Retrospective indicators, prospective trends

• Prepare for the Endemic Economy. Despite Omicron, we still foresee a global growth cycle that acts as a tailwind for real estate recovery. The ride won’t always be smooth and the exact timing of the transition from “pandemic” to “endemic” is not known. Nevertheless, we are getting closer as vaccination rollouts continue to get traction around the world: 4.6 billion people (58% of the global population) received at least one COVID vaccine dose in 2021. Last year also became a very unwelcome crash course on the challenges of adopting rapid changes in public health practices and understanding the microbiology of a rapidly mutating coronavirus. In the wake of COVID-19, countries must rebuild economic productivity, relink supply chains, realign social patterns, and recharge spending power. Buildings must adapt to serve an economy that relies on physical and virtual space to grow in ways unlike the past.
• Anticipate Higher Standards. Investors will ask more of real estate in several different directions all at once. Sustainability (ESG) goals and rising tenant expectations are among the “asks” that investors must respond to. This raises the bar for putting societal and environmental goals alongside traditional financial objectives. Strong financial returns in 2021 (summarized in the January Macro Deck) also lead investors to expect “more of the same.” Yet, rising values will make this challenging, unless leverage or carefully considered risk taking rise too.
• Plan for Climate Change. The attention given to climate risk is accelerating around the world as more evidence of climate change becomes recognized. The impacts of more volatile weather patterns, rising temperatures and new regulations will be integrated into investment analyses. There was no letup from climate change’s impact in 2021, including punishing heat in North America, record-breaking floods in Europe and Asia, right through to wildfires in suburban Denver on December 31st.
• Expect Rising Liquidity and Inflation. Real estate has shifted from capital-starved to capital-rich several times already in this century. Recently, the supply of capital has more than kept pace with the rebound in deal flow. This creates challenges for the deployment of money, even as it boosts the performance of assets already in a portfolio. Rising inflation also raises issues—favoring some property types and lease structures more than others. Not all countries are experiencing inflation or rising interest rates, so country-specific strategies are required.
• Take the Long View. Four secular demand drivers–demographics, technology, urbanization, and environmental factors–will continue to shape real estate markets in the years ahead. The progression and shape of these forces evolve as societies get older and markets react to the global themes. These changes are explored in a series of “Insight Reports” that are summarized in this month’s deck.

High expectations for real estate are tempered by realism and resilience born from a rare combination of uncertainty and extremes in 2021: wildly exceeding expectations in some areas (rebounding spending and asset returns) and deeply disappointing in others (pandemic disruption, bottlenecks, and inflation).

Many real estate investors experienced a year of outcomes better than last year’s consensus expectations. Rent and NOI growth for residential, logistics, and several niche property types set new records in many countries as a rapid demand rebound blew past the supply of space available. Asset returns surged. Global stock markets gained 20% in 2021. Core, unleveraged property indices in the U.S. and U.K. show gross total returns on pace to exceed 15% for the year.