By Meghan Hall
In 2020, many investors pressed pause on placing capital, waiting for fundamentals to stabilize or for new financial benchmarks to emerge after the pandemic rocked the global economy. With 2021 now well underway, a new report released by Cushman & Wakefield predicts that investors will get a green light to resume activity in the coming weeks and months, and Recovery of the global capital markets sector will be largely preceded by vaccination efforts and the waning of the pandemic.
“The key to every economic outlook is that you have to take a stand on how the pandemic evolves,” explained Cushman & Wakefield’s Head of Americas Capital Markets Research, David Bitner. “Our view point…is that even with fits and starts, you are going to have a high level of vaccination by the fourth quarter in most of the developed world… We are starting to reap the benefits of vaccination efforts. That is the bedrock of our view that we’re going to see a very sharp acceleration of economic growth in the back half of the year.”
Global gross domestic product is expected to grow to 5.4 percent in the coming year. Global unemployment peaked at 7.1 percent during the second quarter of 2020, but the expected addition of 27 million jobs will lower the unemployment rate to 6.2 percent by the end of 2021. Initial improvement will be largely led by Greater China and APAC markets such as Australia, Indonesia and South Korea. The United States—and its recent economic stimulus—is also expected to contribute to global recovery. The U.S. in particular is expected to break into the bounds of herd immunity by mid-June if current vaccination efforts continue, allowing for more economically constrained markets to open.
APAC Countries and Greater China are expected to see between 7.47 to 8.73 percent real GDP growth during 2021, and unemployment in the region is expected to fall to 4.3 percent, just above pre-COVID-19 levels. The United States, by comparison, will see about five percent GDP growth through the remainder of the year. Both the APAC region and United States are expected to recover to pre-COVID-19 output by the fourth quarter of 2021.
A number of trends are expected to emerge as a result of pent-up dry powder and new capital being placed. The first: Capital markets are expected to outpace leasing, at least in the short-term. A number of factors are driving the investment market, including pent-up demand for assets, diverse transaction structures when compared to pre-COVID-19. Additionally, low base rates and attractive valuations for some asset classes could spur investors into acting.
Where investors place their capital will also continue to evolve. Over the past year, logistics, residential and life sciences assets have been the “winners” of the past year and have benefitted hugely from the current pandemic. However, property types formerly considered “niche”—such as medical buildings, self-storage and data centers—have made a name for themselves. These property types, while a little more difficult to build at-scale are here to stay, believes Cushman & Wakefield. Investors are increasingly incorporating these property types into their portfolios as core holdings and will continue doing so moving forward.
“I think those assets performing, even in such a difficult market, is going to push a lot of investors into thinking of these not just as niche, but core assets,” said Bitner. “I think you are going to see folks make that effort to build those allocations in support of diversification.”
Investors currently have plenty of funds to place into capital markets, with dry powder across the globe sitting at or above historic records. New fundraising, for the time being, remains weak. However, low levels of fundraising are hardly a concern, according to Bitner.
“I do think [fundraising] will pick up,” said Bitner. “There’s so much dry powder, and in the past five years, we have had investors saying they’ve had difficulty deploying capital.”
Bitner continued, adding, “There’s enough snow on that mountain so to speak, that I’m not worried about the decline in fundraising.”
Moving forward, there are a number of investors driving the market forward. Both private equity funds and institutional core funds became more active at the end of 2020. For institutional core funds, Cushman & Wakefield expects to see increased certainty around office and urban underwriting, balancing previous investments made in logistics and residential real estate. Private equity funds are also seeing funding conditions at record levels, with some investors “waiting years” for pricing disruption. Experts expect private equity investors to jump into the market quickly.
Private capital, which proved to be the most resilient during the downturn, will continue to increase activity through 2021 as do other capital groups. On the other hand, REITS, which have been the most impacted, will see a more gradual improvement in activity as underwriting confidence and prices rebound.
“I think you’ll have differences in opinions about values but greater conviction around those views,” said Bitner. “…And that is going to lead to a much more active market.”