FTI Consulting and Real Estate Fund Intelligence released a study analyzing COVID-19’s impact on investment trends and its associated expected recovery, revealing that 87% of institutional investors expect more or similar investment levels in commercial real estate in 2021 compared with 2020.
Although the initial lockdowns at the start of the COVID-19 pandemic led to a widespread, sudden halt to many commercial real estate transactions, certain pockets of the industry are projected to have a slow, steady comeback in 2021, while others may experience a V-shaped recovery or a continuing lag, according to the survey of U.S.-based commercial real estate debt and equity investment professionals. The research was conducted by FTI Consulting and Real Estate Fund Intelligence during Q3/20.
“Our research shows how varied the expectations for the recovery across commercial real estate sectors are,” Josh Herrenkohl, a senior managing director within the real estate solutions practice at FTI Consulting, said. “The areas where investors expect a V-shaped recovery reflect the thinking that in 2021 there will be a vaccine and that everything gets back to normal. But investors also believe that the recovery for some asset classes will take either a slow, steady U-shaped recovery or an L-shaped scenario, with a further drop and no recovery for an extended period (depression).”
Key Study Findings
- In the short-term, 77% of respondents said they were attracted to traditional asset classes, with another 39% interested in debt.
- Looking long term, traditional assets classes are the favorite, with 81% of respondents indicating so. However, 39% also said they were attracted to specialty housing, such as affordable housing, senior housing and student housing.
- The industrial sector — which has remained relatively stable throughout the pandemic — is expected to recover the quickest, with 75% of respondents predicting a quick, decisive V-shaped recovery for the asset class. Another 13% of respondents expect a U-shaped recovery for the sector.
- For urban multifamily assets, 56% of institutional investors believe the recovery will be U-shaped, while another 15% expect to see either a V-shaped or W-shaped recovery, which shows a quick recovery, followed by a downturn, and then another quick uptick.
- In suburban multifamily, 41% foresee a V-shaped, quick recovery; 33% foresee a U-shaped recovery; and 22% predict a W-shaped recovery.
- For office, a U-shaped recovery was strongly predicted for both urban (49%) and suburban (48%) assets; only 7% expect to see a V-shaped recovery in urban office and 21% expect a V-shaped recovery in the suburban office market.
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“The office market will be a zero-sum game over time: a shift to more remote workers, office occupants demanding more square footage per head, and select suburban offices becoming the spokes to urban hubs for the next two to three years. However, over the long term, I expect the workforce will return to urban centers,” Jahn S. Brodwin, senior managing director and co-leader of the strategic and transaction advisory group within the real estate solutions practice at FTI, said.
The survey revealed expectations for a far slower recovery of the retail and hospitality sectors:
- Only 1% of respondents expect a quick revival of high street retail and mall shopping. For shopping malls, 70% predict an L-shaped recovery.
- 58% of respondents foresee a U-shaped recovery, and 16% of respondents expect a V-shaped recovery in neighborhood shopping.
- The hospitality sector is projected to make a slower rebound, with 75% predicting a U- or L-shaped recovery for that asset class.
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2021 Outlook
In general, U.S.-based institutional investors expect that transaction volume will be significantly higher in 2021, with 44% of respondents believing 2021 transaction volume will be above average or at record highs if there is a cure or vaccinate by the end of 2020.
The research also revealed that because other kinds of investments will be more turbulent as a result of market volatility, institutional investors may remain keen on long-term commercial real estate investment, as 87% of respondents said they thought there will be more or similar amounts of institutional investment in 2021 vs. 2020.
With 38% of investors seeing distress in the commercial real estate market in 2020 and 54% expecting to see it in 2021, institutional investors foresee new opportunities in the marketplace.
“Institutional investors have the capital and fortitude to play the long game and weather the storm, which will create opportunity,” Herrenkohl said. “Real estate continues to be a good hedge for many investors looking to manage risk and diversify their portfolios.”
REFI Global conducted the survey for FTI Consulting over a two-month period in partnership with REFI’s July 2020 Global Investors Virtual Summit among 64 U.S.-based commercial real estate investment professionals, including fund and investment managers, REITs and other institutional investors.
