Welcome back. Whether an institutional investor looking to place capital, a manager looking to help investors deploy, or an advisor to either side, 2020 is sure to be a year full of challenges, as our edit team’s selected takeaways from the prediction notes we received this week suggest. From these, we see a year for value-adding – or protecting – in a marketplace protracted at the high end of the cycle:

  1. Global investment volumes will continue moderating: Global brokerage JLL is still crunching its Q4 2019 numbers, but the early indications are for the year’s total real estate volume to come in at approximately $750 billion – as much as 5 percent lower than the year before. It predicted a further decline in 2020, led by weakness in European markets, particularly in the office and retail sectors.
  2. A lackluster final quarter highlights fundraising’s plunge: PERE’s preliminary full-year findings reveal total capital raising for closed-end private real estate funds has plummeted almost 23 percent to $114.8 billion, partly due to an approximate 27 percent drop in the number of funds reaching a final close. The 180 closings recorded in 2019 represent the fifth consecutive year of fewer closings, and PERE researchers see the trend continuing in 2020.
  3. Private real estate will stay a land of giants: Capital advisor Park Madison pointed out in a white paper how closing will nonetheless remain no issue for the sector’s mega-managers in 2020. It recorded 40 funds of $1 billion or more closing last year, chiming with PERE’s own findings in its November cover story which revealed how funds of more than $1 billion have raised exponentially larger percentages of a fundraising year’s aggregate capital. Conversely, in 2019, sub-$1 billion funds accounted for their lowest cumulative fundraise in a decade.
  4. The US market will play its credit cards: In its 2020 Real Estate Trends report, manager PGIM forecasted an increase in debt originations in the US. Driven largely by continued low interest rates, refinancing debt on existing portfolios is playing a big part in its originations estimate of $700 billion this year, up 7 percent on 2019.
  5. The non-bank lending market will see further growth in Europe: At a media presentation this week, LaSalle Investment Management anticipated more opportunities for alternative lenders in the region, especially in the higher return space. A contributing factor is regulation Basel IV, which takes effect in 2022 and is expected to decrease lending activity from banks. However, the manager also said it is adopting a pan-European focus this year – a shift from its previous focus on the UK, Europe’s largest real estate debt market – as investment activity picks up across the region.
  6. More investors will go alternative: Sticking with the world’s biggest institutional market, alternative assets will further attract investment dollars, said a CBRE report. The broker spotted a modest oversupply in the senior living and self-storage sectors, but, overall, alternatives had proven to have quick absorption rates and strong yields. Alternatives accounted for approximately 13 percent of US investment last year and CBRE sees this percentage improving in 2020.
  7. Health and science have clearest path: While 2019 saw much debate on the most efficient use and leasing of office space, manager Nuveen Real Estate predicted offices catering to healthcare and life science tenants to outperform stateside in 2020. At close to 18 percent of the US’s GDP, healthcare is its fastest growing sector while a supply-demand challenge will see lab-equipped space command a premium too, Nuveen reckoned. Last year, these office types delivered premiums of 60 and 40 basis points over core offices and Nuveen sees this continue this year.
  8. A year to watch digital real estate: With the rollout of 5G networks there will be a surging demand for data centers, consultancy PWC predicted in its joint report with the Urban Land Institute. In Asia’s markets, for instance, the two organizations saw the rollout in Korea, Japan, Australia and Singapore having a profound impact on investment, with 18 percent of respondents surveyed voicing increased interest in the sector.
  9. Climate change will become an economic issue: As governments around the world push policies to curb carbon emissions, advisory firm Park Madison Partners projected real estate owners will be meaningfully impacted. Under a new carbon tax in New York City, for example, high-emitting properties could see properties cost $20 or more per square foot to operate, according to the firm. While that law will not take effect until 2024, cautious investors in the Big Apple will likely be considering these possible rising costs today.
  10. ESG will move up the Japanese agenda: Placement agent Asterisk issued a white paper on the increasing relevance of environmental social and governance considerations for Japanese institutional investors as they assess private real estate managers and vehicles. As with so many trends, the turn to greater ESG emphasis is being led by the $1.5 trillion Government Pension Investment Fund, which has just committed to join the equality campaign 30% Club. Asterisk predicted other Japanese investors would follow suit in 2020.

PS: This is your final chance to vote for the investors, managers and advisors you believe to have excelled in 2019 in PERE’s Global Awards. Visit the dedicated voting page here to register your votes. Voting closes at midnight tonight.