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2022 real estate industry M&A outlook

Momentum continues, but sector matters

In 2022, real estate M&A activity will continue to be high, although it will likely be unevenly spread—the result of spillover from the 2021 sector story of “hot” versus “not.” The ability to rapidly pivot and adapt in today’s dynamic macroeconomic environment is an essential attribute of effective M&A deal teams.

A look at real estate mergers and acquisitions

The pandemic has reshaped and reprioritised where and how people live, work, and play, and their choices are exerting major influence on commercial real estate (CRE) industry mergers and acquisitions (M&A) activity. Performance measures across the industry make one thing abundantly clear: sector matters.

  • The industrial sector had a banner year, with demand for properties supporting the digital economy driving robust transaction volume and premium pricing.
  • The residential sector continued its strong and stable run, buoyed by a competitive homebuying market and increasing consumer interest in single-home rental properties.
  • The hotel and leisure sector saw early activity—showing promising signs of recovery after two challenging years.
  • Office sector M&A was down across the board due to increased uncertainty about when—or if—occupancy levels will return to pre-pandemic levels.
  • While retail M&A activity was up from 2020, consumers’ preference for online shopping, increasing vacancy rates, and higher operating costs weighed heavily on the sector.

Read more about real estate industry trends across office, industrial, retail, hotel and leisure, residential, and nontraditional sectors, and see our full real estate M&A outlook for 2022.

Signs of progress in the real estate M&A landscape

We expect to see continued high levels of CRE M&A activity in 2022. Pent-up demand, ready access to capital, a low-interest environment (at least for the near term), and abundant “dry powder” should have investors clamoring for properties in the hot industrial and residential sectors, despite their rich prices.

Optimism appears to be growing for a moderate uptick in the office and hospitality sectors, and retail’s surprising fourth-quarter performance may be an indicator of better times ahead. Potential headwinds include fierce competition for scarce assets, the impacts of rising inflation and interest rates on company valuations and deal financing, and impact of escalating geopolitical turmoil on the global economy.


2022 real estate M&A drivers and trends

To adapt and grow in the future, real estate executives should consider how to address the following global and US-specific trends.

The pandemic’s uneven impact across CRE sectors is prompting company leaders to emphasize and accelerate the process of realigning portfolio assets through organic and inorganic means to hedge risks and generate greater value.

While “core four” real estate (office, industrial, retail, and multi-family) remains the foundation of a diversified portfolio, institutional investors, REITs, and PE firms are increasingly funneling more of their investments into “alternative” assets such as data centers, cell towers, and movie studios—so much so that the alternative space has become more mainstream.

CRE investment options in 2022 are more varied than ever. A pricing  gap between Class A and Class B and C space in second-tier metro office and retail properties may generate interest in lower-end assets. Last year’s passage of the bipartisan $1 trillion Infrastructure Investment and Jobs Act creates opportunities for new CRE development.

Because real estate investments come with unique risks and considerations, organisations should be strategic and intentional when making CRE part of their growth strategies. Deal teams should use tenant and end-user data, predictive models, geospatial variables, and other advanced analytics.

PERE 2021 fundraising may be below pre-pandemic highs and concentrated in fewer funds, but PE firms continue to hold tremendous reserves of “dry powder” to invest in commercial real estate. Very low interest rates and yield from bonds and related instruments have driven many PE investors to real estate as a proxy for that asset class.

PEs have also moved into open-ended, non-traded REITs—a major driver of CRE M&A activity—in addition to closed-ended funds. And while the pandemic interrupted PE firms’ multi-year buying spree in 2020, deal volume and value rebounded in 2021, building momentum for the coming year.

COVID-19 variant uncertainty and travel restrictions contributed to middling foreign investment in US real estate in 2021, although interest from abroad began to show signs of life in the second half of the year: 2021 foreign investment in US properties increased 90% from year-end 2020, building momentum going into 2022.

Between a record stockpile of “dry powder” globally, lower yields on CRE and traditional financial investments outside the United States, and geopolitical constraints, foreign companies will likely target US real estate in 2022 for many of the reasons they always have: ease of doing business, the wide range of asset types, and a bullish outlook on income growth, especially during periods of high inflation.

We do not anticipate significant headwinds for 2022 CRE M&A arising specifically from accounting, regulatory, or tax influences, although some changes in focus among advisory and regulatory bodies as well as the progression of certain country and global regulations and standards merit watching.

The impacts of higher interest rates on CRE company financials and M&A activity can swing both ways: As interest rates rise so, too, will investment income, which increases cash flow that, potentially, can be applied to M&A. In another positive, higher interest rates typically increase company valuations, which can strengthen sellers’ negotiating positions.

Moving forward with 2022 real estate M&A opportunities

Commercial real estate M&A will continue its momentum in 2022, although overhanging pandemic, economic, and geopolitical uncertainties may again influence sector-specific dealmaking. A large majority of CRE industry respondents to the Deloitte 2022 M&A Trends Survey expressed positive opinions about the outlook for industry fundamentals over the next 12 months, with nearly three-fourths (73%) anticipating increased transaction activity.

Industrial and multi-family residential deal volume and value will likely continue to impress, as long as high prices and asset scarcity don’t deter buyer enthusiasm. Sectors hit hard by the pandemic—office, retail, hospitality—may figure prominently in portfolio consolidations, diversifications, and conversions.

Deep-pocketed PERE firms will continue to look for buying opportunities among both premium and distressed properties. Foreign investors may add to their traditional (office) and alternative asset (industrial, multi-family) holdings.

As they formulate their 2022 M&A strategies, CRE leaders should remain alert to the impacts of higher inflation and higher interest rates. The ability to rapidly pivot and adapt in today’s dynamic macroeconomic environment is an essential attribute of effective M&A deal teams. Finally, in anticipation of increased transaction activity, companies should consider expanding their finance department capabilities and systems to strengthen performance, improve access to capital markets, and move M&A planning to action.

Look back

In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors. What are the key trends, challenges, and opportunities that may affect your business and influence your strategy? Look for more perspectives and insights from some of Deloitte’s forward thinkers.

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