to increase concession packages, while also enhancing amenities to meet today’s demands: greater connectivity, more technology to promote safety protocols and flexible lease terms. With forecasted completions expected to outstrip net absorption over the next five years, landlords will face incremental competition for occupancy, providing tenants the opportunity to upgrade, expand and improve their space. As a result, the sector is likely to see an increased bifurcation of pricing between Class A, B and C buildings, and potentially increased adaptive reuse opportunities into residential or self-storage facilities.

Consumers return as restrictions ease

Pent-up demand and easing COVID-19 restrictions helped boost consumer expenditures to the benefit of retailers. As a result, personal consumption expenditures returned to pre-pandemic levels in March. Over the course of the past year, landlords and retailers alike adapted their spaces to facilitate omnichannel relationships with consumers — store delivery, curbside pickup, expedited delivery and in-store shopping. While REIS forecasts negative net absorption in excess of 33 million square feet in 2021 across community and neighborhood centers, positive absorption through 2025 will more than offset these losses. Moreover, anticipated new supply evidences the staying power of brick and mortar retail but new development should be mindful of the shift to hybrid retail and logistics-style hubs to remain competitive.  

Demand continues to fuel growth

Demand for industrial space has been fueled by increased e-commerce activity and a broader anticipated economic recovery. Both major distribution hubs and local markets are adding inventory to meet demand for logistics and last mile distribution. However, as prime development sites become increasingly scarce, new supply may be constrained further, driving rents upward. Nationally, forecasted average annual rent growth of 3.4% through 2025 remains above historical trends. Additionally, demand may benefit from anticipated increases in inventory as retailers aim for resiliency and to meet consumer expenditures. The retail inventory to sales ratio reached an all time low of 1.10 in March 2021. Such fundamentals will continue to fuel investor interest in the sector.

Housing boom felt around the nation

The single family residential market experienced a surge not seen since before the Great Financial Crisis. While the monthly supply of houses sat at 4.4 months in April 2021, it reached an all-time low of 3.5 months in September 2020 not seen since 2005. More telling, the national median sales price reached an all-time high of $358,700 in the fourth quarter of 2020, dipping only to $347,500 in the first quarter of 2021. The shift in housing demands and acceleration of millennial home-buying, has spurred interest in single family residential development beyond the core homebuilder heavyweights. Private equity and institutional investors have taken interest in acquiring land banks and development of build-to-rent products as buyers and renters look for additional space. Still, interest is not waning in the multifamily sector. AFIRE’s 2021 investor survey reports that 86% of respondents plan to increase their exposure to multifamily over the next three to five years. Currently, signs seem to indicate a continued positive operating environment for the housing sector notwithstanding some headwinds associated with what may ultimately prove to be transitory commodity price pressure and increased interest rates at some point.

Recovery taking shape earlier than expected

The US lodging industry continues to regain strength with early signs of an accelerated recovery emerging since our last publication. In PwC’s November 2020 edition of Hospitality Directions, we assumed the significance and frequency of recent COVID-19 case spikes would increase the length and severity of the pandemic. Beginning in mid-December, the US passed a milestone when the FDA announced emergency use authorization for three COVID-19 vaccines which has greatly helped mitigate the spread of the virus. The implementation of three vaccines, earlier than previously expected, has positively impacted the recovery timeline. As detailed in our latest US Hospitality Directions, we currently expect annual occupancy for US hotels this year to increase to 57.2%, and average daily room rates to increase 8%, with resultant RevPAR up 40.1% from last year. RevPAR is expected to finish 2021 at approximately 74% of pre-pandemic levels.

“Over the first six months of 2021 we have continued to observe increased levels of capital deployment. While the set up has headwinds, we expect to see this activity continue, particularly in healthcare, housing, and digital oriented sectors.”

Tim Bodner, PwC Real Estate Partner

Key deal drivers

Value creation through emerging technologies

Emerging technologies have created ample opportunities for value creation within the commercial real estate industry. We have seen several applications of tech-enabled platforms being utilized to digitize operating models and generate innovative new investment opportunities. Firms like Enodo have created AI-assisted underwriting platforms for multifamily buildings that allow for predictive modeling based on a comparison of expenses/rents and fees across millions of properties. Artificial investment manager Skyline AI has partnered with top commercial real estate firms to establish investment vehicles augmented by AI. Virtual real estate has emerged as a viable sector, enabled by NFT, allowing investors to monetize digital properties through advertising, charging admission and capital appreciation. Investors have been eager to capitalize on these emerging opportunities, as evidenced by over $24 billion in venture capital funding targeting proptech firms in 2020 and the fervor spilling over into 2021. Ultimately, these technologies are radically reshaping traditional practices and conventional wisdom across all industries, with commercial real estate being no exception.  

Desire for flexibility drives continued investment

Supply-chain resilience has come into investors’ and consumers’ focus over the last 18 months and the previous shifts in supply chains have in some instances been paused or changed directions. Companies are reimagining their supplychain strategies to lend flexibility and increase ability to manage risks, with strong supply chains becoming ever more of a competitive advantage. Logistics real estate has outperformed other sectors in years leading up to the pandemic, and the recent outlook on industrial fundamentals indicates that the sector will continue to experience strong tenant demand. Therecent shifts in supply-chain strategy will further continue to drive investment in logistics assets to enable the ability of companies to establish regional hubs closer to their consumer bases. At the same time, we see the potential for investors to give new life to some struggling asset types (such as suburban Class C malls) that nevertheless are located in areas with well-developed infrastructure and strong supply of skilled labor.

Niche subsectors taking center stage

The COVID-19 pandemic brought increased focus to innovations in healthcare, as the world raced to develop, produce and distribute a vaccine to ease the global crisis, and the healthcare system reimagined doctor-patient interactions. As a result, healthcare assets, including the one-time niche sector of life sciences-focused real estate, have captured the attention of many institutional investors. We expect capital flows to continue going forward across single-asset and portfolio transactions (similar to the transaction between Brookfield and Blackstone affiliates) and new development (similar to the significant level of activity occurring in Boston). The resilience of the healthcare sector against economic uncertainty, combined with the ability of healthcare oriented cities to draw a highly educated workforce, will provide ongoing opportunities for long-term growth and differentiated real estate investment, particularly for investors and asset managers who are able to navigate the complexity of developing and managing these unique assets.

Change in content consumption patterns drive ongoing need for real assets to support the evolving media industry

The global pandemic accelerated industry shifts in multiple sectors, and the entertainment and media industry was no exception. Subscription video-on-demand revenue is expected to reach more than twice the size of box office in 2024, and households have accelerated the cord-cutting trends over the past 18 months. Given the new ways in which people access and consume media and entertainment content, content creation has become more decentralized, with new players entering the space. As a result, real assets that support content creation will continue to play an important role in enabling the ongoing breadth and diversity of content supply on a global basis. For example, the need for studio and soundstage space is evidenced by recent leasing and development activity in New York City and the New York Tri-State area, where a number of content creation platforms have sought out dedicated space in the recent months. Demand for real estate assets that support the growing content creation needs is expected to drive transaction activity among content creation companies and investors alike, with potential additional focus on redevelopment opportunities for existing spaces (e.g. conversion of industrial facilities).

Contact us

Tim Bodner

Tim Bodner

Real Estate Deals Leader, PwC US

Andrew Alperstein

Andrew Alperstein

Real Estate Acquisitions Leader, PwC US

Steven Kennedy

Steven Kennedy

Director, PwC US

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