The post-pandemic surge in commercial real estate activity has shown signs of moderating. During the third quarter of 2022, total volume was down 21% compared to the same period for 2021.
So what happened? Most notably, transaction volume in the third quarter of 2022 for office was down 33% versus the third quarter of 2021, driven by a lag in return to office and the associated increase in subleases, combined with record lease expirations. Hospitality was not far behind, with a 21% decrease for the third quarter of 2022 as compared to 2021. However, the post-pandemic recovery is continuing and we expect it to do so, particularly given the demand from leisure travelers willing to spend on experiential hospitality, as well as the status of the sub-sector as a high-conviction theme in the portfolio of many asset managers.
Deal activity in the industrial space declined by 18%, as compared to the red-hot comparative 2021 period, but we believe the sub-sector will remain buoyant as companies continue to play catch up in building out their logistics and storage capabilities, underpinned by the need to stockpile inventories for the ever-booming e-commerce market and capacity constrained supply chains.
Meanwhile, despite facing increasing interest rate rises, we expect transaction volume in the multifamily sub-sector to remain robust as activity is supported by attractive returns relative to risk, the ability to reset rents to market on a monthly basis, which are rising month-over-month in many markets, and a progressively more challenging for-sale housing operating environment.
Finally, deal volume in the retail sector was 9% below the levels seen in the third quarter of 2021. The comparative period was particularly strong as a result of the post-pandemic surge in consumption. Going forward we expect retail to be a bifurcated story with high-quality, well-located assets winning out as older, technologically obsolete assets face headwinds.
Business portfolio review is another lever companies can pull to foster growth and build shareholder value as the economy softens. Management’s objective in a review is to allocate capital to the most promising businesses and consider whether it is appropriate to divest less attractive units.
In this age of continuous disruption, divestitures can be a critical tool in transforming and reconfiguring a firm. PwC’s upcoming divestiture study shows that executing a divestiture in a timely manner can help increase the chances for value creation.
A key barrier to moving quickly to divest, however, is inertia. Many factors can create inertia, including entanglements, emotions and cognitive biases. A firm’s directors can play an important role in overcoming inertia. The degree of board governance is significant in increasing the likelihood that a company will consider divestment, the study shows. Having a positive attitude towards divestitures and developing a reinvestment plan also can help companies overcome inertia.
“Throughout 2022, we have continued to see resiliency in the real estate deals environment amid a challenging macro set-up. Moving forward, we expect this to continue and for experiential themes to comprise a more significant share of overall volume.”