Research report

5 for ’21: Commercial real estate

2020 created significant challenges for CRE, but we also see reasons for optimism moving forward. Our chartbook outlines recovering transaction activity, the impact of the election, and more.

Download the chartbook
December 16, 2020 | 12 minute read

Search for yield, availability of capital will push CRE transaction activity toward recovery

Volumes have been depressed since the onset of the pandemic

Source: Real Capital Analytics, as of October 31, 2020.

Transactions are the lifeblood of the commercial real estate market, facilitating price discovery which ultimately greases the rails for further capital deployment. 2020 has seen a break in that cycle brought on by the COVID-19 pandemic. The crisis has created massive uncertainty around short-term property cash flows and longer-term attractiveness of certain sectors and put strain on the availability of financing. This has caused a chasm between buyer and seller price expectations, resulting in volumes sinking 40% versus the same period in 2019.

With all that said, we see reasons for optimism that this downturn will not mirror the last recession, when monthly volumes ran mostly below $10 billion for a 20-month period. First, investors’ hunt for yield has become much more pronounced over the past year. With the Barclays Agg yielding barely over 1%, CRE equity cap rates of 6.5% and senior CRE debt interest rates around 3%–4% or higher, the space provides opportunity for income-starved investors. Second, private real estate funds currently hold more than $330 billion in dry powder that must be deployed. Together, we believe these factors, combined with a successful vaccine rollout, should lead to a speedy recovery in CRE activity.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Matthew Malone, CFA

Managing Director, Real Estate

Search our site