Following the turbulence in 2022, opportunities will abound this year due to repricing, continued outperformance of high-quality office assets, and deflation in some key sectors, according to Hines’ global outlook titled “2023: Navigating Through the Labyrinth”.
The report analyzes transaction volume, debt availability and asset pricing and identifies opportunities in the Americas, Asia, Europe.
Global Chief Investment Officer David Steinbach said, “In a period of global economic discord, the key to unlocking transaction volume will be debt availability and the reset of pricing levels more in line with expected fundamentals. Successful acquisitions and developments in the new year will focus on high quality assets that meet customer demands for simplicity and flexibility. We expect to see more accretive opportunities emerge as a result.”
Looking at global trends, the report reveals areas that continue to have strong fundamentals as well as signs for investors to pivot strategies, including improvement in transaction volume, rising availability of traditional debt, and cost-averaging down (i.e., deploying capital patiently during a market disruption).
The report provides sector insights for the Americas, Asia, and Europe and suggests how real estate investment strategies should evolve this year:
Investors are still recalibrating their portfolios, as they have seen downturns on both the equity and fixed-income sides of their ledgers. Tenants have been reviewing their growth plans for the year ahead and pausing on new activity, however, there is potential for opportunities during the second half of the year, including:
· Industrial: Industrial fundamentals are still strong in most markets, but demand will drop if discretionary consumer spending is negatively impacted by the downturn. The most interesting opportunities are in high barrier markets where yield premium to acquisition value is substantial.
· Office: Continued caution is warranted as the full impact of hybrid schedules has not been fully absorbed. Flight to quality will remain evident in new development performance as a better designed, modern, sustainable product.
· Living: Careful submarket selection is paramount, as some markets are oversupplied, and affordability ratios are elevated. Secondary and tertiary markets may provide outsized opportunities arising from migration trends, and there is continued demand for larger units, activated green spaces, and single-family rentals.
· Retail: Compelling opportunities are emerging to redevelop dated retail for the highest and best use, such as grocery-anchored, lifestyle and open-air service-oriented retail offerings and last-mile logistics.
Against the backdrop of this year’s macroeconomic and political headlines, the rebalancing of real estate product types has largely played out. Trends have indicated that the real estate industry’s main sectors may converge further. Opportunities exist in:
· Industrial: Demand for logistics space remains strong to address e-commerce demand, and as Asia’s economies become wealthier, there is a need for more cold-storage facilities.
· Office: Assets have seen strong growth in high-value locations. While Asia has not been hit as hard by working from home or hybrid schedules, attracting new tenants to office spaces will require a new creative dimension of user experience.
· Living: Rental demand continues to grow in markets where homes have become increasingly unaffordable; this includes developed markets like Australia, Korea and Japan.
· Retail: Yields for retail assets have been attractive relative to other property sectors. Increased stability in retail fundamentals will continue as vacancies and rents have been stable or moving in the right direction.
· Emerging Sectors: Sectors such as life-sciences are institutionalizing, suggesting higher income yields and growth prospects.
As we look at strategies for 2023, the ‘beds and sheds revolution’ of recent years has played out. There is no longer a standout winning sector. Our ability to understand nuances of quality within a product type has become more important than just picking the right general bucket. Opportunities will include:
· Industrial: As capital demand normalizes, focus is expected to return to individual assets and location quality.
· Office: The future of the office debate continues with a focus on a flight to quality – with occupiers seeking a path to net zero. This means there is a smaller pool of viable assets, yet a focus on prime buildings given ESG should outperform older assets.
· Living: Mainstream residential is losing its appeal as yields tighten and heightened regulation (e.g., Ireland, Netherlands, Germany) has restricted rental growth. However, niche product types such as senior living, student housing and serviced apartments maintain their appeal.
· Retail: The sector is faring better than expected. Negative sentiment has resulted in attractive pricing; however, new economic headwinds and uncertainty will delay a quick sector rebound as consumer confidence continues to draw back.