In recent years, the Covid-19 pandemic, shifting demographics, climate change, geopolitical ruptures and advances in technology have caused a paradigm shift in both the global economy and real estate.

Robert Rackind

Robert Rackind

The lasting consequences on social behaviour and human connectivity with buildings in which people live, work and spend leisure time is bringing a new approach in creating the built environment and urban communities. The internet, e-commerce, retail and logistics are now intrinsically linked, with accelerating trends of consumer demand for homes and workspace, causing investors and developers to rethink their approach to investing and managing real estate.

The real estate industry must respond quickly to these trends, which are prevalent across all asset classes, to future proof businesses and portfolios. The onus is now on investors to adapt or die.

This year, we expect rental growth in multiple markets where supply-demand imbalances persist, contrary to what we would expect from the usual cycle. This rental growth will support capital values, including selected prime offices, multi-family and logistics assets.

The long-term cycle has accelerated in the wake of the economy’s fundamental reset. The faster shift to improving energy efficiency and renewable energy production will also require added capex in 2023. In fact, one of the most prominent aspects of the long-term cycle is a focus on energy efficiency. Maintaining assets’ quality is more important than ever.

“It is essential to manage assets up to a high level of energy efficiency, focusing on insulation, better heating, ventilation and on-site energy production.”

A noteworthy difference from the usual cycle is that rental growth outlook is favourable. This is because the supply side of the leasing market has been relatively weak, while demand is expected to be fairly robust – unemployment is not expected to rise significantly, e-commerce continues to grow and urbanisation continues.

We are accelerating the growth of our living portfolio, including build-to-rent, student accommodation and hotels. We see a systemic shortage of such assets as the cost of living rises and cities’ populations grow. For example, Germany is far from reaching its target of delivering 400,000 homes a year. High, continuous demand for tertiary education is driving housing demand from students, especially in Europe. At the same time, tourism’s recovery from the pandemic and the return of in-person conferences is driving net-operating income growth for hotels around the world.

We see several different ways for real estate investors to change their portfolios to protect value from the short-term slowdown, while also structuring them in a way that can capture the long-term growth dynamic. For core-type investors, these include monitoring energy efficiency, increasing portfolio management granularity, and selling non-performing assets and ones with weak long-term fundamentals.

For value-added investors, it is essential to manage assets up to a high level of energy efficiency, focusing on insulation, better heating, ventilation and on-site energy production. The shortage of beds and bifurcation in the office market are just two examples of opportunities.

Finally, value-added investors must be ready to deploy capital. The short-term cycle, driven by interest rates, is working against existing value-add investors, but as values trend downward in 2023, the trough gets closer in time. And we are already seeing the first signs of stabilisation in the capital market as yields flatten.

Robert Rackind is global head of real estate for Credit Suisse Asset Management