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2021 real estate M&A outlook

Balancing opportunity and uncertainty

The disruptive challenges of 2020 severely eroded real estate mergers and acquisitions (M&A) activity. Now the commercial real estate industry walks a tightrope, trying to balance uncertainties and arising opportunities for growth. Find the equilibrium to help your organization thrive by exploring the real estate industry trends and drivers reshaping the sector in our 2021 outlook.

Looking back at real estate M&A in 2020

The pandemic’s impact on the commercial real estate (CRE) industry is a study in contrasts, with a stark dichotomy in operating fundamentals among subsectors and asset classes. Warehouses, grocery stores, multifamily, health care, data centers, and cell towers have been affected differently than offices, hotels, restaurants, and retail, which have felt the brunt of the pandemic’s negative effects.

In the short term, many CRE owners face cost pressures due to softening operating fundamentals: increasing vacancy rates, rental collection declines, and higher operating costs from implementing additional health and safety measures.

In the long term, the pandemic has dramatically altered where and how people live, work, and play, which could radically reframe the future of certain property sectors. Yet even amid the challenges, pent-up demand for desirable properties and abundant available, low-cost funding should help the CRE industry revive (albeit unevenly) as 2021 progresses and, ultimately, thrive.

Read more about real estate industry trends in 2020 across office, industrial, retail, hotel and leisure, residential, and nontraditional sectors, and see our full real estate M&A outlook for 2021.

Signs of progress in the real estate M&A landscape

The restart of sustained CRE M&A in 2021 won’t be like flipping on a light switch. We expect deal activity to remain slow in the year’s first half, although the industrial and multifamily residential subsectors will continue to show forward movement. However, an interesting mix of factors, led by widening distribution of COVID-19 vaccines and passage of the $1.9 trillion American Rescue Plan, should build enthusiasm for dealmaking as the year progresses:

  • The latest RCLCO Current Real Estate Market Sentiment Index has increased 22.4 points over the past six months, with respondents predicting that conditions will improve “significantly” over the next 12 months.
  • The US National All-Property Index grew 7.3% YoY. The industrial index posted a 0.6% monthly gain in December and rose 8.8% YoY. Annual price gains in the apartment sector reached 8.3%, with 0.9% of that increase coming in December.
  • Baseline economics remain favorable: Low interest rates appear to be here to stay, according to recent Federal Reserve policy statements, and capital allocations remain available for potential real estate investments.
  • PE firms have a tremendous amount of capital to deploy in 2021 and may be potential lifelines for struggling hotels, retail properties, and entertainment venues. Private investors are always on the lookout for attractively priced assets, and we expect transaction activity levels to rise in 2021.

We expect 2021 M&A to be most active in the industrial and nontraditional, specialized office (medical), and multifamily residential subsectors.

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2021 real estate M&A trends and drivers

In addition to piloting their company through the pandemic and various economic and market conditions in 2021, real estate executives should consider how to address the following trends as they move forward with their M&A growth strategies.

Moving forward on 2021 real estate M&A opportunities

COVID-19 will continue to overhang real estate in 2021, accelerating key trends already in play. The pandemic also may accelerate M&A opportunities for real estate sellers, buyers, and investors. Numerous buying opportunities, distressed and otherwise, are likely to emerge as the year progresses, even if conditions remain volatile and uncertain. Buyers should regularly update their target list, confirm that their financing “ducks” are in a row, conduct due diligence through a pandemic lens, and pursue full-value assets that can add scale to existing subsector holdings or provide entry into exciting new markets.

If you’d like to talk more about real estate industry M&A trends and how your organization can succeed in 2021, let’s set up a conversation.

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Look again

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.

Discover more Industry Outlooks.

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