Real estate: Deals 2022 midyear outlook

In the face of uncertainty, real estate momentum continues

• Continuing a trend from 2021, real estate deal activity maintained a strong pace, with asset-, portfolio- and entity-level transactions in the first quarter of 2022 exceeding the same period in 2021.
  
• While there has been some cooling in the red-hot industrial space, industrial and multifamily assets have continued to drive growth in transaction volumes. This has been driven by continued supply constraints, particularly in multifamily, where the lack of affordable housing continues to be a problem.
  
• Previously niche sectors, such as cold storage, data centers, life sciences and content/media-related real estate, are emerging as cornerstones of real estate investment activity — another trend that has continued from 2021. Additionally, as consumer spending continues to rapidly shift from goods to services, we are seeing increased attention to experiential assets (e.g., marinas, ski resorts, golf courses, etc.).
  
• In the face of uncertainty on many fronts, we continue to believe that deal activity in the second half of 2022 will be robust as:
  
  • Non-traded real estate investment trust (REIT) sponsors continue to deploy the significant capital raised;
  • Long-term investors recapitalize existing funds through continuation vehicles in sectors experiencing strong demand drivers and favorable supply;
  • The listed REIT industry continues to consolidate given growing importance of scale, growth and capital considerations; and,
  • More opportunities emerge given current levels of replacement cost, financing maturities and equity market valuations. These trends are contingent on the absence of any significant deterioration in financing markets. 
• We expect such activity to be characterized by an increasing flight to quality, a focus on underwriting assumptions given higher interest rates and inflation, enhanced attention to environmental, social and governance (ESG) considerations, and a focus on portfolio optimization as investors deal with rising capital costs, macroeconomic uncertainty and inflationary pressures.
  

Commercial real estate transaction activity continued its post-pandemic surge. During the first three months of 2022, total volume is up 68% compared to the same period for 2021.

So what happened? Most notably, transaction volume in the first quarter of 2022 for retail is up 104% versus the first quarter of 2021, due to a focus on grocery-anchored assets given their proven resiliency, coupled with consumer appetite for experiential in-person brick-and-mortar retail therapy. Hospitality is not far behind, with transaction volume up 101%, underpinned by the recovery seen in the US lodging sector, particularly in March of this year, and in contrast to the low levels seen in the first quarter of 2021.

Comparatively, the industrial sector saw transaction volume increases of 76% during the first quarter of 2022 versus the same period in 2021. E-commerce and just-in-case inventory stockpiling following supply chain challenges contributed to this growth, which we expect to continue for the next two years before the market potentially softens as it responds to the continued pipeline of additional space in excess of historical averages.

Meanwhile, transaction volume in the office sector was up 62% versus 2021 in the first three months of 2022, driven by a return to work and associated increases in leasing activity, which has resulted in positive net absorption. We expect activity to continue for recently constructed or redeveloped assets and/or assets with advanced ESG certifications, while older assets will experience headwinds.

Lastly, we expect transaction volume in the multifamily sector to remain strong given demographic shifts coupled with supply constraints. Activity is supported by attractive returns relative to risk, the ability to reset rents to market on a monthly basis and a progressively more challenging for-sale housing operating environment.