Capping off what’s looking to be a robust first half of 2022 for commercial real estate deal flow, at least one major firm is betting on a continued strong outlook for the rest of the year.
London-based PricewaterhouseCoopers LLP this week found, in the first three months of 2022, total volume in the U.S. was up 68% compared to the same period for 2021, reaching $172 billion. With Thursday being the final day of the second quarter, Q2 data isn’t complete yet, but early indicators suggest transaction volume held up, amid surging interest rates and new questions about the broader economy.
But it’s not simply the volume of deals that’s surprising to Tim Bodner, real estate deals leader at PwC U.S. It’s the asset classes where investors are flocking to, beyond the usual suspects of industrial and multifamily.
Retail and hospitality have rebounded strongly in 2022, with transaction volume in Q1 2022 for retail up 104% on an annual basis and hospitality deal volume volume up 101% in that same time period.
Some of that is likely owed to demand coming back to those property types after a pandemic-induced slump, in which activities like traveling and in-person shopping fell off a cliff. But, Bodner said, those sectors are also becoming more attractive to investors as consumer preferences and spending patterns change.
“If you’re sitting here as an institutional investor, you’re saying, in an inflationary environment, I’d much rather be in the hospitality sector, where I can reset my rents on a nightly basis,” Bodner said.
Still, there are questions about how much consumer spending power will be sustained, even though spending on goods, services and travel have held up fairly well through high inflation. The Conference Board’s Consumer Confidence Index report released Tuesday fell to 98.7 in June, or down 4.5 points from 103.2 in May.
Purchasing intentions for cars, homes and major appliances held relatively steady in June but intentions have cooled since the beginning of 2022, a trend likely to continue as the Federal Reserve aggressively raises interest rates to tame inflation, said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement. She said vacation plans softened further in June, and, looking to the next six months, consumer spending and economic growth are likely to continue facing strong headwinds from further inflation and rate hikes.
What’s held back the hospitality sector’s rebound the most has been a muted return of business travel and convention activity. Those still aren’t back to pre-pandemic levels but, Bodner and others have said, group travel and business-related bookings are improving.
Building on that, Bodner said he sees investment potential for non-mainstream property types, such as golf courses, gaming and marinas, as people increasingly get back to pre-pandemic activities.
When asked whether rising interest rates and the increased threat of a recession could put a damper on commercial real estate deal volume, Bodner said he feels there’s still a tremendous amount of conviction around real estate.
He said there are some 1,200 closed-end opportunistic real estate funds raising money right now, which suggests to him continued confidence in real estate investment.
Still, he continued, deals on the margins that would’ve penciled out in a lower-interest rate environment, but no longer do, will get scrapped, and some market participants are pulling back.
“… (W)e think we’re going to continue to see that, and investors for sure are adjusting expectations and, in a number of cases, adjusting on valuations,” he said.
Economists who track the commercial real estate market closely have also indicated pricing readjustments are happening for deals right now, given higher interest rates. Richard Barkham, global chief economist and head of Americas research at CBRE Group Inc., previously told The Business Journals the rising cost of capital has some groups that had been planning to sell properties and portfolios in 2023 are actually moving those dispositions into this year, given current economic conditions. Others, however, are holding off.