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Real estate: Deals 2022 outlook

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What's driving deals in 2022

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.

Real estate surge continues and expands

  • Through the second half of 2021, real estate has roared back to life with asset-, portfolio- and entity-level transactions recovering, and in some instances exceeding, pre-pandemic levels.
  • There’s fierce competition for assets, particularly in the industrial and multifamily sectors, thanks to the abundance of domestic and foreign capital, the persisting low interest rate environment and the resilience of real estate fundamentals in most subsectors through the COVID-19 crisis.
  • As a result, previously niche sectors such as cold storage, data centers, life sciences and content/media-related real estate continue to become more mainstream, attracting an increasing share of total investment capital.
  • In addition to the current deal themes continuing into 2022, we also see an emerging investment thesis — particularly among foreign capital and longer-term institutional investors — on real assets that support the physical, social and digital infrastructure needs of today’s society.
  • As with the second half of 2021, we expect deal activity into 2022 to be characterized by increasing speed to close, attention to environmental, social and governance (ESG) considerations, and a focus on portfolio optimization.

As offices reopen, transaction volume surges

Commercial real estate transaction volume has resurged after a pandemic-induced pause in mid-2020. During the first nine months of the year, total volume is up 74% compared to the same period for 2020 and 10% compared to 2019. Most notably, hotel transaction volume is up 280% versus 2020 and even 13% versus 2019.

So what happened? Travel restrictions were lifted and leisure demand returned, thus reducing uncertainty. This led to investment activity returning to drive-to and resort destinations as well as the economy segment. Comparatively, while transaction volume in the office sector is up 45% compared to 2020, it remains 16% below 2019 levels. If the hospitality sector, likely the most impacted by the pandemic, is any barometer for investor activity, we can expect transaction volume in the office sector to return in 2022 as more companies return to work and there is more clarity on how office space will be used.

Separately, retail volumes, while up compared to 2020, are slightly down, albeit relatively flat, compared to 2019 as the sector continues to transform and work through unutilized space. Lastly, we expect transaction volume in the industrial and multifamily sectors to remain strong given the strong tailwinds of continued evolution in consumer trends and supply chain management as well as demographic shifts. Overall, the pace of activity is expected to continue, supported by low interest rates and attractive returns relative to risk. 

Sub-sector outlook

WFH revolution puts focus on class A office space

Cities have reopened, leading employees to begin returning to the office. However, the work-from-home (WFH) revolution’s effect on the office asset class is far from over. WFH could create existential change for office space the way e-commerce did for brick-and-mortar retail space. CBRE Econometric Advisors forecast there could be a 9.1% decrease in office space demand, while a Green Street Advisors report suggests that demand could drop by up to 15%. Although overall demand is decreasing, there has been strong investment in class A offices as tenants want the newest, safest and most advanced working spaces. Boston Properties, the largest publicly traded owner of class A office space in the country, is a prime example of investors being bullish on this class as they have continued acquiring numerous class A office properties and forming joint ventures with institutional investors on many of these deals. Look for real estate investment trusts (REITs) and institutional investors to continue their investment focus within the class A office space in the near future.

Strengthening retail fundamentals

During the pandemic, retailers adapted their spaces to address changing consumer preferences — curbside and in-store pickup, expedited delivery and more socially distanced in-store shopping. Additionally, due to generous government payouts and other support programs, as well as solid jobs recovery and the strongest wage gains in recent memory, consumers are flush with cash and ready to spend it. According to Colliers Q3 2021 Capital Markets Report, retail fundamentals are strengthening which can be seen in Q3 2021 having the strongest quarter of positive absorption since 2017. Furthermore, retail closures for 2021 are expected to come in at their lowest total in more than a decade. At the beginning of the pandemic there was concern that retail real estate was dead, but the resurgence of growth in retail is making investors move towards getting more exposure to retail real estate.

Industrial sector still attractive to investors

Industrial remains a hot investment target as absorption and cap rate compression records continue being set quarter after quarter coupled with the fact that e-commerce growth is showing no signs of slowing. 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, rents continue to skyrocket. Nationally, the forecasted average annual rent growth of 3.4% through 2025 remains above historical trends. The multiyear success of the industrial sector has garnered the attention of many investors and is among the reasons the industrials percentage share of all CRE transactions increased 12% during the first half of 2021 compared to the first half of 2019. We expect that institutional investment will continue to pile into this asset class, as the industrial sector has had the highest returns among all real estate property types over the past one-, three-, and five-year periods for institutional money managers.

Single-family housing remains in high demand

Residential real estate continues to see unprecedented growth that shows no signs of letting up. Multifamily is still an asset class that is seeing solid returns and plenty of demand, but it’s the single-family space that’s really catching the eyes of investors. The single-family residential market in 2021 showed high demand but an inadequate supply of new development. This trend is expected to continue through 2030, as housing analysts calculate the current level of long-term underbuilding in a range from two to five million unbuilt homes. Additionally, since most millennial adults today are still renters — they are playing catch-up in family and household formations — the demand curve for home ownership is vast for the next decade. What has become clear is the central challenge and pivotal opportunity for single-family property investment through 2030. Look for private equity and institutional investors to continue to deploy significant capital in the coming years to take advantage of the unmet demand for single-family housing.

Hospitality sector bounces back

The US hospitality sector is getting a strong boost from reduced uncertainty due to widespread vaccination, the continued strength of leisure travel and the recent start of US inbound international travel. Revenue per available room (RevPAR) is now expected to largely recover back to 2019 levels by the end of 2022. Despite the lingering uncertainty over the return of business travel to 2019 levels, deal volume for hotels has bounced back more sharply than any other real estate asset class (+257% YTD Oct 2021) and cap rates have compressed over the last 12 months (about 30 bps). The gaming sector continues to experience a boost from the continued strength of leisure travel, and look for more transactions in the regional gaming sector. The buyer pool for hospitality transactions regained its depth in 2021, as buyers sitting on the sidelines returned to the fray (e.g. REITs), even as private and institutional capital continued to lead acquisitions. With a significant amount of capital and latent demand for hospitality as a “reopening play,” 2022 is anticipated to be an active year for targeted brand acquisitions, portfolio sales, privatizations and further sector consolidation.

“Our thesis that we would see increased capital allocated to alternative sectors, such as digital-infrastructure, has been proven and we expect this to continue moving forward.”

— Tim Bodner, Real Estate Deals Leader

Key deal drivers

Record REIT M&A activity expected to continue

The first 11 months of 2021 saw record levels of REIT M&A activity, including eight public-to-public and public-to-private megadeals, such as Realty Income’s $18 billion merger with VEREIT and the recently announced $10 billion acquisition of CoreSite Realty Corp by American Tower Corp. These entity level transactions highlight the acceleration of the previous trend of consolidation in the public REIT space, led by a focus on portfolio optimization, building resilience in the face of economic and demographic shifts and capitalizing on a favorable deal-making environment. In both asset- and portfolio-level deals as well as corporate M&A, investors are focused on capabilities-driven transactions, such as deals that fill existing portfolio or capability gaps or provide a scalable business model. We expect REIT transaction volume to continue on pace with current levels into 2022, fueled by active debt markets, successful equity capital-raising and a desire to complete transactions ahead of potential policy changes in an election year.  

Intersection of real estate and real assets

Commercial real estate and infrastructure have a proven symbiotic relationship that will continue to converge as more investors and managers view the two asset classes under the singular moniker: real assets. There is an expectation that capital will increasingly be committed to growth opportunities within real assets as infrastructure can provide longer term investments while also enhancing pricing on commercial real estate that directly or tangentially benefits. More than half of respondents to Emerging Trends in Real Estate 2022 indicated they believe transportation, public transit and technology can each have the greatest impact on the real estate industry at 70%, 66% and 51% of respondents, respectively. With the recent passing of the $1.2 trillion Infrastructure Investment and Jobs Act, prospects bode well as it includes commitments of $110 billion for roads and bridges, $66 billion for high-speed rail, $65 billion to bolster broadband infrastructure and $25 billion to modernize airports, among other spending. Already investment in data centers has increased significantly this year as it benefits from tailwinds of continued changes in how business is conducted and is one example of how capital will be committed to growth.

Tax uncertainty may impact deal activity

Consistent with the results of PwC’s 2021 Global CEO Survey, real estate dealmakers are keeping a close eye on ongoing discussions in Washington around tax policy reform, including debates focused on carried interest and capital gains provisions. Looking ahead to an election year, we anticipate several competing forces that could impact real estate deal activity. On one hand, some industry participants may accelerate their timing to close in-process deals ahead of the finalization of any proposed changes in federal tax policy that could increase their tax obligations. Others may instead pause on executing strategic transactions in US real estate until a resolution of tax reform discussions resolves some of the existing uncertainty in real estate deal structuring.

Increasing resilience and security

Given the devastating impact of recent natural disasters such as wildfires, record heat, hurricanes, flooding, etc., and the anticipation of an increase in this trend as highlighted in the United Nations climate change report, climate change and the resilience of real estate is more important than ever to consider from an operational and transactional perspective. This fact, coupled with increased pressure and focus from investors and public sentiment, is driving about 80% of Emerging Trends in Real Estate 2022 survey respondents to report that they consider ESG elements when making operational or investment decisions. While awareness has grown around the effect of climate change and ESG on real estate and the costs associated (increased insurance, retrofitting/construction costs, etc.), there is currently a lack of standardization and formalization in most deal processes to address this risk as part of underwriting. We expect further regulator focus on ESG elements, particularly with respect to reporting transparency and required metrics tracking, similar to certain existing regulations within the European Union. 

SPACs expected to see elevated levels of capital

Even as the broader special purpose acquisition company (SPAC) market cools, we expect these reverse mergers to be a powerful force for raising capital in real estate in 2022. Of the 221 announced and completed SPAC transactions in 2021, 18 involved real estate-related targets, most notably in the property technology sector, which registered its second-highest Investor Confidence Index of 8.9 out of 10 at mid-year 2021, according to Metaprop’s Global PropTech Confidence Index. We believe that this sector is poised for significant opportunities for future growth, as property technology becomes more and more embedded in all facets of real estate, from property management to climate risk and mitigation. Given the current volume of SPAC dry powder seeking an acquisition target, combined with the growth and maturity of the property technology sector, we see continued elevated levels of capital raising activity extending into 2022.

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

Deals Partner, PwC US

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