Real estate deals insights: 2021 outlook

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Real estate takes the lead

Like all other industries, real estate was not immune to the impacts of COVID-19. While deal volume and value declined significantly through the first half of 2020, the industry is re-emerging stronger through the second half of the year and beyond. While certain sub-sectors have struggled with the changes to the economy and new ways of being have emerged, others have exploded with investor activity and interest. Real estate plays a crucial role across all sectors and the role of industry professionals has never been more important.

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Challenges and opportunities for deals in 2021

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021. Explore national deals trends

Real estate deals outlook

Real estate is at the center of changes across markets and geographies. Whether it’s the acceleration of technological change, the need to comply with social distancing regulations, or changes in the way we go about our daily routines, the built environment supports all of our potential use cases. This uniquely positions the real estate industry to be at the heart of changes throughout our world. By embracing the demographic, social, and regulatory shifts, real estate investors have a tremendous opportunity to take the lead in driving change while also earning suitable returns. 

Not all sub-sectors will fare equally coming out of COVID-19. This will force the real estate industry to take a deeper look at fundamentals and market demands which will require a new era of innovation. This will attract the best and the brightest who will reimagine the possible and redevelop the built environment in an inclusive image that will be valued by environmental, social, and corporate governance (ESG) investors. As we’ve seen, investor demand is here — here now — and the real estate industry is likely to capitalize on this tremendous opportunity that lies ahead in our recovery. 

Sub-sector outlook

Work from home works, but office remains

The move to widespread working from home will likely have a lasting impact on the office sector, as 55% of employees anticipate that they’ll still work remotely at least one day a week even after the pandemic. But that still means that up to four days a week will be spent in an office, making future changes more nuanced with respect to location and design. More companies may establish satellite offices, increasing activity in submarkets and select suburban locales. However, just as the concept of an office will remain relevant, so too will major metropolitan areas s as centers of business activity, culture and education.

Source: PwC US Remote Work Survey, June 25, 2020

Winners will grow, as will repurposing needs of dark space

This year, with stores closed and consumers concerned about the pandemic, online sales surged. Some consumers made the foray into e-commerce for the first time, and they often liked the convenience and security of the experience. But, we should keep this shift in perspective: 84% of 2020 retail sales were from brick and mortar locations. In-person retail locations are still at the heart of the shopping and buying experience. Retailers with winning omnichannel strategies that engage consumers to visit stores may be able to cherry pick the best locations. Meanwhile, forced and voluntary closures of retailers have accelerated bankruptcies, resulting in higher levels of dark space. Investors may find a number of attractive opportunities as they look to repurpose those facilities.

Source: St. Louis Federal Reserve FRED

Demand continues benefitting from multiple drivers

Interest in industrial property has seen continued growth, due to the continued rise in e-commerce activity. The transition from brick-and-mortar to online shopping has led to more demand for both fulfilment and last mile locations. This growth is likely to remain, as some of the shoppers who shifted their buying habits during the pandemic will remain converts. Certain markets will also benefit from the demographic shift to the Sunbelt Region, which is forecasted to continue. Finally, there could be an upswing in demand for warehouse space, as firms face increased inventory requirements due to recent supply chain disruptions. Near-shoring of manufacturing operations could also be a factor, as the practice is viewed as a US job creator, thus gaining political support.

Performance to remain strong overall, but some subsectors preferred

The continued need for housing supports a strong outlook for multifamily residential units, though we could see a slight softening in demand in 2021 from an overbuilding of luxury units in urban high rises. Workforce and affordable housing, while susceptible to potential headwinds driven by unemployment and stimulus benefits uncertainties, are still likely to see the greatest demand. Separately, single family rental housing will garner greater investor interest and acceptability as an asset class as new and existing households place a higher value on lower density living. More investors are eying purpose-built product to meet this demand. These demographic shifts and low mortgage rates are also likely to support for-sale single family residential housing.

Niche sectors begin to appear core

Data centers and cell towers will remain in high demand when considering the increased use of technology as companies adapt to work from home and the continued adoption of the cloud at the enterprise level. Unsurprisingly, data centers are the top performing REIT sector with year-to-date total returns of over 22% in the first 10 months of the year, far outpacing any other individual sector.

The pandemic has also fueled interest in health-related properties, specifically life science and medical office assets. The race to develop an effective coronavirus vaccine has highlighted the importance of lab space to facilitate research and development, and more investors have begun to seek exposure to this specialty asset class. Similarly, medical office buildings that serve local communities are in high demand. Pricing for these facilities will likely remain strong, and they may even increase given the lower availability of product and availability of capital. 

Source: NAREIT 

“Our hypothesis surrounding real estate’s resilience has been proven, and we expect creative deal activity to meaningfully accelerate moving forward.”

Tim Bodner, US Real Estate Deals Leader

Key deal drivers

Teaching an old space new tricks

While the world and our daily lives have dramatically shifted during 2020, the need for physical space remains universal and constant. Though the reference to “work from home” became a 24/7 reality and online shopping is reaching new highs, we all still have a need for the built environment even if space needs to be reimagined.  In the short term, residential-oriented sectors, those catering to the movement and storage of physical goods, and those focused on the enablement of technological shifts will continue to outperform.  Longer term, however, we expect those sectors that are underperforming to come back in a new and repurposed manner.  And we are already seeing this: well-located shopping centers are being converted into mixed-use real estate or logistics assets, while office buildings are being changed in a way to fit a more flexible work environment that enables workers to have choices.  We believe that “choice” will become an even more common term in our daily vernacular replacing #WFH.  

A global and multinodal mindset will increase in importance

While globalism has been the mantra of the last several decades, a fundamental shift has taken place which is altering the global order. Geopolitics and demography are forcing significant changes in how space is used. The real estate industry will be a critical factor in enabling this shift.  As a result of the pandemic, companies have clearly been altering their supply chains, and some workers have moved to less dense environments if they’ve had the opportunity to work remotely.  However, we expect that these are short-term trends that will moderate over time. Cities will continue to define our economic and cultural life: entertainment hubs can’t be easily replicated in suburbs. And the growing importance of geographies around the world — India and the African continent come to mind — mean that globalism is hardly over. For real estate, foreign capital should remain important, global investment theses and policies could change but continue to exist, cities are likely maintain their import, and suburban real estate close to city centers may still make good investments. The Washington, DC metro area offers some interesting examples, given development along the Potomac and Anacostia rivers near Nationals Park and in Arlington, Virginia.

Technological hopes and enablement

Technology has enabled our lives and spaces to transform faster than ever expected. The rapid pace of innovation is helping people adapt to new circumstances, from innovative air evacuation systems that enable safer buildings to the promise of 5G communications devices. Technology will play a more significant role in making real estate assets more adaptable and responsive; in some cases, building use cases themselves may change. While the real estate industry has been viewed by some as relatively slow to adopt technology, we may now be reaching an inflection point. In particular, technology may allow investors to spot and capture previously untappable value from real estate assets, and this could be a tremendous driver of deal activity.

ESG guided investing and affordable housing

In recent years, many people are paying more attention to environmental, social, and corporate governance aspects of their investing activity. This is particularly true for institutional investors, where reputational risks and other ESG considerations are starting to shape transaction pricing, long-term growth strategies and future risk profiles. One of the most significant intersections between the real estate industry and ESG factors has been the national conversation around affordable housing. Years of underfunding and inattention have created a housing availability and affordability crisis in many areas of the United States. Institutional investors have been increasing commitments to “impact investing,” and real estate investments that address racial inequality are a key target. Given the current supply and demand characteristics, we expect transactions in affordable housing managers and developers to expand in the years to come. We also anticipate additional efforts to raise capital in both public and private vehicles to address these demands, including continued activity with respect to “green bonds”.

Future of Capital

Continuing a trend from previous quarters, there continues to be record levels of dry powder available focused on real estate. Preqin reports $139.1 billion of dry powder for core-plus, value-add and opportunistic strategies in North America for all property types as of the end of November 2020. In addition, while this data is only for closed end funds, there was 26% increase in dry powder for core strategies from December 2019 to November 2020. In addition to equity capital, capital raised for real estate debt funds has exceeded that raised for all of 2019.

We haven’t yet seen a marked increase in distressed deals. Many parts of the market have been supported by economic stimulus payments, gradual reopening in certain sectors, and the fact that the crisis is health related and not inherently financial in nature. Still, investors remain split on potential scale of distress in the market in the coming months, and it’s likely to differ by sub-sector. For now, given the capital on the sidelines, investors have looked to different types of deal structures to put this capital to work. Rather than outright acquisitions, we’ve seen greater use of preferred equity, land deals and leaseback of ground leases, and other non-traditional forms of rescue capital to provide liquidity. Indeed, it’s possible that capital allocated to transitional situations will exceed that allocated to distress situations, particularly if additional economic stimulus is approved in the near term.

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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