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December 31, 2020

This past year has dramatically shifted the way people live and work and accelerated numerous structural shifts that were already underway prior to the COVID-19 outbreak. From the perspective of the commercial real estate industry, many companies began this year with generally strong financials, but this year laid bare the gap between efficient operators and ineffective industry players. Under a backdrop of suppressed interest rates and unprecedented quantitative easing, investors are now readying their dry powder to take advantage of profitable investment opportunities across a broad range of promising markets.

For a deeper exploration of what to expect next year, we’ve outlined our thoughts on the direction commercial real estate may take in 2021.


Increased optimism and transaction volume in 2021

While commercial real estate investors were relatively cautious at the beginning of 2020, according to multiple industry surveys the outlook for 2021 is significantly more optimistic.

Domestic investors ended 2020 with a flurry of multifamily transaction volume, and overseas investments in U.S. multifamily assets are expected to increase through 2021, as new types of investors such as sovereign wealth funds and foreign family offices enter the space. This surge in activity is not just limited to multifamily investments, and the majority of respondents in a recent CBRE survey expressed their belief that both multifamily and industrial asset transactions will return to their pre-pandemic levels within the next year.



Investor interest is highly correlated to transaction volume, and as an indication of this optimism the amount of public and private equity available for commercial real estate funding is expected to increase significantly in 2021 relative to this year’s levels. According to Preqin, there is nearly $200 billion of dry powder sitting on the sidelines for upcoming core-plus, value-add and opportunistic strategies in North America for all property types, and in addition to equity capital, capital raised for real estate debt funds has exceeded that raised for all of 2019.

As a result, 2021 is generally expected to be a busy year for the commercial real estate industry, and as a testament to this position a recent NREI study on HNWI commercial real estate activity shows that nearly 60% of respondents plan on increasing their allocation to commercial real estate over the next year—a new high watermark in the five-year history of the survey.


Multifamily investments will remain the most widely demanded commercial property type

Though initial reports suggested that apartment owners would struggle to collect rent during the pandemic, multifamily properties have held up relatively well amid the COVID-19 pandemic and these property types are expected to continue with solid demand in 2021. The underlying market fundamentals of the multifamily market remain strong and the U.S. continues to face a multifamily supply shortage across multiple markets, U.S. multifamily investment transaction volume is expected to rebound by ~33% in 2021.

Furthermore, according to CBRE, multifamily rents declined less and recovered faster than those of other asset classes during the past two U.S. recessions. Given that the U.S.’ economic challenges will take some time to fully resolve, multifamily developers are pivoting more heavily to middle-class and workforce housing. These assets’ rents and occupancy levels remained resilient during the 2020 downturn, particularly in the suburbs, and are therefore seen by many as a countercyclical investment during periods of economic uncertainty.

While multifamily asset performance will largely come down to submarket conditions and tenant composition, housing is a fundamental need, particularly at more attainable price points. Even before COVID-19, the share of U.S. multifamily investment into secondary markets was growing significantly, topping 65% each year since 2016. With renters-by-circumstance less incentivized to stay in expensive markets and growth in demographics that skew towards suburban housing, we expect investors to follow renters to the suburbs at an expedited pace in 2021 and beyond.



As a result, while interest in multifamily properties dipped slightly in 2020, this property type remains by far the most widely demanded commercial real estate investment among investors.


New industrial asset completions will be met by healthy demand

Industrial assets have been the unexpected winner of 2020, with logistics, warehousing, and fulfillment significantly outperforming most real estate asset classes this year. Industrials remained resilient throughout the COVID-19 pandemic in large part due to a surge in demand from sources such as e-commerce, speed-to-consumer supply chain strategies, and logistics users’ adoption of high-throughput modern logistics facilities.

According to CBRE, each $1 billion in e-commerce sales generates approximately 1.25 million SQF of warehouse space demand. Net absorption within this asset vertical is projected to reach nearly 250 million SQF in 2021, which exceeds the previous five-year annual average of 211 million SQF. This healthy demand is expected to spur new construction, which is already near-record levels, as well as strong pre-leasing of speculative projects. Overall, new industrial completions are forecast to jump by 29% next year and given land constraints and high development costs in the areas which benefit most from warehousing and last-mile distribution facilities, the adaptive reuse of retail buildings for industrial occupiers is also expected to accelerate in 2021.

On top of the rise of e-commerce during the pandemic, coronavirus-related supply chain issues are causing manufacturers and warehouse owners to store up inventory to hedge against future disruptions, and there has been an increased push to build in strategic redundancies into the U.S.’ national supply chain. This substantial shift requires regionalizing production to allow for speedier deliveries as well as increasing overall inventory capacity, which may increase logistics demand by 400 million square feet over the next couple of years.



This combination of national defense, e-commerce, and shift towards a more fluid workforce mean that industrial assets are likely to continue playing a central role in the future economy. As a result, industrial absorption has outpaced the rapid rate of new deliveries, and CBRE expects nearly 80% of U.S. industrial markets to see positive rent growth over the year. For these reasons and more, industry payers expect substantial capital inflows into the U.S. industrial market from both domestic and foreign investors in the future.


Short-term property value fluctuations may present a good buying opportunity in 2021

With the exception of industrial assets, commercial property values are expected to take a short-term hit in 2021 as the economic repercussions of COVID-19 catch up to the commercial real estate sector in full. However, this downturn is not expected to last long, and according to a recent survey carried out by the financial consultancy firm Duff & Phelps, 90% of respondents expect asset prices to recover to pre-pandemic levels by 2021.



This expected dip can potentially provide favorable entry points for real estate investors who prioritize cashflow generation over property value appreciation – particularly given the fact that rent levels among assets such as middle-market multifamily assets have remained surprisingly resilient throughout the pandemic.


In Summary

2020 was a difficult year for many, and for most the top priority was to help ensure the safety of our families, friends, and communities. While there were still a number of profitable investment opportunities throughout the year, real estate interest and transaction volume understandably dropped across the board as investors recoiled from the ambiguities of the market and the unexpected changes in their own lives.

That being said, over the past few weeks we’ve seen a number of optimistic developments ranging from multiple COVID-19 vaccines to an uptick in real estate transaction volume in the last two quarters of 2020. At the same time, total U.S. public debt has exceeded annual GDP for the first time since World War II, and investors are increasingly looking for alternative opportunities which hedge against inflation and uncertainty.

Our latest deals — a garden-style multifamily community in the suburbs of Las Vegas and a blended fund focusing on industrial and multifamily assets — were selected on the basis of our outlook for 2021 in addition to the underlying deal fundamentals. Both deals benefit from the above trends, which preceded but were expedited by the COVID-19 outbreak. Armed with everything we have learned in 2020, we look forward to sending this year off with gusto and embracing the new opportunities 2021 will bring.