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.

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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.

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