Real estate M&A activity continues to moderate in the face of challenges caused by shifts in monetary policy to combat inflation, including interest rate hikes by the US Federal Reserve, the European Central Bank, and others. These have increased borrowing costs and put pressure on valuations globally. Commercial real estate is being severely affected by changes in the way businesses operate and people live, work, and play in a post-COVID-19 world, with some of these changes already present prior to the pandemic. However, we expect that these evolving preferences will continue to generate M&A opportunities as investors seek to capitalize on emerging investment themes, transform operating models, and reposition themselves for future growth.
Although capital markets remain tight, capital is still available for M&A, with private capital and select public company investors looking to accelerate their deployment activity in real estate to capitalize on the shifting environment. In the following six to 12 months, we expect private equity firms, family offices, sovereign wealth funds, and other investors with abundant capital to be more active in the M&A scene as they are attracted to lower valuations, distress situations and emerging themes—particularly those involving experiences (e.g., casinos, wellness resorts, and sports entertainment districts).
M&A activity in certain parts of the world is expected to be more dynamic than in others, with more capital being deployed in markets such as Australia, China, India, Japan, and the US. The Middle East, which has historically invested outward, is seeing more legislation in terms of international investment, paving the way for increasing inbound investments.
‘From the Americas to the Middle East to Europe and to Asia, deals are getting done, capital is available, and unique investment opportunities continue to present themselves. While the overall environment is complex, these themes make me optimistic and keep dealmakers looking forward.’
Office
- Macroeconomic events continue to affect the office subsector, with double-digit vacancy rates observed across all global regions. Rising interest rates are making acquisition and construction debt more expensive and creating downward pressure on potential rates of return. Financing is expected to be more challenging in the near term, with building grade being an important determinant in both capital availability and the growth of an asset’s financial performance.
- We expect M&A activity to be highest in areas where strong demand is to be found, such as select cities in Asia, prime locations, and modern and high-quality buildings. Landlords remain hopeful that the trend of employees returning to in-person work in an office continues to build momentum, although so far the movement has been slower than anticipated in most places.
- In Europe, regulatory changes requiring buildings to achieve a certain energy efficiency performance are amplifying demand for quality assets. For example, effective starting in 2023 (Netherlands) and 2030 (UK), office buildings will be required to have an energy performance certificate (EPC) rating of C or above. With an increasing number of companies committing to decarbonisation and specific net zero goals, lessors are aligning their lease footprints with such goals, resulting in a greater demand for new green technology–based advanced office spaces with amenities to improve the tenant experience.
Read our key trends for the industrial, residential, retail, and hospitality sectors.
Industrial
- The industrial subsector continues to be fueled by the boom in the movement of commercial activity online and adjustments to companies’ supply chains. Trends vary by geography as follows:
Americas
- In North America, while the demand for industrial assets in the US is tapering, demand in Mexico is growing: according to the US Census Bureau, in the first quarter of 2023, Mexico surpassed China to become the number one trade partner with the US. Mexico is likely to continue to benefit from a wider onshoring or nearshoring trend as businesses look to insulate themselves from future supply chain disruption by relocating production operations to be closer to end markets or to reduce their exposure to geopolitical tensions.
- Like Mexico, South America is seeing a vibrant M&A scene that is powered by ecommerce demand; significant growth potential in agribusiness, with current development projects expected to double the inventory in this space (Chile); and an emerging demand for industrial parks, which are industrial coworking places with shared access routes, roads and utilities (Peru).
Europe
- The deals market in Europe’s industrial sector remains dynamic, driven by healthy rental growth and continuous interest in newly built energy-neutral properties. However, certain markets in Europe are facing challenges, including a shortage of land, rising construction costs, and increasingly strict environmental regulations.
Middle East and Asia–Pacific
- The Middle East and Asia–Pacific regions continue to benefit from structural factors, including the ecommerce boom, leading to sustained high occupancy levels and rental growth. Asia is expected to remain the leading region for new industrial developments, even as some manufacturers are increasing their activity in other parts of the world, such as Mexico. Even as supply chains normalise and tenants balance rationalising space for inventory with managing potential future supply chain volatility, demand will continue to outweigh supply. Any vacant space is therefore expected to be absorbed quickly.
Read our key trends for the office, residential, retail, and hospitality sectors.
Residential
- We continue to see strong performance and an active deals market in residential-related real estate. Higher interest rates globally have increased the cost of homeownership, in turn creating more demand for rental properties (such as multifamily, manufactured housing and single-family homes for rent). This higher demand, together with inflation and constrained supply, has driven up rental prices, enhancing returns and offsetting the rising cost of capital for investors.
- In the US, the residential sector continues to provide investors with stability amid an uncertain economic environment. New supply is concentrated in class-A properties in high cost rental markets; however, chronic shortages in the affordable and attainable categories continue.
- In Europe, certain regulatory actions, including proposed capped rent and enhanced fire safety rules for residential buildings, are creating a more tenant-friendly environment, which may curtail some deal activity.
- Mexico and the Middle East’s emergence and growth as digital nomad hubs has contributed to higher demand for rentals in those regions. The Middle East’s residential market is getting a boost from an easing regulatory environment towards foreign investment that is attracting inbound capital.
- In Australia, manufactured housing estates and build-to-rent are attracting investor interest. More favorable resident sentiment towards manufactured housing estates, as compared to deferred management fee (DMF) retirement villages, is emerging due to the significant financial advantages of lower exit fees and no capital gains sharing. The build-to-rent sector is emerging in the Australian property market not only as an alternative residential real estate development platform but also as an alternative investable asset class.
Read our key trends for the office, industrial, retail, and hospitality sectors.
Retail
- While retail in South America is seeing a slower recovery in the aftermath of COVID-19 and global macroeconomic uncertainty, we expect retail to maintain the current strong performance in the North America, Asia–Pacific, and EMEA regions, albeit likely at a more moderate pace towards the second half of the year as consumers grapple with high interest rates and inflation.
- The consumer trend of returning to in-store shopping and the shift in consumer spending from goods to services have kept retail rent growth strong, with record-low retail availability. We continue to see strong demand for assets in prime locations as brands are seeking to establish a brick-and-mortar footprint or create innovative spaces in response to consumers’ evolving shopping preferences.
- Consumers’ shift in shopping behavior has also driven the development and redevelopment of shopping centers into mixed-use, experiential properties, a theme expected to continue to play a key role in driving M&A through the remainder of 2023. As a result, margins are expected to improve once tenants and landlords can agree on how to reposition these properties for their mutual benefit.
Read our key trends for the office, industrial, residential, and hospitality sectors.
Hospitality
- M&A activity in the hospitality sector is expected to remain high despite uncertainty in the macroeconomic environment. Increased domestic and international leisure travel demand remains a significant contributor to this strong performance. Individual and group business travel demand have continued rebounding and are expected to contribute more substantially to future M&A activity. The pent-up travel demand is starting to translate into increased hotel occupancy. However, inflation has been pushing up hotel operating costs, creating challenges across the board.
- In the UK, certain regulatory actions, including stricter requirements in fire safety–related rules that require additional capital expenditure to ensure compliance, are potentially curtailing deal activity.
- Overall, we expect the appetite for M&A activity to continue to grow through the remainder of 2023 as the hospitality sector is poised for expansion, supported by increased inbound investment in the Middle East and Asia–Pacific, and a positive outlook for the tourism sector as a whole.
Read our key trends for the office, industrial, residential, and retail sectors.
2023 mid-year M&A outlook for real estate
Despite an extended period of macroeconomic uncertainties and increasing regulatory constraints in the real estate industry, business leaders are navigating these cyclical challenges by adopting a long-term approach and focusing on value creation to deliver sustained outcomes. With capital remaining available for M&A, we are optimistic that demand for high-quality properties around the world and fresh opportunities, particularly in the Middle East and Asia–Pacific, will translate to more vibrant deal activities over the next six to 12 months.
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