- After the decline in commercial real estate transaction volumes in the United States in 2020, 2021 has seen a remarkable comeback.
- With a 43% share of investment activity in 2021, multifamily remains the sector of choice. This is the strongest activity since EA began collecting data in 2001, underscoring investor confidence in the sector.
- With the exception of retail, cap rates are expected to stabilize and remain slightly below their pre-COVID-19 levels over the next few years.
- The relatively wide cap rate differential may provide some protection against rising interest rates over the next five years.
After a dramatic decline in commercial real estate (CRE) transaction volumes in the United States in 2020, 2021 has seen a remarkable comeback. Global transaction volumes are almost double 2020 levels, reaching $809 billion. This is almost 50% above the average annual volume of $530 billion between 2015 and 2019. While the historically high transaction volumes in 2021 can be partially attributed to the postponement of uncompleted transactions during a 2020 difficult, investor sentiment also played a major role in the sharp rise in the market. turn around. After reassessing CRE fundamentals and the macroeconomic environment in light of the new challenges of the pandemic, investors have begun to regain confidence and realign portfolios, sometimes extending to new types of properties.
Figure 1: Volume of CRE transactions in the United States
Investors are changing strategy in the face of new challenges and opportunities
As employees and consumers adapted to more virtual work and online shopping, CRE investors shifted their strategies in 2021. Some property types saw an increase in transaction volume while others decreases. Figure 2 shows transaction volumes by property type illustrating the evolution of investor preferences over the past 15 years.
Figure 2: Share of US Deal Volume by Property Type
The share of multifamily in total investment has grown steadily over the past 15 years, rising from about a quarter in the late 2000s to a third in 2016. Between 2016 and 2019, the share grew stabilized at around 33%, making it the largest type of ownership by investment. volume. During the pandemic, sales of multifamily investments have been remarkably robust, both in share and volume. Multifamily remained the preferred sector in 2021, with its share reaching 43%, the highest point in tracked history, underscoring investor confidence in the sector. This success can be partly explained by the fact that new residential construction has not kept pace with household formation in the United States over the past decade.
The volume of industrial transactions has also increased significantly over the past decade and continued to rise throughout the 2010s, propelled by e-commerce and increasing warehousing space requirements. Due to lockdown measures in 2020, e-commerce accounted for 22% of total retail sales, pushing industry transaction volumes to a record 26%. E-commerce volume remained above pre-pandemic levels in 2021. EA expects e-commerce penetration to continue to grow. In the short term, the supply chain disruption could propel the production of goods in the United States, further increasing the demand for warehouse space.
The retail, hospitality and office sectors continue to face the most challenges. Retail’s share of all CRE investment transactions fell to 11% before the pandemic as e-commerce reshaped the retail landscape. A drop to 10% in 2020 and 2021 showed that investors had already made the necessary corrections before the pandemic.
Hotel share in 2021 rebounded to 6% from 3% of all CRE transactions in 2020, almost reaching its pre-recession level. Office is still under pressure from virtual work adjustments, and the share of investment in offices has fallen to 18% in 2021 from 30% in the mid-2010s. This does not mean that the office sector is in permanent decline. .
Figure 3: Capitalization rate forecast
During the pandemic, retail cap rates increased by 50 basis points (bps). The gap between buyer and seller expectations was widest for commercial building types, according to RCA. As retail fundamentals began to improve in the second half of 2021, income growth and consumer spending helped cap rates stabilize and compress slightly. But as the retail sector continues to be impacted by increased e-commerce penetration, cap rates are not expected to return to pre-COVID-19 levels until 2026.
Office cap rates increased by 20 basis points between the start of the pandemic and mid-2021. They stabilized and even slightly compressed from the second half of 2021 as vaccines became widely available and employees began to return to the office. There is a variation in the movement of the capitalization rate between the different classes. Of higher quality, Class A properties showed more cap rate compression than Class B and C properties.
Multifamily has provided relatively high and stable cash returns compared to other sectors over the past two decades. Strong lending from government-sponsored agencies supported multifamily acquisition volume. The perceived resistance of this sector to the vagaries of the economic cycle makes it a good defensive bet in times of economic slowdown.
Industrial rent has been strong and is expected to increase throughout the forecast period (10 years). Multi-family and industrial buildings have held up well in the pandemic, with cap rates expected to compress over the next 5 years. With continued economic growth expected in 2022, CBRE expects commercial real estate to rebound and generate strong revenues. With the exception of retail, CBRE expects cap rates to stabilize and remain slightly below their pre-COVID level over the next several years.
Figure 4: Difference in office cap rates
There is still room for cap rate compression
It is useful to look at the spread between cap rates and yields on risk-free government bonds. Although interest rates have an impact on capitalization rates, the two variables do not move in parallel due to changes in investors’ perception of risk.
The spread between office cap rates and the 10-year Treasury yield is wide at 273 basis points, which may provide a cushion against rising interest rates. In CBRE EA’s forecast, even though interest rates will rise throughout the forecast period, there is still room for some cap rate compression. And the longer-term spread, after 2026, should reduce to 150 bps, which remains higher than the spread at the end of 2018 (115 bps). In general, the spread tends to increase during periods of economic contraction and decrease during recoveries, and we expect this trend to continue in the future.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE: CBRE, a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate investing and services company (based on revenue of 2019). The company has more than 100,000 employees (non-affiliates) and serves real estate investors and occupiers through more than 530 offices (non-affiliates) around the world. CBRE offers a wide range of integrated services, including facilities, transaction and project management; property management; investment management; assessment and evaluation; real estate leasing; strategic advice; real estate sales; mortgage services and development services. Please visit our website at www.cbre.com.