After a hectic year caused by the pandemic, the real estate market is showing some signs of recovery, albeit slowly, with sharp differences between sectors.
Overall: In 2020, aggregate capital raised by private real estate funds focused on North America fell 26 percent from 2019, according to a Preqin report on US real estate markets released Monday. Data compiled as of April 2021 showed that the total value of real estate transactions with private equity was equivalent to nearly 30 percent of last year’s amount; although, according to the report, there may be an increase in the second half of the year.
The country’s residential real estate sector has been the most active this year, with deals totaling $ 17 billion in the first four months of 2021 – due in part to a shift towards telecommuting with people migrating to warmer, less expensive cities. Emerging trends in home-based work, including the shift to less urban areas, “are already shaping investor demand and city ratings in terms of invested capital.” Some pension funds have already increased target placement of real estate Last year.
As companies introduce hybrid work options where employees can work from home for part of the week, flexible working can still influence location decisions. According to the report, a possible return to the office will require less space and therefore generate less demand for office property. In 2020, there were 744 private equity transactions in office real estate, down 49 percent from 1,465 transactions in 2019. In the first four months of 2021, only 204 transactions were concluded. The tied fund figure was even gloomier: “No fund focused on US offices closed in 2021,” the report said. “By comparison, eight office funds closed in 2020.”
But the authors of the report warn against a complete phase-out of office real estate in 2021, noting that despite the declining attention to this part of the market, it “underestimates the potential for funds investing in various sectors in the US in targeted offices.”
The downward trend continued in the retail sector. In 2020, retail transaction volume fell 48 percent from the previous year due to “weaker valuations and as investors became more reluctant to invest in the sector during a period of rapid change,” the report said. “By 2020, this shift has already begun to affect retail property valuations, and this has been compounded by the decline in transaction activity and investor interest caused by the pandemic.”
Unsurprisingly, the country’s industrial and logistics sector continues to be the biggest winners in the market. Asset distributors “benefited significantly” from stable rental income in 2020, and increased e-commerce activity has boosted asset values, according to the report. Researchers expect this upward trend to continue into the second half of 2021. “After emerging from the pandemic, industrial real estate will continue its growth trajectory as the economy returns to pre-pandemic levels of activity.”
As for the future of hospitality, a sector hit hard by the pandemic, one big deal could help turn the tide. The report highlights that the joint venture between Blackstone and Starwood Capital Group to acquire the hotel company Extended Stay America is a deal that could change the outcome by 2021.
“Extended Stay America boasts a portfolio of about 650 hotels that Blackstone and Starwood have visited over the years, despite both companies having previously invested in a hotel chain,” the report said. “Long stays have been able to mitigate the impact of the pandemic by hosting guests such as key workers for a week or longer, keeping occupancy rates well above the US average.”
According to the report, as the US economy emerges from the pandemic, “significant” real estate capital still remains. “Private equity funds continue to raise more capital in search of the relative returns that only real estate can provide.”
But money must be invested selectively. “Investors should reassess their risk-adjusted return forecasts for each market and sector given the recent economic instability, changing demographics and changing patterns of demand for space.”