Inflation, Geopolitical Conflict Make CRE Look Better Than Ever
Private equity, endowments, and large institutional investors will continue to seek CRE as a place of fiscal safety.
It’s a good time to be in commercial real estate, at least according to DLA Piper’s Global Real Estate Annual State of the Market Survey. With trouble in the world and the economy, CRE attracts a lot of attention not in spite of concerns, but because of them.
“People tend to like hard assets both in times of inflation and when there’s geopolitical conflict, so I think all of that bodes well for real estate on a macro level,” John Sullivan, US chair and global co-chair of DLA Piper’s real estate practice, told Nareit’s REIT Report podcast. “And I think it means that the private equity funds and the endowments and the big institutional and governmental non-US investors are going to continue to have a big appetite for commercial real estate.”
The survey saw “not only a remarkable resurgence across the CRE sector, but also increased bullishness as leaders look to the future,” as the report noted. “While general bullishness remains roughly consistent with our 2021 report at 73 percent, more respondents in 2022 have a higher level of confidence for the real estate industry’s next 12 months. The increased optimism relative to 2020—when just 21 percent expected a bull market—is significant.”
Confidence came from three top factors: an abundance of capital (52% citing), strong fundamentals in most asset classes (20%) and the US economic outlook (16%). On the flip side, interest rate increases (26%), inflation (18%), and long-term effects of working from home (15%) were reasons for a lack of confidence.
According to the survey results, private equity investors are expected by 48% of respondents to be the most active over the next 12 months, “roughly consistent with prior years.” About 92% have it within the top three, with domestic pension and sovereign wealth funds being the other two.
Almost two-thirds (64%) expected geopolitical instability to be the single biggest influencer on CRE with the global economic outlook as a major factor came in second place with 45% mentioning it. Only 15% pointed to climate change or ESG.
Where will people put the money? Into logistics, warehousing, and cold storage in the opinion of two-thirds of respondents; 57% saw multifamily as a strong CRE investment type. Big locations for investment were in and around the Sun Belt while such traditional areas as New York City, Los Angeles, Silicon Valley, and San Francisco saw their favorability fall.
The bulk of respondents at two-thirds thought office would continue to hurt with vacancies below pre-pandemic levels for “at least two to three years” or even more so.