Money is rapidly being put into United State real estate funds amid recovery from the COVID-19 pandemic, but it’s being invested a little differently than in years past, Bisnow reports. Downtown office towers have been a primary target for the biggest commercial real estate investors, but the rise in telework and drop in office space demand has left CRE investors looking elsewhere for opportunities.
Industrial CRE and multi-family properties have been two of the most sought-after investment targets, according to Bisnow. Both properties remained steady during the pandemic. As the sectors garnered more cash, investors began to look towards other arenas such as life sciences, medical offices and data centers.
“There’s a flood of capital worldwide looking for some sort of yield, so there has been capital going into alternative CRE just as a way to find opportunities, because it’s so crowded elsewhere in the market,” Real Capital Analytics Senior Vice President Jim Costello told Bisnow.
Investments in CRE rise—just not for office space
The industrial and apartment deal volume were 18% and 8% higher, respectively, than their 2015 to 2019 averages, according to RCA’S most recent U.S. Capital Trends report. Meanwhile, all of the other major property sectors fell below their pre-COVID averages. U.S real estate transactions total deal volume during the second quarter was $68.3 billion, according to Pregin. That figure is more than double from the same timeframe last year. Pregin also reported a 16% increase in the amount of real estate funds in the market between January and June, as well as a 15% increase in the amount of capital targeted.
“There’s a lot of money out there,” Avison Young President of U.S. Capital Markets John Kevill told Bisnow. “Unlike in 2009 and 2010, there hasn’t been a massive degradation of the capital base. People have made more money so they have more to put in. And the world is a volatile place, and real estate has always been a good spot for investment in times of volatility.”
Nuveen Real Estate Managing Director Nadir Settles noted, “There’s a huge appetite for real estate right now.” He also acknowledged that Nuveen is raising money where demand is high and the company is doing so at a high volume. Settles said that industrial and multi-family have generated the most demand, along with emerging sectors like life sciences.
“In others, it’s more of a struggle because that’s the investor appetite,” Settles said. “They have trepidation on retail. They have trepidation on office, so where there’s demand for Nuveen in multi-family and alternative investments, that’s where other investors, as well as ourselves, are probably seeing a lion’s share of flows come into.”
When will investments in office CRE pick back up?
Investors have been hesitant to put funds towards downtown office space because a majority of employees are still working from home. The average building occupancy is just 31% across the 10 largest markets during the week of July 7, according to building security firm Kastle Systems. That is a more than 30% decrease from the week prior.
Settles forecasts the office market will start to rebound after Labor Day when more people head back to their offices. In the meantime, he’s noticed that life science property demand has surged. He attributes the COVID-19 for the increased demand.
“The subsector that really grew during the pandemic was life science,” he told Bisnow. “We already had a foothold in life sciences and are looking to go deeper there, and there’s a lot of investor interest in life sciences.”
Meanwhile, Kevill said he’s seen large CRE investors look to decrease the office space square footage in their portfolios and add other types of property that they had not in the past.
“Particularly institutional investors are taking a look at the pie chart everybody throws together of asset allocation and adding new slices to the pie,” Kevill said. “Now you’re seeing a slice for senior living, medical office, self-storage, last-mile industrial, data center. Even the larger core and core-plus funds are looking to distribute risk in many cases away from office and into other asset classes.”
Additionally, with investors having more money to invest in CRE that they did during the Great Recession, they are looking at real estate sectors’ fundamentals and seeing how much more growth potential they have that traditional office space.
“That strategy is essentially a reset,” Kevill said. “This (pandemic) has been such a massive shock to the system, many investors have had to take a step back and looked at their strategy.”
Joe Dyton can be reached at firstname.lastname@example.org.