Commercial real estate (CRE) has certainly felt the impact of the pandemic. From empty hotel rooms to remote working affecting urban office space requirements, the concerns about the aftermath of Covid-19 touch each sector.
When Kroll’s real estate advisory group conducted its survey of CRE in 2020, the optimism recorded as lockdown restrictions eased proved to be a false start, as another Covid wave hit the market.
A year later, the newest survey shows that optimism is once again creeping into the sector.
Seven in 10 (69%) of real estate professional respondents expect commercial transactions to return to their pre-pandemic level by the end of 2022, while fewer than one in 10 (8%) still feel the pandemic is the biggest risk facing the sector.
That is a clear vote of confidence and follows already positive results we saw in some sectors last year. For instance, there was a significant upswing in acquisitions of industrial and logistics properties, as well as data centres. Ongoing supply chain issues mean this strong performance for the logistics sector looks set to continue, and 40% of respondents to our research think this segment will emerge the strongest from the pandemic.
Covid’s effect of reshaping attitudes has created new opportunities for CRE to thrive
Optimism is reaching a broader range of sectors – including those hit hard by Covid. Nearly two thirds (61%) of real estate professional respondents predict average office occupancy levels will fall only by between 1% and 10% over the next year.
There is every reason to believe this optimism will translate into real results. For the most part, vaccination programmes continue successfully, and vaccines are proving effective, meaning Omicron restrictions have been short-lived.
Not-so-hidden risks
There are still serious challenges about the ongoing impact of Covid-19 that are likely to keep optimism grounded in 2022.
Rather than the V-shaped bounceback many expected in 2021, a slower U-shaped recovery is now seen as the biggest risk to real estate markets, according to 41% of respondents.
In the UK, in particular, there is growing unease about the pace of recovery, specifically the rise of inflation as the greatest threat to the commercial market.
In spite of some ongoing risks, Covid’s effect of reshaping and resetting attitudes has created new opportunities for CRE to thrive. A growing focus on climate change, underpinned by COP26, has brought sustainability to the fore, mirrored in the CRE sector.
Sustainability is considered more important now than before the pandemic. Only 6% of respondents in the sector think it has little effect on their decision-making in 2021, compared with 51% who think sustainability is critical, and 43% who say it is important, even if it is not a deal-breaker.
A growing focus on the environment has driven up demand for sustainability, a topic that will only become more crucial to real estate strategies, deals and decision-making in the years ahead.
This means assets that are not sustainable may not be transactable, while the best examples are likely to set new pricing benchmarks. As for owners and investors sitting with a glut of inefficient assets, the closer to 2025 we get, the greater the possibility that they will not be refinanced by lenders or let to tenants, let alone hold value.
John Slade is non-executive chairman of Kroll’s real estate advisory group and senior adviser to Allianz Real
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