EMERGING TRENDS IN REAL ESTATE - 2022 Global Outlook - ULI Knowledge Finder
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2022 Global Outlook
EMERGING TRENDS
IN REAL ESTATE
®
Contents
02 Executive
summary
04 State of
uncertainty
20 Financing
decarbonisation
34 Sponsoring
organisations
35 Interview
participants
Front cover: Marunouchi, Tokyo, Japan (Getty Images)
Nashville, Tennessee, US (Getty Images)
Emerging Trends in Real Estate® Global Outlook 2022 1
Executive summary
“Right now, everybody’s flying blind, and it’s much harder Just as everyone dared to hope that the The outlook for real estate is not just A key difference this time is that
to make decisions with money at stake.” pandemic is receding, Russia’s invasion dependent on the direct effects of industry may also have to deal with
of Ukraine has set off a new wave of Russia’s invasion of Ukraine on global the consequences of very swift
Senior director, global real estate adviser, apprehension across the world along economies but also on how the conflict changes in government spending in Some investors are
with fears of a wider conflict.
Global Emerging Trends in Real Estate 2022 will hit confidence among consumers, favour of defence and energy policies
thinking more about
businesses (or occupiers) and investors. and away from the areas that directly
The invasion is having devastating Against those unknowns, property affect real estate, such as infrastructure diversification in
consequences for the people of deal-making is expected to slow down, and housing. investment strategies
Ukraine, and there is no clear outcome especially in Europe.
for this humanitarian crisis nor for the Above all, how will the current crisis
— spreading risk
global response to Russia through There are other potential implications influence the environmental, social across sectors and
economic and financial sanctions. for real estate from the prevailing and governance (ESG) agenda? The geographies, which may
uncertainty in terms of intensifying pandemic has already reinforced the
From a capital markets perspective, existing trends. The industry is already importance of ESG for everyone in well see already strong
attention has dwelled on the immediate paying far closer attention to detail real estate. If anything, the interviews capital flows from the
effect of the conflict on already surging in asset management than in pre- for Global Emerging Trends indicate
energy prices, leading inevitably to pandemic times. Some investors are even greater concerns this year around
West to Asia Pacific
inflation lasting at higher levels for thinking more about diversification in capital and operational expenditure as gather momentum.
longer. At the very least, the “economic investment strategies — spreading risk well as the risks associated with making
war” will slow global growth in 2022. across sectors and geographies, which real estate fit for purpose in all aspects
may well see already strong capital of ESG.
For real estate, there is much flows from the West to Asia Pacific
uncertainty. A huge release of pent- gather momentum. As we explore in Chapter 2, equity
up demand led to record volumes of investors have stepped up their
investment transactions as economies Some operational real estate sectors game and are leading the way when
reopened during 2021. That level have won wide and growing support it comes to directing capital towards
of activity never looked likely to be across the industry, partly because decarbonising real estate whereas
repeated this year. Even before the they are contra-cyclical and offer lenders have been mostly following.
invasion, industry leaders canvassed more of an inflation hedge than There is much more to be done by
for Global Emerging Trends were mainstream sectors. It remains to be lenders and regulators if the industry is
scaling back their expectations. Central seen whether demand for such assets to meet its targets.
banks, led by the Federal Reserve in will become even stronger during the
the US, had been planning to tighten economic fallout from Russia’s invasion But there is now great uncertainty
monetary policy to keep inflation in of Ukraine. about whether the surging energy
check, but there is now a question over costs resulting from the Ukrainian crisis
whether this will continue in Europe. In any event, when it comes to will speed up or undermine the global
Supply chain disruptions, already a big deployment, real estate investors transition from fossil fuels to cleaner
problem, could get worse. can redirect capital or turn off the tap energy sources to fight climate change.
altogether. Far more difficult questions The danger is that high prices will
The industry still clings to the familiar arise around other, longer-term capital spur further investment in oil and gas
pro–real estate investment criteria — expenditure commitments, not least production, at least in the short term,
property as an inflation hedge and the those relating to COVID-19. The industry just as they did in previous crises. For
premium between yields and interest is once again facing an economic the longer term, the hope is that acute
rates — but with serious concerns slowdown while struggling to come problems of energy security will act as
over how long they remain in place. to terms with long-term structural a wake-up call to governments about
The risk is that inflation spirals outside trends reinforced or accelerated by the radical economic transformation
the influence and control of the the pandemic. they need to implement under the
central banks. ESG agenda.
Business district, Madrid, Spain (Getty Images)
2 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 3
Chapter 1
State of uncertainty After the disruptive force of the Global volumes for completed sales of A key factor was the premium
pandemic, Russia’s invasion commercial properties totalled more between property yields and interest
than $1.3 trillion in 2021, 59 percent rates, which remains in place across
of Ukraine comes as another
higher than the 2020 total and 22 most global markets. This positive
humanitarian crisis and
percent ahead of the previous peak in capital markets perspective for real
“We think people will continue to allocate money to real estate, but the massive economic shock that 2019, according to MSCI Real Capital estate just about holds good — for
biggest risk is what’s happening in Ukraine and Russia, and the impact of have yet to make their full mark Analytics (RCA). This extraordinary level the time being. But the uncertainty will
energy prices on inflation.” on the world of real estate. of activity was driven by worldwide inevitably slow the deal-making down,
demand for residential and industrial especially in Europe.
The huge uncertainty from COVID-19 property and in particular a dramatic
Global investment manager,
as an accelerator of major trends in upturn in the US.
Global Emerging Trends in Real Estate 2022 society and business has been the
main narrative for the real estate
industry for over two years. The invasion Figure 1-1 Global real estate capital flows 2007–2021
of Ukraine — the threat of war escalating $bn
in Europe — takes that uncertainty to an 1400
altogether higher level. 1300
1200
In some respects, the industry faces 1100
a potential re-run of the early days of
1000
COVID in 2020 — a cyclical downturn
900
uneasily juxtaposed with long-term
structural changes to real estate. That 800
was an extraordinarily difficult year 700
of adjustment, and the industry is 600
still figuring out how those long-term 500
trends will unfold. 400
300
If there is a consensus among
200
economists, it is that the Ukraine
100
conflict is unlikely to lead to world
recession although no one is ruling 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
out that outcome. At the very least,
however, the effect of the Russian EMEA Asia Pacific Americas
invasion of Ukraine is expected to be
a far greater geopolitical risk alongside
slower global growth and higher and Volume YOY change
longer-lasting inflation. %
75
Even that relatively benign macro 50
scenario this year would serve as a
major jolt to the real estate industry, 25
which throughout the sharp economic 0
recovery of 2021 enjoyed record levels
-25
of investment, almost as if COVID had
never happened. -50
-75
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: MSCI Real Capital Analytics.
Note: Charts exclude development sites.
London, UK (Getty Images)
4 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 5
Chapter 1: State of uncertainty
It is possible that the industry in Europe Mixed macro outlook The Ukraine crisis has rapidly emerged
may have to deal with the consequences as a fresh risk to global economic
of very swift changes in government growth. Forecasts had been scaled
spending in favour of defence and The International Monetary Fund (IMF) down anyway, not least in the US, We think that by the end
has forecast that global economic
energy policies and away from the areas
growth will moderate from 5.9 percent
which RCA says was “the engine
of next year, there will
that directly affect real estate, such as of growth for the global property market
infrastructure and housing. in 2021 to 4.4 percent in 2022, and slow in 2021”. According to the IMF, the be even clearer signs of
still further to 3.8 percent in 2023. Even
before news of the invasion of Ukraine
US economy grew by 5.7 percent in slowing economic growth
Yet the invasion of Ukraine also poses 2021 but is likely to be hindered this
bigger questions around the ESG in February, as one global investment year by labour shortages and reduced
because of the regular
agenda. The pandemic has already manager says, many in the industry were government support. economic cycle actually
“starting to ratchet back expectations”
reinforced the importance of ESG for
for 2022 after the record investment of
rearing its head.
everyone in real estate. If anything, the
interviews for Global Emerging Trends last year.
indicate even greater concern this
year over the capital and operational “We are absolutely assuming that COVID
expenditure as well as the risks is here to stay, but its impact is in the
associated with making real estate fit for process of sort of evaporating,” says
purpose in all aspects of ESG. another global manager. “We think that
by the end of next year, there will be
With surging oil and gas prices an even clearer signs of slowing economic
immediate consequence of the growth, not because of COVID but
Ukrainian crisis, the focus has been on because of the regular economic cycle
the short-term inflationary impact. But actually rearing its head.”
longer term, will the acute problems of
energy security act as a wake-up call to One European-based investment
governments about the radical economic manager says: “In terms of occupational
transformation they need to implement activity, around this time last year, there
under the ESG agenda? was a lot of confidence in the economic
recovery because of pent up demand.
There is still confidence but also a level
of realism now that the recovery may not
be as strong as we first thought.”
Shenzhen, Guangdong, China (Getty Images)
6 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 7
Chapter 1: State of uncertainty
Inflationary pressure Figure 1-2 Importance of issues for North American real estate in 2022
Perhaps not disruptive, but an elevated Though inflation appears to be less Another global player believes base
level of inflation remains problematic of a concern in Asia Pacific than the rate rises by central banks are likely but
Economic/financial issues when it comes to development, just at other regions, even there it adds to the doubts they are going to be able to raise
Real estate leaders are naturally the point when the industry wants to development challenge. “Logistics on them “sufficiently” to move the real risk-
Job and income growth 4.29
monitoring the global economy 4.28 resume pandemic-delayed projects or the development side is more exposed free rate. “What we care about in real
Qualified labour availability
alongside the issue of inflation, which Interest rates and cost of capital 3.97 advance repurposing initiatives. to inflation than other sectors just estate is the spread to the real risk-free
was one of the major concerns last year Capital availability 3.66 because of the nature of the product,” rate. I think the real risk-free rate stays
but an even greater concern today as the Inflation 3.66 The Emerging Trends reports for says one regional player. “Developments low, nominal rates stay low in some
Ukraine crisis unfolds, at least in Europe Global economic growth 3.44 Europe and United States and Canada are usually very quick builds and they’re formats, and so we’ll continue to see
and the US. In January, inflation in Federal taxes 3.35
both highlight construction material not very complicated. You tend to do allocations of money to real estate.”
Europe hit 5.1 percent and in the US 7.5 State and local taxes 3.28
and labour costs as among the most most of your procurement at one time,
percent, which is the fastest annual rise Tariffs/trade conflicts 3.07
important issues facing the industry in and if you’re at a point where there’s a
there for 40 years. Currency exchange rates 2.50
2022. The interviews for Global Emerging spikiness in pricing you could get hurt.”
Social/political issues Trends suggest that risk is still keenly
The full impact on real estate of labour Epidemics/pandemics 4.16 felt. “I do worry about inflation,” says With big caveats over development and
shortages, rising wages and food bills Housing costs and availability 4.13 one global manager active in both north huge uncertainty due to the invasion Logistics on the
and surging energy costs remains Political extremism 3.44 America and Europe. “The vast majority of Ukraine, most interviewees still cling development side is
unclear. Last year, disruption to global Climate change 3.43
of our fresh capital is for development to the traditional view of real estate
supply chains, especially in Asia, helped Immigration policy 3.32
and so we are susceptible to inflation. It as a good inflation hedge generally.
more exposed to inflation
increase inflation rates. This year, the State/local government budgets 3.32
is very hard to predict costs.” “Intuitively,” says one global investment than other sectors just
big unknown is the outcome of the Income inequality 3.25
Russian invasion of Ukraine, which Federal government budget deficit 3.17
manager, “I do think that real assets are because of the nature of
better positioned than fixed income,
has heightened the fears over supply Diversity and inclusion 3.12
especially, to handle inflation. And
the product.
Higher education costs 3.07
chains, energy prices and the risk of levered real assets, which is a lot of the
Geopolitical conflicts 2.99
inflation spiralling out of the control of industry, will actually come out as a
Threat of terrorism 2.87
central banks. relative winner.”
Real estate/development issues
Yet as this report goes to press, the Construction material costs 4.47
prevailing view among many in the Construction labour costs 4.46
industry, and many economists, is of Construction labour availability 4.46
moderating economic growth, inflation Land costs 4.07
State and local regulations 3.61
peaking this year and central banks led
Operating costs 3.57
by the Federal Reserve following with
Property taxes 3.53
only modest interest rate rises.
Infrastructure/transportation 3.51
NIMBYism 3.45
As one global investment manager 3.45
Tenant leasing and retention costs
predicts: “Inflation will be sustained at Environmental/sustainability requirements 3.36
a higher level than what we’ve seen for Risks from extreme weather 3.13
a long time, but not at a disruptive level Health and wellness features 3.08
and not at the levels we have seen at Health- and safety-related policies 2.96
this moment.” Municipal service cuts 2.89
1 = No importance 2 = Little importance 3 = Moderate importance
4 = Considerable importance 5 = Great importance
Source: Emerging Trends in Real Estate United States and Canada survey 2022.
North Carolina Central University,
Durham, North Carolina, US (Getty Images)
8 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 9
Chapter 1: State of uncertainty
Finding late-cycle value In an echo of those pre-pandemic times, Over the past year, average yields across With supply chains continuing to be
Figure 1-3 European business environment in 2022
last year’s Global Emerging Trends the major global logistics markets have disrupted, the demand for logistics
highlighted a “hesitancy around pricing” converged to a relatively narrow range space is clear and it is growing. But as
“Economies have been stopped, of logistics. One year on, logistics has of between 4.25 percent and 5 percent, some interviewees point out, supply has Business issues
reopened, stopped again, reopened. come to epitomise the potential risks according to RCA. The challenge for increased a lot over the past year. Cybersecurity
That’s not what you would call a typical and rewards of real estate investment — investors lies in balancing what looks “If supply increases a lot more, then 22 45 16 14 3 %
economic cycle,” says one global a sort of lightning rod for bullish and like late-cycle pricing with the societal, there is a risk that those tight cap
investment manager. “But in real estate, Inflation
bearish comment about the asset class or non-cyclical, shift to e-commerce that rates are not accompanied with big
we’ve got the intellectual luxury to 12 47 18 19 4 %
as a whole. has underwritten the growth of logistics rental growth in the future,” warns one
basically say that with industrial, it’s since before the pandemic. European investor. “At the moment for Interest rate movements
pretty late cycle. It’s had a massive ride.” With a buildup of capital that favours the logistic sector I think that pricing 10 45 19 21 5 %
real estate over other asset classes, has gone to a point where you’ve got to Business interruption
Another interviewee suggests that the logistics remains the main draw, be very careful. You’ve got to analyse 13 42 18 22 5 %
global economy appears to be heading alongside residential. That trend shows it deal by deal. You cannot say, our European economic growth
rapidly towards “late-cycle dynamics”, no sign of stopping, say the industry strategy is to buy more industrial, and
indicating a return to the typical 10 40 18 28 4 %
language and concerns that prevailed
leaders canvassed for this year’s report, Economies have been anything goes.”
Management of the workforce
although investment volumes will likely
in all the Emerging Trends reports in the fall in these sectors along with the rest
stopped, reopened, According to a US-based investment 8 35 27 24 6 %
years leading up to the pandemic. of real estate. Unsurprisingly, given the stopped again, reopened. manager, rents must be assessed in the Global economic growth
greater geopolitical risk this year, the That’s not what you context of logistics operators’ overall 5 38 20 32 5 %
hesitancy over logistics pricing persists. supply chain costs. “The rent is a tiny Digital transformation
As one sceptic puts it: “A lot of capital is
would call a typical percent. So, I do think there continues
45
10 32 24 25 9 %
not always smart capital.” economic cycle. to be room to run in industrial. That said,
Sudden shifts in consumer demand
I would be prioritising three and a half
6 30 26 31 7 %
to four percent cap opportunities [in the
End of government support packages
US], as opposed to two and a half to
three percent.” 5 27 27 27 14 %
Currency volatility
While logistics has soared, various 5 25 33 25 12 %
forms of retail have struggled, and Business liquidity issues
certainly the pros and cons around the
6 24 28 29 13 %
growth of e-commerce have formed a
Deglobalisation
well-rehearsed storyline for years.
Retail has played the part of the real 3 24 33 29 11 %
estate pariah, and yet some interviewees
across all three regions are a little concerned
0 Very 10 20 30 Somewhat
40 concerned
50 60 Neither/nor
70 80 90 100
more open-minded now about “value Not very concerned Not at all concerned
opportunities” arising in the sector,
Source: Emerging Trends in Real Estate Europe survey 2022.
and not necessarily for the sake of
repurposing the assets.
“You have to ask, what is the purpose
of a physical retail environment?” says
one global manager. “What we’re seeing At the moment for the
is that physical retail is recovering logistic sector I think that
where the answer to the question why
it should exist is clear. And really the
pricing has gone to a
answer to that, we believe, includes point where you’ve got to
outlets, convenience retail and the best be very careful.
shopping malls, which offer amenities,
food and beverage . . . an experience.”
Magellan Terrace, Hamburg, Germany (Getty Images)
10 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 11
Chapter 1: State of uncertainty
There is a clear sense now that as a One global investor acknowledges Altered expectations Figure 1-4 European social-political issues in 2022
result of two crises following in quick the need to go “much more granular”
succession the due diligence undertaken in Asia: “We are already present in
We are already present on the acquisition of any property the region, but we are really trying After all the changes to business
strategies and worker lifestyle choices
in the region, but we are type will be more rigorous than ever. to understand it beyond the main
over the past two years, it is remarkable
Environmental issues (e.g., air quality/climate change)
And as the interviewees all point out, markets where everyone is playing and 29 47 12 10 2 %
really trying to understand at a very basic level far greater care focus more and more on the smarter that the investment ebb and flow of
real estate can appear much like it did Housing affordability
it beyond the main is taken over asset management now economies in south-east Asia, even if
before COVID-19. But the simplicity of 24 44 19 10 3 %
than pre-pandemic. there is less liquidity.”
markets where everyone that observation masks the fact that Social equity/inequality
is playing and focus more Even in what was once regarded as At the same time, a big theme in the pandemic has dramatically altered
15 49 22 12 2 %
expectations of how people will use
and more on the smarter mainstream real estate, the story has Emerging Trends Asia Pacific relates
properties in the future. Political instability (international)
advanced from the early lockdown to both the office and retail sectors
economies in south-east rhetoric of “winners and losers” into as “currently oversold”. Indeed, one
12 46 20 19 3 %
Asia, even if there is a much more nuanced analysis. investment manager based in Asia Despite overall resilience, some sectors Political instability (Europe)
and markets have experienced upheaval,
less liquidity. “We are looking closely into each Pacific and interviewed for this global
leaving many assets obsolete and
5 40 21 27 7 %
and every sector,” says one edition stresses the importance, still,
needing to be repurposed — a theme Political instability (national)
European institutional manager. of “relative value” and therefore “the
that to varying degrees runs through 12 31 20 22 15 %
opportunities in the traditional spaces”
Instead of writing off offices and such as retail and offices. all three regional reports. Repurposing Mass migration
retail, for instance, another European initiatives have been gathering pace over 7
10 31 26 26 %
investment manager believes their This regional manager refers to the past year, but again the likelihood is
Termination of government support packages
“very uneven recovery” presents “the institutionalisation of real estate that the momentum here will stall as part
of the greater market uncertainty and 4 28 32 26 10 %
opportunities. “We went from the chasm in Asia” — in other words, a long-term
between winning and losing property shift of all grade A real estate sectors ongoing supply chain disruptions. 0 10 20 30 40 50 60 70 80 90 100
types to now tracing the fissures and into institutional ownership. “You Very concerned Somewhat concerned Neither/nor
fault lines in these unfavoured sectors.” ignore that tailwind at your peril,” this The need for repurposing does not go Not very concerned Not at all concerned
interviewee says. “If you’re delivering a away, certainly not in the office sector,
which has long been the foundation of Source: Emerging Trends in Real Estate Europe survey 2022.
Many of the interviewees stress durable income stream, there’s demand
the importance of diversification in for that yield. We’re just consistently commercial real estate portfolios. But
investment strategies — spreading pleasantly surprised when we deliver COVID-19 has dented that hegemony, By contrast, office deals last year
risk across sectors and geographies. a build-to-core asset by the number of reinforcing a long-standing trend for accounted for less than 20 percent of
With that diversification in mind, investors that are interested in the asset remote working to such an extent that the total invested in US real estate for
previous editions of Global Emerging and the price they’re willing to pay for it has become a permanent option the first time. It is a startling decline,
for millions of office workers, at least We have more conviction
Trends highlighted how some global the income. Out of all the things that given the sector’s past status
investors were placing their “big potentially keep me up at night, liquidity in North America and Europe. It is as a bedrock component of real for future performance,
accepted that the office sector in Asia
growth bets” on Asia Pacific. In light on exit is not even on the list.”
is not facing the same existential crisis
estate portfolios. rent growth and capital
of Russia’s invasion of Ukraine will
those capital flows gather momentum from remote working as in Western “We do want to reduce our exposure
appreciation in industrial
this year? markets. In Seoul, for instance, office to office,” says one US-based and multifamily than we
investment in 2021 was well ahead of
previous years, according to RCA.
investment manager interviewed do in office.
for Global Emerging Trends. “The
driver is actually [that] we have more
conviction on a relative basis for future
performance, rent growth and capital
appreciation in industrial and multifamily
than we do in office. It’s not that we
don’t believe in office, but we believe in
it less on a relative basis, put it that way.”
12 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 13
Beyond the mainstream Figure 1-5 Most problematic issues for Asia Pacific real estate investors in 2022
Impact of COVID-19 on property rent/values 6.98
Between them, the business disruption
Low yields 6.21
from COVID-19 and the strictures of ESG
Vacancy rates 6.06
have forced the industry to broaden its
Lack of investable properties 5.99
scope beyond mainstream property
Trade friction/geopolitical tensions 5.94
sectors and think more about the overall Competition from Asian buyers 5.65
role of real estate in society. Asian economic growth 5.35
Competition from global buyers 5.35
“You must have the conviction of Global economic growth 5.31
thematic investing long term: What Environmental compliance 4.72
are you investing behind?” says one Climate change 4.52
US-based investment manager, Impending interest rate hikes 4.48
reflecting the views of many. “We are Cost/availability of finance 4.46
Melbourne, Australia (Shutterstock) trying to anchor more consistently Currency volatility 4.41
— and strongly align our investment 1 = Least problematic 5 = Neutral 9 = Most problematic
strategies — with housing affordability,
Source: Emerging Trends in Real Estate Asia Pacific survey 2022.
migration trends, technology and AI,
Two years on from the outbreak of The running debate about the future of If anything, the latest interviews reflect climate change. These topics are social,
COVID-19 there is still no clear direction the office is also inextricably linked to even greater urgency around ESG and and they are global, and they also have For several years, Global Emerging
here. A disconcertingly broad range of ESG, which is a narrative thread that the resulting risk of obsolescence, a very direct impact on our industry.” Trends has signalled the move into these
industry perspectives exists about how is only growing in its influence over or stranded assets, than the industry
sectors as part of a fundamental shift
some form of hybrid working model real estate, including finance, which acknowledged even just a year ago. The pandemic has certainly reinforced into more operational and service-based We are trying to
will affect office demand. But in any we examine in Chapter 2. As one US “I don’t think that this business about the trend of investors targeting contra-
conceivable outcome, companies will player says of ESG: “I feel like that dial obsolescence is a gradual decline. I see cyclical sectors, such as life sciences
real estate although such investment align our investment
comes with challenges. In Europe, the
be leasing less space in the future. New got turned.” it much more as a hard stop. You could and data centres, which profit from lack of availability of life sciences and strategies with housing
hires and added space required for fall off a cliff and find your asset is now,
social distancing are unlikely to fill the There is arguably an element of frankly, unsellable,” says one European
megatrends and therefore generate data centre deals has been a problem. affordability, migration
resilient income. In Asia Pacific, one interviewee refers to
resulting vacancies. industry self-preservation here institutional player. trends, technology and
the need to understand the “ecosystem”
because increased tenant focus on In effect, as one Asia Pacific player around data centres. “The tenant AI, climate change. These
healthy buildings is accelerating the “Climate change is clearly far more front puts it, the industry is “buying into the
obsolescence of older buildings with and centre on a global agenda than it new generation, new economy sectors
concentration is massive in the space. topics are social, and
And so, if you don’t create an asset at
outdated ventilation systems and floor has been, and it’s becoming actionable. where the underlying business growth the right price point that can have some
they are global.
I don’t think that layouts. Demand for this product will That’s the key,” says one US-based is coming from digitization, wellness pricing power against that demand,
decline among tenants and investors investment manager. As this interviewee or healthcare, because those are just
this business about alike as a “flight to quality” draws tenants points out, two-thirds of US office stock tenants that are growing”.
you’re going to struggle.”
obsolescence is a gradual to newer construction. is located in cities that already have
Challenges aside, operational real estate
decline. I see it much some form of 2030 net carbon target,
has won wide and growing support
Another US investor points out that the and a tax or consequence if owners fail
more as a hard stop. You only segment of US office stock that to meet it.
across the industry. It remains to be
seen whether demand for such assets
could fall off a cliff and has seen positive net absorption over
will become even stronger during the
the past year is supply completed since “I do think that it has absolutely put a
find your asset is now, 2015; everything else is negative. “It’s spotlight therefore on obsolescence
economic fallout from Russia’s invasion
of Ukraine. As one European interviewee
frankly, unsellable. not that it’s just new, it’s that it is more because you now need to have a plan for
points out, operational real estate usually
sustainable, it is greener, and it is more a property over a 10-year period to bring
comes into its own during a period of
efficient. And I think for those who are it in line with where you think it’s going
higher inflation. “Anything where you
making new decisions, if their employees to need to be. And it’s clear that some
can add a service component can be
are coming back to the office, if they assets are cost-prohibitive when making
quite helpful in terms of an inflationary
are going to be in that environment, the improvements, or modifications, that
environment because you can increase
they’re going to want to be in the would be required to achieve carbon-
the price of your service, or you have the
right environment.” reduction targets.”
optionality to do it.”
14 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 15
Chapter 1: State of uncertainty
Balancing housing Sentiment swings back
affordability against returns in favour of big cities
For years, housing affordability has But 2021 marked something of a However, capital flows into Asia Pacific’s Big cities still find favour with the As one global investor says, the major Though some city dwellers decamped
been near the top of the list of social- tipping point in real estate investment — housing markets are evolving. Long-term industry leaders canvassed for the cities are “much more resilient to to less expensive neighbourhoods it
political concerns among industry more capital was deployed in the institutional investors are considering Europe and Asia Pacific editions the working-from-home trend” and was not the mass exodus of “urban
leaders in North America and Europe, global apartment market than offices build-to-rent as a means of accessing of Emerging Trends, reflecting an conducive to upgrading buildings so legend”. Emerging Trends United States
and it is an issue clearly exacerbated for the first time, according to RCA. the sector across the region. A number inherent preference for the safe and they conform to more stringent ESG and Canada points out that young
by COVID-19. By all accounts, investor interest of interviewees also indicate that global the familiar as well as the adaptability criteria. “If you want to think about where professionals have been returning to
in the residential sector continues players are targeting Japan, which is of these markets to structural to continue to hold offices, or indeed buy downtown areas of cities such as San
The point has been made in Emerging unabated in 2022, but so do concerns the region’s most mature multifamily changes in society. more offices, you’re looking at locations Francisco, New York City and Boston,
Trends before that stable housing over affordability. market by far but is still seen as that have got quite dense populations. even in advance of office reopenings.
markets are integral to the mobility of “fragmented” and therefore ripe for Against the prevailing economic They are big talent pools, they tend to
companies and their employees as well In the US, as one interviewee puts it, some consolidation. uncertainty following the pandemic, it have good public transport, and they’ve Yet given the strong prospect of remote
as the broader economic development international capital is “buying into is little surprise that London, Berlin and simply got more alternative users or hybrid working as a lasting legacy
of society, which benefits everyone. Yet trends”, such as the pandemic-induced There is another important aspect to Paris are seen as the best investment of space.” of COVID-19, the consensus view is
house prices and rents barely paused domestic migration to Sun Belt cities, the shift of capital into residential, which prospects in Europe, nor that Tokyo, that office occupancies are unlikely to
in many Western cities during the brief some of which, RCA says, showed the lies at the social/affordable end of the Singapore and Sydney lead the rankings As this investor suggests, offices in recapture their former rates or command
recession before resuming their upward greatest residential price increases spectrum, and once more this trend is in Asia Pacific (see page 18). dense city centres, close to public previous rents. It remains to be seen
path as economies have reopened. last year. more prevalent in North America and transport, usually have higher rents whether this turns into an opportunity,
Europe than Asia Pacific. Investing in London and Paris are lauded for and will be much more cost-effective as some believe, for US cities to attract
For investors, the corollary of this Europe’s residential growth was led social housing is increasingly seen by their “gateway status”, but there is to be made green. “What is really a more varied tenant base through the
widespread problem has been a last year by Germany following the investors as an opportunity to combine a broad attraction common to all going to suffer are buildings in the repurposing of redundant space.
reallocation of capital from unfavoured completion of Vonovia’s acquisition of a stable income with the “S” in ESG. the leading cities in these regions suburbs because the rent is too
sectors into various forms of housing. Deutsche Wohnen to create a portfolio In other words, this represents a smart around market liquidity and breadth of low; the economics of ESG just “Big cities continue to be viable, robust
And again, the growing attraction of some 550,000 apartments worth strategy in both the short and long term. economic activity. don't work on them.” places to invest because there are jobs
of residential has been reflected in over €80 billion. This ranks as one of and there are people,” says one US
Emerging Trends’ North American and Europe’s largest ever property deals. “It is about finding extra opportunities It is noteworthy that London now tops The narrative around city growth is player. “Looking forward, however, if
European editions over several years. But regardless of its financial merits, that are mispriced in the capital markets the European rankings despite being arguably more nuanced in Emerging you think in terms of key drivers such
the transaction has also shone an because they are under-addressed perceived to have suffered in the Trends United States and Canada, which as population, the relative percentage
Interviewees for Global Emerging Trends even brighter spotlight on Deutsche by those markets,” says one global immediate backlash against big cities identifies “a more suburban future”, growth is definitely greater in other cities.
suggest the same supply-demand Wohnen as the focus of public protests investment manager. “Maybe it’s low and long commutes during the worst of particularly in the Sun Belt region. I think the gateway cities will bounce
dynamics that have led to the housing in Berlin over tenant rights and returning to invest in this sector, but the pandemic in 2020. Once dismissed as secondary investor back, but back to a pace of growth
affordability issue are, in turn, creating affordable housing. maybe it’s a safer return. We are figuring markets, Sun Belt metropolitan areas and expansion, vitality and investment
a compelling resiliency from a capital out the risk and reward to the level that European leaders also express now dominate the city rankings on the attractiveness that they held before?
markets perspective. The likes of senior Housing affordability has not surfaced would actually direct capital at solving confidence in London’s ability to back of economic and employment Not necessarily.”
living, student housing and co-living, for as an issue for the respondents to the some of these social issues.” reinvent itself as a base for technology growth as well as strong prospects in
instance, benefit from lower vacancies Emerging Trends Asia Pacific survey and life sciences, and the importance homebuilding and affordability.
and attractive risk-adjusted returns in the same way as the other regions. of flexibility is a theme picked up by
compared to commercial assets. And yet the perennial problem for interviewees for Global Emerging Trends. Dallas, Atlanta and Phoenix — three of
regional multifamily markets has been Emerging Trends’ Sun Belt staples for
high prices, which have generally made some years now — were also among
cap rates too low to attract private- the top 10 global cities in terms of
equity investors. investment activity in 2021, according
to RCA. And yet top of RCA’s list is Los
Angeles, which suggests all is not lost
for the gateway urban core in the US.
16 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 17Chapter 1: State of uncertainty
Top cities for real estate investment in 2022 …
US Europe Asia Pacific
Nashville London Tokyo You do have to consider total
Raleigh-Durham Berlin Singapore
Phoenix Paris Sydney returns. But I worry for some
Austin Frankfurt Melbourne investors that are very income-
Tampa/St. Munich Seoul
focused, with the cap rate
Petersburg Madrid Osaka
Charlotte Amsterdam Shanghai compression that’s already
Dallas/Fort Worth Hamburg Ho Chi Minh City occurred, and a rising interest
Atlanta Barcelona Shenzhen
Seattle Brussels Guangzhou
rate environment that yield gets
Boston compressed. In the end, it is not
nearly as attractive.
Global investment manager,
Global Emerging Trends in Real Estate 2022
Source: Emerging Trends in Real Estate® Asia Pacific, Europe, United States and Canada 2022.
People are going to demand better-
… and how countries fared in 2021
quality office space and want a
better environment to work in. I think
Table 1-1 Transaction volumes, 2021 Table 1-2 Global capital trends by property type, 2021 the older assets where you’re unable
Americas EMEA Asia Pacific
Volume
(US$ bn)
YOY
(%)
to reposition or comply with the fast-
Volume YOY Volume YOY Volume YOY
Office 337.6 22% growing environmental requirements
(US$ bn) (%) (US$ bn) (%) (US$ bn) (%)
United States 699.1 105% Germany 114.0 46% China 55.1 18%
Industrial 287.2 58% of our governments here will get
Retail 137.8 42%
Canada 27.7 49% United Kingdom 83.5 55% Australia 40.4 105%
Hotel 73.2 134%
left behind.
Brazil 2.1 -16% France 35.1 -11% Japan 38.6 -14%
Apartment 452.3 102%
Mexico 0.8 15% Sweden 34.5 94% South Korea 37.3 32% Asia Pacific interviewee,
Seniors housing and care 27.3 46%
Netherlands 17.0 -24% Hong Kong, SAR, China 11.3 32% Global Emerging Trends in Real Estate 2022
Income properties 1,315.4 59%
Development sites 713.3 6%
Americas 729.9 101% EMEA 380.1 28% Asia Pacific 205.4 22%
Grand total 2,028.6 35%
Source: MSCI Real Capital Analytics.
Source: MSCI Real Capital Analytics.
18 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 19Chapter 2
Financing decarbonisation
“Regulation is changing dramatically, in a good way, pushing the entire Morality, good intentions By contrast, the “S” in ESG, social But most of all, the real estate industry
industry to be a crucial lever for accelerating the transition economy.” and science are unlikely to impact, is in its infancy. But the needs to come together to work
financing of real estate looking to with regulators at city, national and
advance the environmental,
improve society is growing, a subject international levels to harmonise the
European lender, social and governance (ESG)
addressed in Emerging Trends in Real definition of “zero carbon”, the way in
Global Emerging Trends in Real Estate 2022 agenda in real estate on their Estate Europe 2021, and which is which carbon emissions are measured,
own. Money and regulation explored further on page 33. how green buildings are classified,
will make the difference. the kind of targets regulators and
However, there are still fundamental authorities are going to enforce, and
The Organisation for Economic issues to resolve in finance markets, what constitutes a green loan — there
Co-operation and Development calls the world of debt and equity, before is currently no standardised definition.
for $7 trillion to be invested each year that reallocation can start to ensure Financial actors in real estate are
between now and 2030 for the world real estate does its bit in solving the reacting to the market forces that
to meet climate and development problems of the climate crisis. dictate that greener buildings will prove
objectives. “That will mean an more financially valuable in the coming
historic reallocation of capital in real Equity investors are leading the charge, years. But regulation is a crucial factor
estate,” one Global Emerging Trends and to a large degree are working to influencing those market forces.
interviewee says of how that will affect get ahead of impending regulation.
the built environment. Debt providers on the other hand, with As many interviewees say, regulation
notable exceptions, seem to be waiting here is positive, albeit something of
That reallocation has the potential to for regulation to come. They are being an invisible hand that is precipitating
enable real estate, a major contributor reactive rather than proactive when it change at different speeds across the
to global carbon emissions, to play comes to using their influence to help world. It will get more stringent. But it
its part in decarbonising the world real estate decarbonise. Real estate is needs to do so in a cogent way, and the
economy. The shifting of equity and an industry where debt plays a huge industry needs to help regulators to do
debt towards green buildings and role in the financial ecosystem. For that.
away from assets with little chance of lenders to hold back from using their
reducing carbon emissions is already influence at this crucial moment of Real estate knows what it needs to
well under way. history is a real missed opportunity. do. It has a pretty good idea of how to
do it. If it can work out how to pay for
In concert with governments and Sometimes financial markets are and profit from it, it has a great shot at
financial regulators, the organisations creating barriers rather than breaking achieving its goals.
providing the equity and debt that them down; the abundance of liquidity
drive real estate and determine how in the global economy offers an historic
it acts have the power to influence opportunity to allocate capital to green
the industry’s approach to issues like buildings and projects. But that same
decarbonisation and social impact. liquidity can reduce the urgency to act The shifting of equity
among lenders and investors. The way and debt towards green
The question of whether environmental real estate defines a green building can
sustainability makes business misdirect investors and lenders that
buildings and away from
sense, is largely answered. “This might want to act in good faith but end assets with little chance
is not a philanthropic issue,” one
interviewee says. “This is hardcore
up acting in a way that hinders rather of reducing carbon
than helps wholesale decarbonisation.
business development.” emissions is already well
under way.
Modern energy-efficient apartment buildings,
Tubingen, Germany (Getty Images)
20 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 21Chapter 2: Financing decarbonisation
We see sustainability as Cash rules everything It is just a distant rumble coming from
the future right now, but there are the
a licence to operate in first murmurings of a word that has
If you want equity from someone in
terms of our keeping our real estate today, you must have a
been a major talking point in other
polluting sectors like oil, gas and
pool of capital the same sustainability strategy. Some might heavy industry: disinvestment.
call it decarbonisation, some might
as it has been, or even call it net zero, some might call it “There are anecdotes out there, where
bigger, in the future. environmental. But it would be rare to equity investors [in listed companies]
raise equity for real estate investment have told real estate operators that if
without a robust strategy in this they don’t have a GRESB score of X,
area today. they can’t make the investment,” one
interviewee says. “So that is happening.
“We see sustainability as a licence But it’s not mainstream by any stretch.
to operate in terms of our keeping I think what has gone mainstream is
our pool of capital the same as it has the dialogue.”
been, or even bigger, in the future,” one
interviewee says. “And our access to What is driving this? It is a shift in
capital is crucial for us.” the perception of what constitutes a Electric charge points, London , UK (Getty Images)
valuable building, a market force that
Whether you are a listed company is being pushed by regulation.
trying to get investors to buy your
shares, a fund manager raising “Today’s green premium is tomorrow’s
equity for an unlisted fund, or a
private company looking for a backer,
brown discount,” one interviewee The market decides But the brown discount, buildings This reallocation process also has the
says bluntly. In some countries, real without much chance of meeting potential to influence the flows of capital
interviewees say there is now little estate appraisers and valuers are sustainability standards set by tenants, between sectors, interviewees say.
difference. Because large institutional But even when it is not formalised, investors, regulators or a combination The conversation around sustainability
being explicitly tasked with taking
investors are increasingly focused the market is already doing this to of all of the above, is seen as very real. happens most frequently about offices,
sustainability into account when
on the topic, and they are such huge a large degree. Not every investor The International Renewable Energy given its size as an asset class on a
assessing the value of a building. For
sources of equity capital, they are cares equally, and in some markets, Association has estimated that $7.5 square metre basis. But international
instance, TEGOVA, the European Group
calling the tune. this is happening faster than others, billion of real estate assets globally industrial developers like GLP and
of Valuers’ Associations, has recently
depending on the likely tenant or the could be left stranded by tightening Segro are increasingly developing
updated its Blue Book of valuation
“Shareholders want to know that end buyer of an asset. regulation and changing investor new assets with high sustainability
standards and is planning another
carbon, energy, water, waste are review this year. sentiment, a huge figure, albeit this credentials because tenants are
being measured, they want to see An increasing number of tenants want covers residential real estate too. becoming more demanding.
the KPIs,” one interviewee says. to be in the most ESG-advanced
“They want to know that there’s a buildings, to achieve their own targets, “In light of this current transition to a Retail is seen by many interviewees
positive trend showing that you’re and investors want the buildings where low carbon economy, some buildings as lagging behind significantly when
making some effort to decarbonise. there is tenant demand. that might have been viewed as core it comes to the energy efficiency of its
And they want to tell that story to their before suddenly are not core anymore,” properties — another problem for the
LPs and investors on the flip side, If you want your building to be liquid, it one interviewee says. And if you are already struggling sector. The popular
who are asking them questions. So, has to be green. There is a feeling that a core investor, this fundamentally multifamily sector is a mixed bag:
everyone’s a middleman.” only the very best buildings from an changes the type of building you new assets are being built with good
environmental standpoint command can buy or hold — several investor sustainability scores, but retrofitting
that “green premium”, which research interviewees say they are undertaking older buildings with many hundreds
on the London market by JLL suggests processes to decide which buildings of occupants is costly and complex.
could be as high as 12 percent for the they think will meet current and future
best assets. sustainability requirements, which
can hit targets with some capital
expenditure, and which might need
to be sold.
22 Emerging Trends in Real Estate® Global Outlook 2022 Emerging Trends in Real Estate® Global Outlook 2022 23Chapter 2: Financing decarbonisation
The future is retrofitting “The bigger issue is with the existing Other interviewees point out that the
stock,” one interviewee argues. “If industry will not fix this problem on
we talk about what has the highest its own. “In some cases, especially
For investors, buildings that need impact, it’s brown to green, and where the economic benefit is marginal,
capital expenditure to make them it’s repurposing.” governments will need to provide
more energy efficient, present the the incentives for owners to upgrade
biggest challenge, but also the With that in mind, the capital targeting properties, possibly in the form of
biggest opportunity. green retrofits, whether from existing subsidies,” one says.
owners or new buyers, is perhaps the
Some interviewees argue that, for greenest capital of all, even if it is not The argument follows that if
existing assets in a portfolio, there has expressly labelled as such. governments fail to help the industry
never been a better moment to spend with subsidies, they risk missing their
the money required to decarbonise. There is a perception, albeit one that own country-level, net zero targets.
is challenged by some interviewees,
“In an environment where interest rates that value-add and opportunistic
are super low, if you cannot invest investors have been less focused on
now to make your asset better from sustainability than more institutional
an environmental perspective, you investors because they are likely to hold
will never be in position to do it,” one assets for the short term and sell them In an environment where
interviewee says. “The cost of funding before tougher regulations and higher interest rates are super low,
of additional capex is almost zero. If you green standards kick in.
cannot make it financially viable today, it if you cannot invest now
Green apartment buildings, Sydney, Australia (Getty Images) will be harder tomorrow.” But they are also the kind of investors to make your asset better
There is a growing understanding in
likely to look at buying buildings that from an environmental
need to be retrofitted and re-let. They
Data centres are huge consumers of At a governmental level, several real estate of the role embodied carbon are fully aware that the mantra of
perspective, you will never
energy, but that is seen more as an issue countries have introduced or are in plays in the overall carbon emissions “buy it, fix it, sell it” now involves the be in position to do it.
for the users than the owners, with big the process of introducing energy of a building — the carbon emitted requirement to make a building as
If you can measure it, occupiers like Facebook and Amazon performance certificates (EPCs), setting in the creation and transportation of sustainable as possible.
the materials needed to build it, and
you can reduce it. committing to green energy for their a minimum energy efficiency standard
during the demolition process. Creating
buildings in many geographies. for buildings that is expected to get
higher over time. a new super-green building is almost
Underpinning this supply and demand never the greenest option because of
for green buildings lies regulation. Why One national scheme praised by many the carbon emitted demolishing what
do tenants want green buildings? It is interviewees is the National Australian was there previously and creating the
about their brand, but they also have Built Environment Rating System new building.
sustainability targets to hit, which might (NABERS). This enables owners to
be imposed by cities, sector regulators, measure their energy usage and waste,
governments or central banks. unlike many EPC rating systems that
give an abstract score, bearing little
And there is an increasing amount of resemblance to actual energy usage.
direct regulation being placed upon “If you can measure it, you can reduce
real estate owners. One of the most it,” as one interviewee says. Australia’s
prominent at a city level is local law financial regulators are also mandating
97, a New York City regulation that will that companies must publish their
fine owners whose buildings exceed emissions if they go over a certain
permitted carbon emission levels from threshold. “It is voluntary now, but in our
2024. “We’re undertaking refurbishments opinion the voluntary always becomes
at one building to avoid fines,” one compulsory,” one interviewee says.
interviewee says. Many other large US
cities are now in the process of enacting
similar regulations.
Office building with solar panels, Tokyo, Japan (Getty Images)
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