As CRE Deal Volume Drops These Sectors Are Poised to Outperform

WASHINGTON, DC—This quarter, total real estate deal value contracted by 10.2%, compared with the same period in 2018, according to PwC’s Q3 Outlook. Indeed, this drop continued a trend seen throughout the first nine months of the year, with announced value of CRE deals slipping by 3.8% from the same period in 2018.

Other numbers also show that 2019 is under performing. Deal volumes are off slightly from 2018 with Q3 down 6.9% from the same quarter in 2018. The Jan-Sept 2019 numbers have also been drifting downward; they are now down 1.8% over the five year average for the same seasonal period.

But PwC believes that this decline overstates the slowdown in the industry and that the market remains attractive for real estate transactions. “Deal activity is episodic and volatile—when you look at it quarter-by-quarter you can see big swings,” PwC Partner Tim Bodner tells GlobeSt.com. Also, in general, it is harder to do a deal today than it has been in the past, he adds.

But deals in certain sectors are getting done. Certainly the industrial and apartment asset classes remain robust and not surprisingly they contributed most to the industry’s deal value during the third quarter, with transactions totaling $40.1 billion and $32.9 billion respectively.

Deal value in the industrial sector rose 62.5% compared with the third quarter of 2018 and more than doubled compared with the second quarter of 2019. Overall, industrial real estate transactions accounted for 31.6% of the industry’s total deal value during the third quarter. That compares with a 15.1% share during the second quarter of 2019 and a 16.7% share during the third quarter of 2018.

There is an incredible appetite for logistics assets right now, Bodner says. “We don’t see any sign of that slowing down.” One challenge in the industrial category, though, is that pricing has risen to the point where it can be harder to get the deal to a place where it works, Bodner adds.

Besides industrial and multifamily, there are other sectors poised for strong growth, he continues.

Experiential real estate, a term usually applied to retail real estate but lately added to other asset classes, is one. Bodner cites all inclusive resorts in the hospitality sector as an example, such as family resorts and water parks. There is also expected to be more activity in the gaming and leisure space. As one example, Blackstone recently struck a deal to acquire the Bellagio for $4.25 billion—an illustration of a relatively new trend in the casino hotel industry in which owners sell off their real estate and remain as operators.

Bodner also predicts more investment by traditional real estate sectors in tech-enabling platforms.

In its report, PwC notes that changes in hospitality trends and guest preferences have led to differentiation in hoteling. “For example, professionals are increasingly using hotel lobbies and other common areas for conducting business. Some hotels are profiting by embracing the coworking model and adapting to demand for nontraditional workspace.” It notes that Accor Hotels launched its Wojo coworking concept in 80 locations, while Hoxton Hotel plans to introduce its “Working From” space in Chicago and London.

Also some investors are rotating towards asset classes or sectors that might not have been as active in the past, such as data centers, Bodner says. “We are also seeing an incredible amount of activity on all types of healthcare, from free-standing net lease assets such as dialysis clinics to hospitals.” In addition there is a great deal of capital now focusing on affordable housing, Bodner remarks.

None of this is to say that investors are throwing off concerns about the current economic and political uncertainties. But the larger point is that opportunities exist for investors willing to look at new trends. “The shift in trends and preferences in many sub-sectors opens the way for differentiation backed by many types of investors seeking higher yields,” the report said. “We expect to see the introduction of unique offerings in real estate that capitalize on emerging social, demographic, and economic trends.”