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Perspectives

2019 Real Estate M&A Outlook

Building real estate industry trends momentum

The outlook for real estate mergers and acquisitions (M&A) appears bright in 2019, bolstered by a rosy investment climate and opportunities from tech-driven disruption. Globally, the US is the most preferred commercial real estate market, followed closely by Hong Kong and China. Retail and lodging sectors will remain strong, bolstered by attractive valuations, along with the “last mile” sector of warehouses/logistics/storage.

Real Estate M&A Outlook and overview

Favorable global commercial real estate industry trends, a positive investment climate, and opportunities from technology-driven industry disruptions are building momentum for an active commercial real estate M&A environment in 2019:

  • Global corporate real estate (CRE) volume continues to climb, with the US remaining as most attractive CRE investment destination. In addition, foreign investors are increasing their investments in CRE debt as they seek diversification.
  • The threat of a rising interest rate environment is moderating.
  • Real estate investment trust (REIT) M&A activity continues to increase. Several REIT asset classes are trading at a significant discount to net asset value (NAV), with regional mall and shopping center REITs trading at the largest discounts. The self-storage sector is trading at the largest median premium.
  • Industrial REITs continue to get a high premium due to strong fundamentals, growth expectations, and demand.
  • A digital and data-driven marketplace is attracting investors to tech-enabled CRE firms and generating disruptive real estate M&A opportunities, as brick-and-mortar owners realign to the internet economy and office/industrial investors consider the changing nature of work and tenant preferences.

2018 in review

Global CRE volume continued its upward trend in 2018, bolstered by steady economic and employment growth in key global markets. The trend moderated a bit in the year’s second half due to some global uncertainty and slowing growth in China.

In terms of inbound transactions, the US continues to be the most preferred CRE market globally, followed by Hong Kong and China. These three countries comprise nearly 50 percent of total inbound investment.

When Deloitte surveyed global real estate investors about their primary objective for doing deals in the United States, respondents cited the potential for higher returns, the breadth of the market and liquidity, a stable economic environment, and a preference for new and emerging business models.

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2019 commercial real estate M&A outlook

We expect 2018’s real estate M&A winners to again lead the way in 2019. Retail and lodging, last year’s top-performing sectors, should continue to generate a major share of deal volume due to their attractive valuations and appeal to opportunistic investors. Meanwhile, real estate buyers looking to add the “last mile” (e.g., storage space) to their portfolios should drive increased M&A in warehouses/logistics/storage, which are likely to continue to demand the highest premiums in terms of value.

While we see momentum building to support an active real estate M&A market in 2019, each of the major asset classes—office, industrial, retail, hotel/leisure, multi-family, and residential—is likely to experience one or more market disruptions that may influence M&A volume and value.

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2019 real estate M&A drivers and trends

Executives whose companies are contemplating real estate M&A in 2019–whether that means selling, buying, investing, or partnering—should plan for the following trends that may either help or hinder their ability to execute on their strategic growth plans.

  1. Global economic and political uncertainty. Escalating political tensions and ongoing tariff and trade disputes between the United States and its trade partners, particularly China, are raising concerns about a potential economic slowdown, if not a full-fledged recession, as early as 2020.
  2. PERE fundraising and dry powder. The boom in private equity real estate (PERE) fundraising has created record levels of capital—often referred to as dry powder.
  3. REIT M&A activity. US REIT M&A volume and value are rising, although both remain well below pre-financial downturn levels.
  4. Interest rates may shift real estate returns. The potential continuation of an increasing US interest rate environment may result in a shift in returns from real estate M&A and put some strain on transaction prices; however, strong industry fundamentals should continue to drive returns and attract investors in 2019.
  5. Tax reform and regulatory relief. A handful of key provisions from the US Tax Cuts and Jobs Act of 2017 (2017 Tax Act), including interest deductibility and qualified opportunity zones, are expected to impact the real estate industry and 2019 M&A planning and execution.
  6. Proptech innovation. Proptechs—a term used to define startups offering innovative, technology-driven products, services, or new business models for real estate markets—are increasingly popular with investors across the real estate value chain.

If you’d like to learn more about the Real Estate M&A Outlook for 2019, download the report or contact us.

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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.

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