Little change in the mood among occupiers over the past quarter at a headline level, though investment sentiment is somewhat less negative

Q3 results show huge divergence in sector performance with COVID-19 continuing to push the real estate industry to confront structural changes. Sector divergence is picking up pace as real estate responds to structural change in demand.

There are historic lows in retail and office demand as availability rises sharply; logistics demand continues to rise.

Respondents believe prices are now more in line with fair value.

Sentiment among global real estate occupiers and investors improved very modestly in the last quarter, though it remains near historic lows as the sector confronts structural change and enduring economic damage, according to the Q3 2020 RICS Global Commercial Property Monitor.

Gunnar Branson, CEO, AFIRE: “In a time of thorough disruption in the real estate investment landscape, the regular cadence of data provided by this report is an important resource, allowing us to see where we’ve been, and where we might go next.”

Although macro data across much of the Americas showed signs of improvement in the third quarter, there is little evidence that this has fed through into the commercial real estate market. In part, this reflects the highly uncertain outlook for economic growth in the face of the latest upsurge in COVID-19 cases. However, it is also a function of some of the structural changes in the property sector that have been under way for some time, but have accelerated as a result of the virus.

The RICS Occupier and Investment Sentiment Indices for the Americas suggest that there has been little change in the mood among occupiers over the past quarter at a headline level, though investment sentiment is somewhat less negative than previously was the case. Broad trends are mirrored in the results from the US (not surprisingly, given its large weighting in the aggregated data), while in Canada, the feedback, though still very downbeat, has seen a slight improvement in both segments of the market compared with the lows recorded in Q2. That insights provided by respondents is still consistent with lower rents and capital values over the next 12 months.

Sector divergence remains key feature

Predictably, the Q3 results show huge divergence in sector performance with COVID-19 continuing to push the real estate industry to confront structural changes. The readings capturing occupier demand to take up new office and retail space are at historic lows with availability rising sharply and landlords under the inevitable pressure to provide greater incentives. In contrast, the appetite for logistics sites continues to grow as do the rent expectations for the better-located properties.

In the US, respondents project prime industrial/logistics space seeing rental growth of around 4% over the next 12 months. For secondary sites, the expectation is for a 2% increase, which is not far behind what is being pencilled in (according to the survey) for data centers. All the other asset classes covered in the Monitor are seen as likely to face rent declines with secondary retail (-14%) and hotels (-13%) at the bottom of the pile. Against this backdrop, it is unsurprising that there is increasing discussion about the scope to repurpose shopping centers to residential.

Markets still not compelling value

Despite the pressure on real estate prices, particularly in the sectors noted above, the perception among respondents to the survey is that both the US and Canada markets are only now approaching what might be described as fair value. For both markets, around half of the respondents to the survey

took this view. That said, somewhere between one-third and two-fifths still perceive real estate to be, to some degree, expensive. Alongside this, roughly two-thirds of contributors believe the US and Canada markets to be in either the early or mid-phase of the downturn (rather than at the floor), implying that further weakness is likely in at least the near term.

This challenging picture is also visible in investment activity indicators that we chart such as new enquiries, which continue to remain very subdued away from the logistics space (and some alternative assets). Foreign investor trends are also broadly reflective of this pattern with generally little interest in offices and retail, notwithstanding the ongoing appetite of some opportunistic buyers.

Simon Rubinsohn, RICS Chief Economist, commented: “COVID-19 is casting a long shadow over global real estate, and its mark will last well into the future. And even though market sentiment is no longer at its nadir, it is very weak and fragile indeed in the face of continued uncertainty. What economic recovery we have seen in many countries remains at risk in the face of heightened concern over rising cases.

“But while economic growth will likely be slow and uneven globally, structural changes within real estate have been far more rapid. The pandemic has accelerated the decline of traditional retail assets, with negative sentiment now filtering through into reported vacancies. The shift to e-commerce is not a flash in the pan, while greater remote working is unlikely to be a short-lived either. This presents longer-term growth opportunities in several sectors. Even when the global economy is on surer footing, demand for industrials and data centres, for instance, will be here to stay.”

Paul Bagust, Global Property Standards Director, RICS: “Uncertainty still abounds for real estate. Flexibility and innovation have been central to the short-term response to the pandemic and the re-opening of buildings, and they will be even more important as consumer and investor demand evolves, and organisations look ahead to an eventual recovery.

“As a result, city centres will continue to change. Flexible and hybrid building use is likely to become more widespread, and will help greater embed resilience into the built environment, allowing asset owners to react to changing demand in certain sectors. Hotels, for instance, could begin to embed workspace. Businesses are also taking a more nuanced view of their office footprint, with the traditional approach to city office space being replaced with property strategies that embrace technology, reflect the changing needs of workforces, and focus on maximising the value buildings deliver.”