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Global commercial real estate investment volume fell by 7.5% in the first half of 2019 compared to the first half of 2018, CBRE reported.
Investment in EMEA dropped by 20% in Q2 as volumes fell to US $57 B. This resulted in a 19% decrease for the first-half as volumes fell to US $109 B. A significant portion of the decline in EMEA has been driven by weakness in the UK, reflecting caution over Brexit. Without the impact of the UK and the retail sector, investment in EMEA was down just 3% in H1, JLL reported.
Momentum in Paris has picked up as liquidity in the second quarter rose to US $8.4 B, nearly 40% higher than the city’s long-run quarterly average. Activity in the first half has been overwhelmingly concentrated in the office sector, which accounted for 90% of all investment in Paris.
One of the largest transactions in Q2 was the acquisition of a portfolio of 28 core office buildings in the Paris CBD. Swiss Life acquired the properties from Terreïs for US $2 B.
Investment in the Asia Pacific market dropped by 2% to US $41 billion during the second quarter, the vigorous start to the year boosted H1 activity to US $86 B, according to JLL. Not only does this represent a 6% increase in liquidity, it also marks yet another record for the region. Leading the way is China, the world’s second most liquid real estate market during H1 2019.
In Singapore, the total real estate investment sales volume amounted to US $6.7 B in Q2 2019, increasing by 49% quarter-on-quarter. This brought the H1 2019 volume to US $11.2 B.
The largest private transaction was AEW’s acquisition of Chevron House for US $1.0 B, followed closely by the half stake sale of Frasers Tower for US $982.5 M.
In Hong Kong, commercial real estate investment weakened further in Q2 2019. Transaction volume totalled HK $21.1 B, a decline of 6.2% quarter-over-quarter and the second-lowest quarterly total recorded since Q2 2016. Activity continued to be driven by the office sector, which accounted for 53% of total transaction volume.
For the first time since 2012, more foreign capital is flowing out of US real estate this year than into it.
This “pullback” in US commercial real estate isn’t the cause of one group of investors dropping out, but there were some notable movements. Real estate investments from China dropped 74%, while investments from Singapore dipped 55% this year over last. Investors from Canada and Germany, however, increased their purchases year-over-year in 2019. Middle Eastern investors increased real estate purchases as well, particularly in the apartment sector.
The driving force behind the drop has been a lack of available deals large enough for sovereign wealth funds and their kind, the study said. The percentage of cross-border investment that has gone to a portfolio or corporate acquisitions has plummeted compared to single-asset transactions.
Brookfield Asset Management remains a dominant force among foreign investors into the US. In the past four quarters, Brookfield has spent over six times as much on US real estate as the second-most-active capital source, German-based Allianz, according to RCA data. Yet Canadian investment dropped the most of any region in the world in the first half of the year, Biznow reported.
Though Welltower has been a net buyer in 2019, its largest single transaction was a sale of 48 senior living properties in New England to a private institutional buyer for $1.8 B at the start of August.
Vancouver-based Onni Group made one of the biggest acquisitions of a stabilized asset in the country this year. The company dropped a reported US $630 M in June on the two-building Wilshire Courtyard office development in the Miracle Mile neighbourhood of LA.
Blackstone announced in September that it had bought a 179 M sq. ft. portfolio of US industrial assets from Singapore-based GLP for $18.7 B. GLP entered the US logistics market when it bought Blackstone’s 117 M sq. ft. industrial portfolio, IndCor, for US $8.1 B in 2014. Since then GLP sold about US $1 B of that portfolio, which was mainly big-box logistics, and used it to expand and become the second-largest owner of industrial assets in the US after Prologis. As well as IndCor, it bought or built around 62 M sq. ft. of urban infill logistics, the kind of edge-of-city locations that are becoming vital in helping retailers fulfill e-commerce orders, Bisnow reported.
Real estate investment transaction volumes in 2018 were the strongest on record, reaching US $1.75 T and remain strong through the first part of 2019, according to Cushman & Wakefield.
At the end of the first half of 2019, JLL reported that capital markets across Asia Pacific have experienced an acceleration of investment volumes and a more accommodative financing environment.
2018 delivered a record level of net absorption across prime Asia Pacific office markets, driven by flex space operators and supported further by IT/tech and professional service sectors.
Across the region, vacancy rates in a number of major markets are at or near their 10-year lows. Major cities particularly in Japan and Australia, as well as Hong Kong have notable tight vacancy rates, which has limited further net absorption and has led to above-trend rental growth.
Tech companies have been shifting out of China in the wake of its trade war with the US.
Google is moving the production of its US-bound Nest thermostats and motherboards to Taiwan. The Wall Street Journal reports that Nintendo is shifting at least some production of its Switch console to Southeast Asia. Apple Inc. partner Foxconn Technology Group said it would be able to manufacture all US-bound iPhones outside of China if it were forced to do so. Wistron Corp., a company that makes servers for Facebook and Microsoft, is reportedly looking to shift some production away from China.
Despite rising labour costs, Vietnam has been one of the beneficiaries since trade war between the world's two largest economies began. The Southeast Asian nation's exports to the US increased 38% on the year in the first four months of 2019, and more tech companies like Apple, Dell, Google and Amazon are considering shifting to the country to avoid the tariffs.
In the first half of 2019, Singapore investors acquired more than US $10 B in overseas real estate, according to JLL. The city-state has emerged as Asia Pacific’s largest source of outbound capital.
Forty percent of these funds were directed to the Chinese market, while US $430 M was directed to the US market.
Cross-border investment volumes out of Singapore have been growing at 12% annually for the past five years with annual volumes averaging US $28 B from 2016 to 2018.
Sovereign funds GIC and Temasek have huge sums of capital to deploy each year and “(t)he merger of CapitaLand and Ascendas created a hugely powerful global vehicle that will continue to deploy large sums of capital overseas,” says Tim Graham, Senior Director, International Capital, Asia Pacific at JLL.
Singapore has one of the most successful real estate investment trust (REIT) regimes in the Asia Pacific region, with 50 REITs and business trusts listed. However, the relatively small size of the Singapore real estate market forces them to look overseas, says Graham.
Property developer City Development Limited (CDL) acquired 12.4% of Singapore-listed IREIT Global in Q2. The REIT owned 5 German office buildings and CDL called the acquisition a “gateway to real estate opportunities in established European economies”.
As the investment hub of Asia, Hong Kong has experienced a decline in market conditions due to social unrest on the island. Tourism numbers in July 2019 were down 4.8% from the year before and retail sales were down 11.4% in July year over year.
Low unemployment and a low risk of interest rate increase may help to improve the retail sector in H2 2019, CBRE reports. However, they predict that spending will remain ‘prudent as labour market conditions could turn negative quickly should the US-China trade conflict escalate and economic prospects deteriorate further’.
Despite volatility and trade uncertainty, the US economy continues to expand at a healthy rate.
The US economy officially began its 11th consecutive year of growth in the second half of 2019, a new record for the longest economic expansion in history.
The economy continued to add jobs during the first six months of 2019, although the pace of job growth has slowed from last year. The last time employment declined was September 2010. Real GDP grew by 3.1% in the first quarter of 2019, 90 bps higher than the 2.2% growth rate in the fourth quarter of 2018. Oxford economics estimates that the increased US-China trade tariffs will have a 15-20 basis point impact on real GDP growth in 2019.
As of August 30, 2019, the futures market suggested a 99% chance of at least one more 25 basis point rate cut and an almost 80% chance of at least two more in 2019.
Commercial real estate investment volume of US $121.5 B in Q2 increased by 3.4% year-over-year and was the highest Q2 total since 2015. Individual asset sales volume increased by 9.3% to US $91.2 B, the highest Q2 total since at least 2004 (the earliest data available), CBRE reported.
Among the major property types, office registered the largest annual increase in volume (30.5%), followed by multifamily (20.6%). Total industrial volume decreased, but individual industrial asset sales volume was up by 2.7% year-over-year.
Acquisitions by REITs and public companies increased significantly year-over-year. Entity-level acquisitions by this buyer type totaled US $2.2 B in Q2 versus just US $28 M in Q2 2018. Individual asset and non-entity portfolio volume was also up by 45% from the 2018 average. Institutional investors were net sellers for the second consecutive quarter, with US $2.2 B in net dispositions in H1 2019, according to CBRE.
The tech sector continues to drive the office market. It has been the largest space user for the past five years, representing 25% of all leasing activity, according to Cushman & Wakefield.
Despite an additional 126.8 M sq. ft. of new industrial product delivered in the first 8 months of 2019, vacancy was still 4.9% in Q2 2019, significantly lower than the 5 year average of 5.8%. Construction starts in Q2 increased by 20.3% year-over-year, with 36 markets experiencing an uptick.
The European Central Bank is to restart quantitative easing in order to revive growth.
Growth is seen slowing sharply this year due to lingering weakness in the industrial sector impacted by the ongoing decline in global trade volumes.
Risks to the outlook remain elevated and include rising global protectionism, slower-than-expected growth in China, Brexit and other political concerns.
The European Central Bank (ECB) unveiled a broad package of stimulus at its meeting on 12 September, in order to revive growth and inflation in the downbeat Eurozone economy. The ECB decided to cut the deposit rate by 10 basis points deeper into negative territory and announced that it was restarting quantitative easing.
According to Eurostat, GDP increased a seasonally-adjusted 0.2% in Q2 from the previous quarter, half that of Q1’s 0.4% expansion.
Foreign groups who had previously invested elsewhere in Europe are now looking at Paris as an alternative to London where Brexit-related uncertainty continues to weigh on the market, JLL stated in their Global Q2 report.
Cross-border investors have been especially active, particularly South Korean groups, helping make Paris the largest recipient of cross-border capital during H1 2019. The most significant cross-border transaction was a US $2.0 B portfolio acquired by Swiss Life, consisting primarily of prime offices in the CBD.
According to JLL numbers, the region’s top growth markets have been Sweden and the Czech Republic, which both saw double-digit increases in liquidity during H1 2019.
In the UK, institutions have decreased their investment activity. A slowing UK economy and a fast-approaching Brexit deadline have made those already heavily invested in the UK more cautious.
The main sources of foreign capital are changing. Top investors from the United States, China and Hong Kong have either been net sellers or absent from the market, while investors from South Korea and Israel have also been buying in large volumes. Both countries are now top 20 net investors into the UK, displacing traditional European sources like the Netherlands, Cushman & Wakefield reports.
Following a prolonged period of inactivity in the office sector, development picks up across Europe. Office completions reached circa 9.8 M sq. ft. in Q2 2019— 8% above the first quarter of 2019. Full-year 2019 completions are forecasted to surpass 60.3 million sq. ft.
European office vacancy contracted by 20 bps to 5.8% in Q2 2019— the lowest level for 17 years. This has been underpinned by healthy occupier appetite (particularly for new build space) and conversions of structurally vacant stock to other uses.
In Europe, 19 of the 24 Index markets recorded a drop-in vacancy in Q2, with the exceptions being London (+50 bps to 4.9%), Dublin (+20 bps to 6.4%) and Prague (+20 bps to 4.5%). Vacancy rates were unchanged in both Budapest (7.1%) and Luxembourg (3.6%). The largest falls were seen in Barcelona (-120 bps to 5.0%), Warsaw (-110 bps to 8.0%), Madrid (-60 bps to 9.5%) and Moscow (-60 bps to 9.4%).
In CBRE’s 2019 Investor Intentions survey almost 20% of EMEA respondents ranked residential real estate as the most attractive sector. This number is up from 7% in 2010. Investment is tracking with these sentiments. CBRE reports that over the last 10 years multifamily investment across Europe has increased by 10 fold. The sector attracted €50 B of investment in 2018, making it the second-highest traded sector after office.
Rising levels of urbanization, socio-demographic shifts and the decreasing affordability of homeownership are driving multifamily demand.
In the UK, shopping centre owner INTU Properties has announced plans to develop 5,000 rental homes around its sites to hedge against the struggling retail sector.
Sweden’s Heimstaden recently purchased a €1.4 B portfolio in the Netherlands from Roundhill, comprising nearly 10,000 units.
Also in the UK, PSP Investments and Quadreal Property Group recently partnered with Unibail-Rodamco-Westfield to deliver 1,200 rental homes in London.
Dream Global REIT announced in September that it is to be acquired by real estate funds managed by Blackstone in a CA $6.2 B transaction.
Dream Global's real estate portfolio was created at an average acquisition cap rate of approximately 6.8%, which includes the significant Netherlands portfolio, valued at an 8.0% transaction cap rate in 2017, and currently consists of over 200 properties located in over 100 Western European cities.
As traditional asset classes become fully valued and yields shrink across the country, investors are looking to alternative asset classes for superior returns.
“Investors are seeking better yields and are increasingly prepared to consider a wider range of property types, different financing options and adjusted risk returns to achieve their goals,” said David Haynes, International Partner at Cushman & Wakefield UK Capital Markets.
Global investment into real estate alternatives, including student housing, seniors housing, laboratories, data centers and cold storage, reached a record high of US $52.1 B in 2016, according to a May 2017 report by JLL. This was the most recent JLL data available.
According to the real estate firm, alternatives made up 6.2% of the total commercial real estate market that year. Institutional participation in alternatives was 41% of the total alternatives market in 2016, nearly double the 2014’s level.
The increase in activity in the alternative space has resulted in the compression of yields which are still higher than traditional asset classes.
“Forward-looking returns in the high 4 percent to low 6 percent range (on institutional quality real estate) are somewhat uninspiring compared to potential returns in the mid-6 percent to mid-7 percent range for alternative real estate asset classes,” said Tyler Blue earlier this year. Blue is the Vice President of the Advisory and Consulting arm of research firm Green Street Advisors.
In 2016, student housing, seniors housing, laboratories and data centres made up more than 99% of the market for alternative assets, with cold storage making up the remainder.
Life Sciences Space
Biotech R&D has grown 88% over the past 20
years.
An abundance of capital allocated to the lifesciences industry is helping fuel strong growth. The US $15.8 B in annual life sciences venture capital funding through Q3 2018 was an 86% increase from the prior year.
Commercial real estate is a beneficiary as life sciences require significant square footage for laboratories, office workers, R&D and device manufacturing.
Boston-Cambridge and the San Francisco Bay Area are leading life sciences clusters in the US, based on a compilation of CBRE data, however, significant industry momentum in New York City— evidenced by more than 1.5 M sq. ft. of lab space under construction, strong municipal support and a major concentration of sought-after talent— support it as one of the nation’s rising life science clusters.
Self Storage
Historically, self-storage has performed well in bear markets compared to other commercial real estate property types, says Chris Sonne, national self-storage valuation leader at CBRE.
Market sentiment is that cap rates in the self-storage sector will increase by 25 basis points or less in 2019, Sonne said.
Self-storage properties have few vacant spaces, according to the data available. All five top REITs in the sector reported average occupancy rates above 89% in Q2 2019. The self-storage properties managed by Cube posted a 93.7% occupancy rate at the end of Q2 2019.
As well, “(g)rowing secondary markets continue to have a strong appetite for self-storage space, supported by robust employment growth and high population gains,” according to analysis from the November 2018 report from data firm Yardi Matrix.
Data Centres
The extensive use of 4G LTE technology and upcoming 5G rollouts will increase internet penetration and drive the growth of data centres across the globe.
The emergence of edge computing is one of the primary factors fostering facilities development in secondary data center markets across the globe.
Billions of dollars are being invested in data centres on a monthly basis.
João Marques Lima, Founder and Editor-in-Chief of Data Economy, said in May that “Over US $10 B have already been disclosed, as having been spent on M&A business and facility acquisitions, possibly driving 2019 to break all M&A records in the data centre space.
At the end of August, Macquarie Infrastructure Partners IV and Netrality Management acquired Netrality Data Centers. Netrality owns and operates six data centres in five US markets.
Student Housing
At the current rate of population growth and participation in higher education, by 2030 there could be as many as 276 million students worldwide.
JLL Alternative real estate report 2018 states that India has 34 million college students, a third of whom are studying outside their home state. Tokyo has 1.5 million post-secondary students, but no global standard student housing facilities. In most Australian cities, there is less than one purpose-built student accommodation (PBSA) bed for every 10 students.
In the US, occupancy is over 95% on average nationally, says Taylor Gunn, former Director of Student Housing at Axiometrics. “We’re seeing performance continue to outpace former years,” she says.
Real Capital Analytics (RCA) reports that the combined assets under management of student REITs globally total almost US $4.9 B, the largest of which are Unite Group Plc in the UK and American Campus Communities in the US.
Significantly fewer funds closed in Q2 2019, as caution seemed to overtake investors according to Prequin.
This has been an unprecedented period of fundraising that has pushed dry powder to a new high of US $1.54 T as of the end of June 2019, meaning that many investors have significant commitments yet to be deployed, Prequin reports in their Private Equity and Venture Capital Quarterly report.
Meyers Research Managing Director, Steve LaTerra, has seen money targeting real estate more than double since 2012. The amount of dry powder has been steadily increasing since 2014 and more money is chasing real estate opportunities today than at any time in history.
Private equity real estate fundraising hit a five-year low in the second quarter of 2019, with $29 billion in total. That marked a 37% decline from $46 billion raised in the first quarter of the year.
Prequin states that while the greatest share of investors still prefers funds focused on real estate in Europe (52% vs. 65% last year), funds focused on North America gained in favor, with 50% of investors planning to allocate money to the region’s real estate over the next 12 months vs. 42% in 2018. Funds with a global reach were the next most popular, at 36% (vs. 34 % last year).
In Q1, Brookfield Strategic Real Estate Partners III raised US $15 B while the Lone Star Fund XI raised US $8.2 B. In fact, the top ten largest funds to close in the first quarter of 2019 collectively raised US $36 B of investor capital, according to data from PERE.
Many global investors are still under-allocated to Asia Pacific real estate and continue to ramp up investments in the region across the risk/return spectrum. As a result, Asia value add and opportunistic funds continue to see solid inflow, JLL reports.
Closed-end private equity fundraising in Asia Pacific reached a 10-year high in 2018, falling just shy of US $20 B. Fundraising, however, has become more concentrated within a smaller number of managers.
Dry power within APAC focused funds is nearing US $40 B. Capital deployment will remain challenging in this competitive environment, according to JLL.
However, significantly fewer funds closed in the second quarter, as caution seemed to overtake investors Prequin stated in their Q2 2019 Report on Private Equity Real Estate Fundraising.
A higher percentage of investors expressed the intention to commit money to real estate funds dedicated to core strategies over the next 12 months– at 63% compared to 49% a year ago. The “core” strategy was by far the most popular with investors during the second quarter, followed by value-add funds (56%) and core-plus funds (40%).
Debt funds also rose in popularity in Q2, to 25% from 17% a year ago.
Of the US $4 T of commercial real estate debt, approximately 70% is currently held by traditional lending institutions while debt funds account for less than 10%, Prequin reports.
Even so, Richard Katzenstein, Senior Vice President and National Director at Marcus & Millichap Capital Corp. in New York City estimates that there are between 115 and 120 debt funds that have been active over the past couple of years.
Life insurance companies have maintained a steady appetite for commercial real estate debt over the past several years. Commercial mortgage holdings increased by 34 basis points, to reach 12.06% of total invested assets, according to the CREFC & Trepp Survey.
“What seems to be in favour for all lenders these days seems to be industrial,” says Gary Otten, head of real estate debt strategies, MetLife Investment Management. That is due to the growth of e-commerce and demand for warehouse and fulfillment space.
“Multifamily and industrial are clearly the favoured product types out there, but we have seen renewed interest in office,” says Jeffrey Erxleben, Executive Vice President/Regional Managing Director at NorthMarq Capital, a commercial real estate debt and equity provider.
68% of the world population projected to live in urban areas by 2050, says UN.
The growth of the urban population in Asia Pacific is expected to exceed over 400 million people over the next 10 years. North and South America are expected to see their urban populations increase by just over 100 million.
The UN projects that 84% of Europe’s population will reside in urban areas by 2050. Based on the current population projections, this would equate to an additional 46 million people. The UK, Ireland, Sweden, Denmark, Norway and France are among the countries experiencing the highest rates of urbanization.
Urbanization influences a broad range of issues including– infrastructure constraints, competition for land, planning, logistics and housing affordability.Continued urbanization will drive demand for homes in many cities around the world.
A 2018 report on European real estate trends by PwC and the Urban Land Institute calls urbanization “perhaps the most significant influencer of real estate strategies in recent years.”
The demand for available housing exceeds the supply, resulting in higher prices across the globe as residential development has not kept pace with population growth.
Renters, not buyers, will be the most seriously threatened when it comes to rising housing costs and limited housing supply. Rents in the US increased by 22% on average between 2006 and 2014, while average incomes decreased by 6%.
To accommodate the increasing demand for housing, it is likely that the trend of adaptive reuse will only grow. Adaptive reuse is the transformation of a building from one use to another and it has been occurring in cities around the world. In New York City, 80 Forsyth Street, which was originally a synagogue, and 8 Thomas Street, which was built to be a soap manufacturer showroom are examples of buildings that have been transformed for residential use.
Berlin has created a universal rent cap for its low-income residents. Inclusionary zoning has picked up steam in many US cities. British Columbia instituted a Foreign Buyer’s Tax on real estate investments. Tokyo has kept housing relatively affordable through extremely high rates of residential construction.
According to Richard Florida, these are all worthwhile ideas with proven benefits, but ultimately, they may not be enough to alter the structural forces in play.
Amid rapid urbanization, neighbouring cities are joining forces to create mega-regions that are increasingly driving the global economy.
In China, city planners are investing in mega-region policy and infrastructure to strategically distribute the country’s fast-expanding industry and population, JLL states in their May 2019 article “How a New Era of Mega Regions is Taking Shape”.
China’s Greater Bay Area is a mega-region spanning 11 cities including the financial hub of Hong Kong, the administrative and trading hub of Guangzhou, and the tech city of Shenzhen, connected by high-speed rail and infrastructure that enables people and businesses to communicate efficiently.
A recently announced mega-region initiative aims to develop 19 clusters of
smaller cities around a primary hub, including the Greater Bay Area, as well as the Yangtze River Delta economy around Shanghai and the Jingjinji region around Beijing.
The cities of Jingjinji, for example, could help absorb Beijing’s high rates of
growth and alleviate its pollution and congestion.
The creation of mega-regions is “a response to the frenetic pace of urbanization, a way to diffuse the pressure on the world’s major cities,” says Jeremy Kelly, Director, Global Research, JLL, and China is not the only
country to have them.
In the UK, for example, the upcoming high-speed rail HS2 could mean the emergence of a new mega-region between London and Birmingham, helping relieve the pressure on the capital’s housing and traffic.
In the Netherlands, the Randstad mega-region spanning dozens of cities was established decades ago, setting the stage for the Holland Metropole where high-speed rail connects Amsterdam, Rotterdam, Utrecht and The Hague, allowing each to draw on the resources of three other cities under an hour away.
With workplaces and work itself becoming increasingly digitalized, new talent needs are emerging and should become a business priority according to Deloitte.
The commercial real estate sector, as a whole, feels the pinch of attracting young talent,” says Marc Torrey, global sales director at SelectLeaders, an online job platform that focuses on the real estate and finance industries.
“Next-generation talent, both millennials and Gen Z, appear to prefer working in a start-up culture,” according to Deloitte.
As a result, businesses are increasingly using shared workspaces as a way to foster innovation among employees and win the war for talent.
“The industry, meanwhile, seems unprepared to recruit, engage and retain this talent pool— 93% of pension funds and 95% of hedge fund investors believe so. As a result, many commercial real estate companies continue to face a scarcity of skilled talent,” Deloitte reported in their 2019 Commercial Real Estate Outlook.
Further, most CRE companies also appear unprepared to deal with the high proportion of Baby Boomers likely to retire over the next three to five years.
This pinch also compounds the struggle to diversify an industry known to be mostly white and male, and where women continue to be promoted less frequently and see a greater pay disparity compared to men. While there have been moves within the industry to recruit more diverse candidates, there is still more that needs to be done, recruiters say.
“Senior leadership teams and boards should also include a fair and more even representation of women, minorities and the LGBT community. Investors—particularly 92 % of the respondents who were large investors with more than US $30 B in assets under management— believe that a more diversified board helps generate a better return.”
A 2018 report by McKinsey & Company, “Why diversity matters”, draws on a data set of over 1,000 companies covering 12 countries measuring profitability and longer-term value creation. It found that:
In order to compete with other industries, total compensation in commercial real estate increased by 15.7% between 2013 and 2018.
Along with rising salaries, commercial real estate firms are increasingly investing in recruiting and retention efforts. Here are some of the emerging trends that recruiting firm RETS Associates are tracking:
Market participants increasingly recognize the importance of sustainability in commercial real estate as a growth engine both on the equity and on the debt side.
Real estate corporations focus on sustainability as a profit driver by 1) reducing costs through energy efficiency upgrades and retrofits, and 2) increasing rents and values, through healthier buildings and sustainable certifications, all leading to higher property values.
Recent studies find evidence of lower default risk on commercial mortgages for buildings with sustainable labels, as well as better loan terms (lower interest rate and significantly longer interest-only periods), compared to those for non-green buildings.
Over the years, the broader concept of “sustainability” has evolved into the more targeted approach of ESG and for the past decade, investors have increased awareness about Environmental Social Governance (ESG) issues and their importance in investment decision-making. However, the tide has been turning into a more proactive approach to ESG investing, especially in commercial real estate.
According to the Global Real Estate Sustainability Benchmark (GRESB) study of 2018, the North America real estate sector improved its sustainability performance, with the regional average GRESB Score breaking the 70 mark, up from 64 in 2017. This is higher than the global
average (68) and second only to Australia and New Zealand (76).
However, when it comes to energy consumption, GHG emissions and water consumption, the average year-on-year reductions posted by the North American sector fell behind global averages. North American entities reported a 1.8% reduction in energy consumption (compared to a 2.5% global reduction); GHG emissions are down 2.9% in the region globally, emissions are down 4.9%), and water consumption increased by 0.3%, compared to a global fall of 0.5%.
REIT’s with above-average energy efficiency performance, taken as a group, outperformed below-average companies on stock price by nearly 2000 basis points, GRESB reported in 2015.
GRESB was launched in 2009 by a group of large pension funds who wanted to have access to comparable and reliable data on the ESG performance of their investments. Their ESG data and benchmarks now cover US $4.5 trillion in real estate and infrastructure value.
Tenant demand has been among the strongest drivers for greener workplaces. More tenants are seeking out green office space, and many are willing to pay more to occupy it.
According to the USGBC, commercial building owners and managers will invest an estimated US $960 B globally between now and 2023 on greening their existing built infrastructure.
BlackRock is aggressively launching products with high environmental, social, and governance (ESG) ratings. The firm’s CEO, Larry Fink, recently predicted that assets under management (AUM) in the ESG category will grow from the current US $25 B to US $400 B in 2028.
Investors, lenders, building owners, asset managers, and tenants all benefit from ESG initiatives. Sustainability consulting firm Verdani Partners reports that while tenants benefit from lower operating costs, building owners/managers enjoy increased rent, building values, occupancy, and retention. Meanwhile, lenders lessen their risk with reduced default rates and investors improve their ROI.
ESG assets and funds have accelerated since 2015, pointing to a growing demand for such strategies.
It is anticipated that Asia will power the next stage of ESG uptake, as China is poised to join Japan in accelerating disclosure and engagement. Key to this is Japan’s giant US $1.5 T Government Pension Investment Fund, Bloomberg reported in their mid-year 2018 ESG outlook.
“Every owner and investor should have an ESG strategy. There are four reasons. First, the business case is incontrovertible. Second, the expectations from stakeholders, including investors and tenants, will only increase. Third, the pressure from regulators and government will continue to rise. Lastly, it’s the right thing for all corporations to do for their brand, their communities, and their continuing social license,” stated Michael Brooks, CEO of REALPAC.
AI may offer big benefits for building efficiency and safety, as well as security and property access, ULI suggests.
The global artificial intelligence (AI) market size is poised to grow by US $75.54 B during 2019-2023, according to a new report by Technavio released in September, progressing at a CAGR of over 33% during the forecast period.
Artificial intelligence (AI) has quickly become the biggest disruptor in the commercial real estate industry. Numerous software platforms now use machine learning and predictive analytics to help investors ensure the profitability and sustainability of their portfolios.
Big data, behavioral modeling, and performance analytics are enabling highly targeted customer acquisition and market analysis that helps investors better understand how properties are performing in designated markets.
Companies such as WeWork and smart buildings such as The Edge already see big potential in analyzing user behaviour in their shared office space to refine their offerings, redesign the layout of their spaces, and create a feedback loop, Curbed reports.
There are three main ways that AI-driven real estate technology is helping drive property valuation and improve portfolio performance, according to Patrick Davidson, COO of G5, a company that focuses on real estate marketing optimization.
Process automation from AI offers a tremendous opportunity to lower costs associated with commercial real estate, especially those associated property management.
However, some of these advances may create additional costs, particularly those associated with protecting data and safeguarding access to building automation systems.
AI-powered retail applications can improve shopper experience through timing promotional discounts and suggesting products frequently bought together.
The iMirror by NOBAL is an iPad-like product bringing e-commerce to the in-store experience. Essentially any product you can purchase online is a fit for the iMirror. The screen allows consumers to continue shopping for other items while in the store and provides a check-out option if the customers add additional products to their carts using the iMirror.
The increasing use of artificial intelligence and robotics in industrial facilities can help the incredible growth of the logistics sector to continue, according to a new report from Avison Young. The report outlines how the advance in technology can help the sector overcome one of its key challenges: the availability of labour.
The Sunday Times reported that Amazon had been forced to increase wages in its UK warehouses because of a lack of staff. This is prompting developers to look at secondary locations with worse transport links but a higher availability of staff.
The increased use of technology like AI and robotics could mean that warehouses need fewer staff, making labour availability less of a factor, and meaning that prime locations become options again. This technology is not only changing the location of warehouses, it is changing the shape of them: it allows them to be built higher, from averages of about 39 feet to up to 98 feet, as automated picking machines access goods stored high up in mezzanine space.
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