Liquidity for global real estate made an emphatic return in 2021. Transaction volume totaled a staggering $2 trillion for the year, 14 percent above the previous record set in 2019, according to data provider Real Capital Analytics. The fourth quarter alone saw $761 million of deal activity across Asia-Pacific, EMEA and the Americas – exceeding the prior high-water mark set in Q4 2019 by 43 percent. Unequivocally, the apartments and industrial property types have led the recent real estate recovery both in terms of sales and price appreciation.
If the post-covid-19 cycle so far has been characterized by surging flows into apartments and industrial, then the remainder of the cycle could be defined by investors making a cautious return to lagging sectors including office, retail and hotel. Global office and retail transaction activity for Q4 2021 was not exceptional, but robust, coming in well above their historical averages.
Attracting STEM tenants
Capital remains plentiful as indicated by current levels of dry powder, and investors are clearly willing to deploy across a variety of property types. However, they are rightfully wary of ‘commodity’ space that the pandemic has rendered obsolete. When it comes to those lagging sectors, investors are, and should be, highly selective. In the US, we believe that life sciences and office properties located in metro areas with a high degree of educational attainment and STEM-related industry employment are benefiting from rising and evolving tenant demand.
Across Europe, work-from-home means tenants will want less but higher quality office space, which remains in short supply. E-commerce continues to fuel logistics demand, supported by the need for higher inventory levels. We remain cautious about most retail, and some areas that have been hardest hit by covid lockdowns could experience a meaningful rebound in rental growth. Though home price appreciation will slow, residential rental growth will be most pronounced where for-sale housing affordability is low.
A broad-scale institutional investment approach requires the ability to systematically and precisely identify where these places tie to the changing space/location preferences of STEM tenants. This represents one of our highest-conviction theses over the next several years. Covid has dramatically narrowed the office opportunity set and, to be successful, investors will need to go to the nodes where tenants want to be long term.
In Asia-Pacific, a step change in zero-covid strategies is likely necessary for further normalization in economic activity. Varying cultural attitudes to ‘presenteeism’ mean future work-from-home impacts to the office sector could be uneven. Rising e-commerce and an aging stock are major drivers for logistics performance.
The need to bolster contingency in supply chains also exists, especially across Southeast Asia where vaccination rates are low. Retail performance will be tied to the stringency of governmental responses to future variants, which have had a profoundly negative impact on tourism and consumer behavior.
Dags Chen is head of US real estate research and Paul Stewart is head of Europe and Asia-Pacific real estate research at Barings.