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28 JUL 2021

Optimism grows as improvement in global real estate markets continues

RICS Global Commercial Property Monitor, Q2 2021

  • Sentiment improving across the occupier market, closing the gap slightly compared with trends on the investment side
  • Industrials remain the strongest sector, led by Americas and Europe with record highs in the United States
  • Rental projections move out of negative territory for prime retail and offices, however rents in secondary retail and offices are still predicted to fall
  • Improving outlook as perceptions shift towards recovery, though uncertainty remains over future impacts of Delta variant

There has been a further improvement in sentiment across the global real estate market, as respondents highlight a continued steady recovery, with the Americas and Europe leading the way. Importantly the improvement is being recorded on both the occupier and the investor sides of the market, reflecting improved macro-economic factors.

Optimism improves among occupiers, edging towards levels recorded among investors

Sentiment amongst both occupiers and investors continues to recover, consistent with the expectation of a sustained economic recovery from the pandemic. The global sentiment reading for occupiers rose from -26% to -10%, whilst for investors it climbed from -10% to +1%. However, whilst forecasts for the global economy have strengthened, uncertainty remains over any future impacts of COVID following the upsurge in cases linked to Delta variant.

Global Commercial Property Sentiment Index*

The RICS global indicator, which tracks the sentiment of on both the occupier and investment side of the commercial property market, has risen for the fourth consecutive quarter, and whilst still negative, stands at -4%, its best level since Q4 2019 (+3%).

Industrials remain the strongest part of the market, with record highs in the Americas

Rising tenant demand for industrial and logistics property is contributing to this being the strongest performing sector, continuing the trend from previous quarters with the aggregated net balance rising from +19% to +30%. This has been particularly driven by the Americas and Europe, with the industrial tenant demand indicator hitting an all-time high in the United States. Industrials/logistics are also predicted to deliver the strongest capital value gains, alongside data centres and followed closely by the multifamily sector.

Global Capital Value Expectations by Sector

Rate of decline slowing in retail and resilience from prime offices

A slight shifting of sector trends can also be seen in retail, where although still heavily negative, the global metric for tenant demand has moved from -50% to -27%, showing the rate of decline in the sector is slowing. That said, in Europe, rents for retail are expected to remain under pressure with prime rents envisaged to fall by -3% in the year to come, while a hefty -8% decline is projected for secondary retail rents.

Meanwhile, tenant demand for office space is now showing tentative signs of stabilising with the negative reading improving from -41% to -16%. In Europe prime office rental expectations are showing resilience and have moved into marginally positive territory for the first time since the end of 2019, with 1% growth anticipated. However, there is a -3% fall expected for secondary office rents, indicating the importance of defining the function and location of offices in the future. The tenant demand for offices and retail are contrasted in APAC, where the results in Q1 were not as negative as elsewhere but the improvement in Q2 has been much more modest, edging up from -24% to -21% for offices and from -36% to -35% for retail.

Improving outlook as perceptions shift towards recovery

Reinforcing the more positive mood from respondents is that they now view global real estate as edging away from the downturn phase of the cycle, representing another small but a positive turning point. 46% of respondents perceive the market in an upturn phase compared to 36% in the past quarter, whilst only 40% suggest the market is in a downturn phase or at the bottom of the cycle, compared to 50% previously.

Perceptions on the Phase of the Cycle

Other key findings from our latest results include:

  • Results are mirrored across the majority of the globe, but Europe and the Americas is leading slightly, with APAC slightly behind, whilst the Middle East and Africa is lagging a little further behind due to pre-COVID challenges due to an overhang of supply.
  • Earlier in the pandemic, APAC was seemingly recovering quicker than other parts of the world. However, it should be noted that the responses for this set of results were taken in June when lockdowns in parts of APAC may have had an impact on the feedback.
  • Concerns on valuation of real estate remain, with just under half of respondents viewing commercial property as being expensive or very expensive.
  • Significantly, global capital value expectations have shifted noticeable for hotels, suggesting they are on the edge of recovery as the global economy reopens. In Q1 a -5% drop was expected but respondents are now taking a more neutral position.

You can read the full report which contains a global overview and in-depth regional analysis here.

Tarrant Parsons, Economist at RICS, commented:

“The latest survey feedback is consistent with a steadily recovering picture across the global commercial real estate market. Although industrials/logistics (supported by rapid growth in e-commerce) remains the only mainstream sector seeing an outright uplift in demand at the aggregate level, the negativity surrounding offices and retail has diminished to a significant degree in Q2.

“All global regions continue to see headline sentiment indices move further away from the lows hit during the middle of last year, with the improvement over the latest survey period a little more evident within the Americas and Europe. Meanwhile, despite the Middle East and Africa and APAC also seeing a slight pick-up, there remains a somewhat more noticeable excess of supply over demand in these two regions.

“There are some alternative asset classes which display a firmly positive outlook right across the globe, with data centres, multifamily residential and aged care facilities in particular displaying solid capital value expectations for the year ahead.”

*The Global Commercial Property Sentiment Index is a weighted composite measure capturing overall market momentum, encompassing variables on supply, demand, and expectations