Capital markets on track for recovery in 2021

Diminishing operational uncertainty and rising institutional allocations are bolstering liquidity in the commercial real estate markets. Global dry powder retreated from the all-time-high experienced in late 2020 during the third quarter but remains above the five-year average – at US$373 billion. This influx of prospective investors is struggling to deploy capital efficiently and at scale, particularly in growing and lower-risk segments of the capital markets. Countries that experienced more severe transaction volume contractions are gaining momentum and have seen growth accelerate, especially markets with diverse commercial real estate inventories that cater to shifting capital allocations and portfolio diversification trends. Activity in the Americas and the largest economies in Europe drove growth during the third quarter.

Investor focus on portfolio diversification remains pronounced in the markets, with an intense appetite for gaining exposure to sectors benefitting from demographic growth and resilient end-user demand. Living has seen US$219 billion of investment year-to-date, an 80% increase over 2020 levels and 36% over 2019. The sector is now the most active globally, ahead of offices, and is driving 29% of transactional activity year-to-date. While the U.S. remains the largest market, the Big 3 markets in Europe are significant growth markets. The industrial & logistics sector remains similarly liquid, with year-to-date investment gains of 78%. The desire to increase exposure at scale has resulted in a surge of large-ticket transactions globally.

While still asset specific, conviction is building for lagging sectors in the current recovery, and the concentration of capital is broadening as the recovery progresses, increasingly benefitting the retail and office sectors. Sentiment by retail asset type varies widely, but capital is now expanding beyond necessity retail and lifestyle or entertainment-oriented centers, the most resilient assets thus far in the recovery. Capital is similarly rotating back into offices, with high-quality assets benefitting most from this capital.

With investor conviction amplified and returning to more facets of the market, competition for on-market deals has climbed markedly. Robust bidder pools are resulting in a higher frequency of bids per transaction and upward pricing pressure, with pricing reaching new records for in-favor sectors and assets. Both existing and new-to-market investors are fueling this appetite and subsequent price discovery.