Late last week JLL released new data showing that global investment in commercial real estate has dropped by 5% year over year as of the first quarter of 2020. This is despite there being substantial liquidity sitting on the sidelines. JLL expects this trend to reverse course given the longevity and diversification benefits of the real estate sector.
Outside of direct investment, real estate investment trusts (REITs) have also seen a downward trend in the first quarter of 2020. According to Sean Coghlan, Head of Global Capital Markets Research at JLL, "Credit and equity markets were among the first to react, with REITs the first in our industry to experience the negative impacts of COVID-19." In the world's largest REIT markets, JLL found that total returns for the first quarter of 2020 fell by an average of 31%.
Coghlan continues that "despite ample liquidity in debt markets, lenders remain in a phase of 'price discovery' and are focused on asset-managing their existing portfolios. This has led to a greater scrutiny over leverage, and a focus on experienced sponsors, resilient sectors, and strong locations in quoting new deals."
In the short term, investors have been seeking out defensive strategies to weather the ongoing pandemic, according to JLL's research. JLL expects real estate with exposure to technology, warehousing, supply chains, apartments, and industrial to perform better than other sectors such as commercial, retail, and hospitality. Investment in multifamily, for instance, is down only 1% year over year in the first quarter of 2020.
Coghlan highlights that multifamily "is considered one of the more resilient sectors, underpinned by the demographic shifts we have witnessed over the past couple of decades. As more people move toward cities and space and affordability become an issue, demand for purpose-built rented accommodation is growing."
Indeed, May rent data for the apartment sector showed increasing signs of optimism. The National Multifamily Housing Council (NMHC) reported that May rent collection sits at 87%, which was 2% higher than at the same time in April 2020. Further, May rent collection is currently only 2% lower than what it was this time last year.
For now, investor caution appears to center more around specific real estate asset classes on the general uncertainty surrounding the pandemic. As countries slowly loosen stay-at-home and social distancing orders, look for investor caution to subside, particularly given the substantial liquidity available.