Months after much of Asia emerged from coronavirus lockdowns, commercial real estate dealmaking remains far below pre-pandemic levels, a sign that markets face a long, slow recovery just as hopes rise for vaccines to make offices, hotels and malls safe again.
Even in places that are conquering covid-19, investors are taking it slowly. About $128 billion in commercial real estate traded hands globally in the quarter ending Sept. 30, little changed from the previous three-month period and the lowest level since early 2012, according to Real Capital Analytics Inc.
The value of third-quarter deals sank 27% in Asia, 37% in Europe and 59% in North America from the third quarter of 2019, CBRE Group Inc. reported.
"Overall, we expect the real estate recovery, particularly the office sector, to lag the broader economic recovery by several quarters," CBRE Group Inc. Global Chief Economist Richard Barkham said in a Nov. 12 note.
Conventional wisdom has been that the pandemic accelerated real estate trends already underway, such as raising values for industrial and logistics properties as e-commerce replaces old-style shopping centers.
When it comes to dealmaking, there's no sign of a speedup, even in regions where the virus remains at bay.
Lending in the U.S. for commercial and multifamily real estate is forecast to remain below pre-pandemic levels at least through 2022 with this year's new loans plunging 34% from 2019, according to the Mortgage Bankers Association. Global fundraising sank more than 50% to $21 billion during the third quarter, as investors backed away from committing money, according to Preqin Ltd.
"The property market as a whole continues to be in the doldrums," Ee Fai Kam, head of Asia operations for Preqin, said in an email.
U.S. office prices continued to fall at about a 1% annual rate through last month, Real Capital Analytics reported Thursday. Suburban offices have led to that slide, falling 1.6% year-over-year in October and posting five consecutive months of declining yearly returns.
Offices still comprise the biggest share of commercial real estate transactions, about one-third of the global market in the third quarter, followed by 24% for multifamily, 20% for industrial, 13% for retail and just 3% for hotel, according to CBRE. In Asia, offices made up more than half of institutional investments.
John Saunders was already back at work at his Hong Kong office in late April after the city's quick progress getting coronavirus cases under control.
As chief in Asia for BlackRock Inc.'s real estate unit, which oversees $26 billion globally, Saunders has seen new leasing resume for office buildings in Tokyo, Shanghai and Sydney, where virus cases have declined dramatically. The number of offers crossing his desk has grown as sellers test the market or feel pressure to raise cash. But he says it's still not time to buy -- and not just because covid-19 is rampaging again across Europe and North America.
"I think the smart money is being very patient," Saunders said in a telephone interview. "Buying tomorrow is going to be much better than today."
Banks, technology companies and other large global employers are unsure how much space they'll need as remote working becomes more acceptable, an uncertainty that's making it hard to value properties, especially as renewed lockdowns sweep the West.
"It's almost feeling like we're back to square one," Carly Tripp, U.S. chief investment officer for Nuveen's real estate division, which manages $127 billion in global assets, said in an interview.
The story has been different in Asia. In China, where the outbreak started, domestic travel and shopping have rebounded to almost pre-covid norms, Tripp said.
Nuveen co-owns five Chinese outlet malls, where stores report record high sales as consumers spend money near home rather than overseas, she said. Office employees have also returned to Nuveen's buildings in Asia, because working from home is challenging in the region's typical cramped apartments, and there's a cultural preference to be in the office, she said.
"Showing up every day is really important to progressing your career," Tripp said.
Property investors aren't coming back as fast as consumers. Valuations for Hong Kong's grade A offices may slump around 20% this year, according to Jones Lang LaSalle Inc.
Travel restrictions are impeding cross-border deals, a shift from the global financial crisis, when international money poured into financial centers like New York and London that were seen as secure bets.
Areas where the virus is now under control often require visitors to quarantine, inhibiting people's ability to inspect properties. The most resilient markets have been countries like Germany, Australia and South Korea, where domestic pensions, insurance companies and other sources of capital are cutting deals, according to Real Capital data.
"The pandemic stopped Korean investors from going overseas for real estate investments, making the domestic office market more attractive," said Joann Hong, a research and consultancy director in Seoul at Savills Korea Co.
One big thing must change before deal volume rebounds, according to Simon Mallinson, a London-based economist at Real Capital Analytics.
"There's no forced sellers, and buyers are expecting discounts," he said. "Activity won't recover until buyers and sellers align."