Another humanitarian crisis and huge economic shock come from Russia’s attack on Ukraine after the pandemic. These events haven’t yet had a big impact on the way real estate is sold.
A lot of people aren’t sure what Covid-19 will do for society and business, and that’s been the main story in the real estate industry for more than two years now. Invading Ukraine, or the threat of war getting worse in Europe, takes that uncertainty to a whole new level.
In some ways, the industry could face a repeat of the early days of Covid-19 in 2020. There could be a cyclical downturn that doesn’t go well with long-term structural changes to real estate. Those long-term trends are still being worked out, and the industry is still trying to figure out how they will work out.
If there is an agreement among economists, it is likely that the Ukraine conflict is not going to cause a global recession, but no one is ruling it out. At the very least, however, the Russian invasion of Ukraine is expected to have a far greater geopolitical impact, as well as slowing global growth and longer-lasting inflation.
It would be a huge shock to the real estate industry even if this year’s macro situation was relatively calm. During the strong economic recovery of 2021, there were record levels of investment in real estate.
Global sales of commercial properties totaled more than $1.3 trillion in 2021, which was 59 percent more than in 2020 and 22 percent more than the previous record set in 2019. MSCI Real Capital Analytics says that’s a big increase (RCA). This level of activity was caused by a lot of people around the world wanting to buy homes and businesses, and especially a big change in the US.
A big factor was the difference between property yields and interest rates, which is still the case in most countries. For the time being, this positive view of the capital markets for real estate is about as good as it can be for real estate. It will, of course, take longer to make deals because of the uncertainty, especially in Europe.
As a result of government spending changes, the real estate industry may have to deal with the consequences. This could happen in Europe, where the government spends a lot on defense and energy, but not on infrastructure or housing.
There are also bigger questions about the environmental, social, and governance (ESG) agenda that come up after the invasion of Ukraine, though. The pandemic has already made clear how important ESG is for everyone who works in real estate. That’s not all: This year, there is, even more, worry about how much money and time it will take to make real estate fit for all kinds of ESG issues.
Macro Outlook Mixed
With the rise in oil and gas prices as a direct result of the Ukraine crisis, the focus has been on the short-term inflationary effects. Short term, will governments be woken up about how much economic change they need to make under the ESG agenda?
Imf predicts that global economic growth will slow down from 5.9 percent in 2021 to 4.4 percent next year, and then even more to 3.8 percent in 2023.
In a short time, the Ukraine crisis has become a new threat to world economic growth. As it was, though, the predictions had been lowered, not least in the US, where RCA says the global property market “will grow at its fastest pace in 2021.” A report from the International Monetary Fund says the US economy grew by 5.7 percent in 2021, but that this year it will be slowed down by a lack of workers and less government help.
Pressure from Inflation
People in the real estate business keep an eye on the global economy as well as inflation, which was one of the biggest issues last year but has become even more critical as the war in Ukraine unfolds, at least in the United States and Europe. In January, inflation in Europe rose 5.1% and in the United States, 7.5%, which is the fastest rate in 40 years.
The full effect on real estate of labor shortages, rising wages and food prices, and rising energy costs isn’t clear yet, but they could have a big effect. Last year, problems with global supply chains, especially in Asia, led to a rise in prices.
As a result of the Russian invasion of Ukraine, there are more fears about supply chains, energy prices, and the risk that inflation will get out of hand.
Perhaps not disruptive, but a high level of inflation is still a problem when it comes to development. This is when the industry wants to restart projects that were put on hold because of the pandemic or move forward with repurposing initiatives.
Even though inflation doesn’t seem to be as big of a problem in Asia Pacific as it is in other parts of the world, it still makes it more difficult for people to get things done. Real estate is still seen as a good way to fight inflation, even though there are a lot of risks when it comes to development and the invasion of Ukraine. One global investment manager says that “intuitively, I do think that real assets are better able to handle inflation than fixed income.” And levered real assets, which is a lot of the industry, will come out as a relative winner.”
Trying to find Late-Cycle Value
Before the virus spread, the Global Emerging Trends report said there was a lot of uncertainty about logistics prices, just like there was before the virus spread. At this point last year, logistics has become a kind of “lightning rod” for both positive and negative comments about real estate investment. This is because logistics is a good example of both how risky and rewarding real estate investment can be.
With a lot of money being invested in real estate, logistics and residential are still the main draws. That trend isn’t going to stop, say the real estate industry leaders who were interviewed for this year’s report. Investments in these sectors are likely to fall along with the rest of real estate.
As a result of the increased geopolitical risk this year, there is still a lot of uncertainty about logistics prices. “A lot of money isn’t always the best money.”
During the last year, the average yields in the world’s major logistics markets have converged to a small range of between 4.25 and 5%, according to RCA. If you’re an investor, you have to figure out how to balance what looks like late-cycle price with the shift to e-commerce that has been going on for years before the pandemic.
Some types of retail have had a hard time, and the pros and cons of e-commerce have been talked about for years. In the past, retail has been a real estate “no-no,” but now some people in all three regions are a little more open to “value opportunities,” even if they don’t mean repurposing the buildings.
Diversify Investing Strategies
In their interviews, many people say that diversification is important when it comes to investing. This means spreading risk across different sectors and countries. Before, Global Emerging Trends talked about how some global investors were putting their “big growth bets” on the Asia Pacific.
Investor: “We are already in the region, but we are trying to understand it beyond the main markets where everyone else is focusing more on the smarter economy in South-east Asia area, that is even if it is less liquidity. We want to go much more granular in Asia.”
In Emerging Trends Asia Pacific, a big theme is that both the office and retail sectors are “too full.” As one investment manager who works in Asia says, “relative value” is still very important, and so are the “opportunities in the traditional spaces” like retail and offices.
Changes in Expectations
This is surprising, given how much has changed since Covid-19. The investment ebb and flow of real estate looks very much the same as it did before Covid-19. But the simple statement hides the fact that the pandemic has had a huge impact on how people think about how they will use their homes in the future.
Despite the overall strength of the economy, some sectors and markets have been shaken up, making many assets obsolete and needing to be repurposed. This is a common theme in all three regional reports. There has been a lot of movement in the last year about repurposing things. There is a lot of uncertainty in the market and in the supply chain, so there is a good chance that this will slow down.
Even in the office sector, which has been the foundation of commercial real estate portfolios for a long time, there is still a need for repurposing, and this is not going to change. In fact, Covid-19 has broken that hegemony, reinforcing a long-running trend for people to work from home so much that it has become a permanent option for millions of office workers, at least in North America and Europe. It’s widely agreed that the office sector in Asia isn’t facing the same kind of crisis from remote working as in the Western world. A report from RCA says that the amount of money spent on offices in Seoul in 2021 was a lot more than it was in the previous years.
Office deals, on the other hand, made up less than 20% of the total money invested in US real estate for the first time last year. It’s a big surprise, given how important the sector has been in real estate portfolios in the past.
After two years, there is still no clear direction here. There are a lot of different views in the business world about how some kind of hybrid working model will change the demand for office space. But in any case, companies will be renting less space in the future. New hires and extra space needed for social distancing aren’t likely to fill the empty spots.
People are always talking about the future of the office, but they also have a lot to say about ESG, which is a narrative thread that is only getting stronger in real estate, as well as finance.
There may be some industry self-preservation going on here because more tenants are concerned about healthy buildings, which is making older development with obsolete ventilation systems and layout obsolete faster. It will be less popular with tenants and investors because people will move to newer buildings because they want to be better.
There is only one type of office stock in the United States with positive net absorption over the past year: supply that has been built since 2015. Everything else is negative. People say that it’s not just that it’s a new thing, but it’s also that it’s better for the environment and more efficient. It’s also likely that those who are making new decisions if their employees are coming back to the office if they’re going to be in that environment, they’ll need the right environment.
Disruptions to the Real Estate Industry
Between them, Covid-19’s business disruption and the strictures of ESG have made the real estate industry think more about how real estate affects the whole world.
The pandemic has most likely pushed investors to look for sectors that aren’t cyclical, like life sciences and data centers, which benefit from megatrends and make money even when the economy is down.
People in the industry are “buying into a new generation, new economy sectors where there is a lot of growth in things like digitization, wellness, and health because those are the things that people want.”
Global Emerging Trends has said for a long time that these sectors are part of a big change in how real estate is used and serviced, but there are some problems with this. In Europe, there has been a lack of life sciences and data center deals. People in the Asia Pacific say that they need to know more about the “ecosystem” around data centers. “There are a lot of tenants in the space.” You’re going to have a hard time if you don’t make a good asset at the right price point that can compete with the demand that you have.
Despite the difficulties, operational real estate has gained a lot of support from other people in the business. It’s not yet clear if the economic fallout from Russia’s war with Ukraine will make more people want these kinds of things even more. The value of operational real estate usually rises when there is a lot more money in the world. “Anything, where you can add a service component, can be very useful in an inflationary environment because you can raise the price of your service, or you can choose to do it.”