First-mover advantage begins to materialize for commercial real estate

Rhea-AI Summary

JLL (Jones Lang LaSalle Incorporated) is seeing opportunities for investors to deploy capital across the capital stack with a focus on credit strategies and sector diversification. $3.1 trillion of real estate assets globally will have maturing debt by the end of 2025. The current refinancing shortfall for these loan maturities is estimated to be $270-$570 billion. Substantial liquidity exists, with $402 billion in dry powder for commercial real estate. Bidding activity has been on the rise, with the average number of bids per deal increasing by 16%. The long-term attractiveness of CRE investments remains intact, especially in sectors like living and logistics. Collective exposure to the logistics and living asset classes across the largest core funds has grown significantly since 2016.

Insights

Market Research Analyst

The commercial real estate (CRE) market is showing signs of revitalization, with increased bidding activity and a significant amount of dry powder indicating a shift in investor sentiment. The rise in the average number of bids per deal, as reported by JLL's Bid Intensity Index, suggests a narrowing of the bid-ask spread, which is a positive sign for market liquidity. This trend implies that the CRE market is becoming more competitive, which could lead to more favorable transaction conditions for sellers and a more dynamic market overall.

It is essential to consider the implications of the substantial maturing debt in the real estate sector by the end of 2025. The estimated refinancing shortfall presents potential risks for the market, but also opportunities for well-capitalized investors to engage in credit strategies and sector diversification. Investors with strong liquidity may benefit from a first-mover advantage, as they can quickly capitalize on the changing market conditions and potentially secure assets at more attractive prices due to the reset in values.

Financial Analyst

The projected $3.1 trillion of maturing real estate debt by the end of 2025 creates a significant opportunity for investors to step in and fill the refinancing gap, which could lead to increased transaction activity. The range of the shortfall, between $270 and $570 billion, suggests that there will be a wide array of opportunities across different regions and asset classes. For stakeholders, including institutional investors and private equity firms, this represents a chance to deploy capital in a market that is readjusting after a period of volatility.

The long-term perspective remains favorable for CRE investments, as they have historically delivered consistent returns compared to other asset classes. This resilience, coupled with the strategic reallocation of capital towards sectors with strong rental growth expectations, indicates that investors are not only looking for immediate opportunities but are also planning for sustained performance in the future.

Economist

The recent volatility in bond yields reflects underlying economic uncertainties that impact the CRE market, yet the sector's resilience in the long-term investment horizon is notable. The strategic shift towards sectors such as logistics and living, which have seen significant growth in core fund exposure, underscores the evolving nature of the real estate investment landscape. This trend is reflective of a broader economic shift towards service-oriented and e-commerce sectors, which have been accelerated by the pandemic but were already in motion due to changes in consumer behavior and technological advancements.

Investors' focus on sectors with strong rental growth expectations suggests a keen awareness of macroeconomic trends and a desire to align investment strategies with long-term demand patterns. The diversification of portfolios to include a higher proportion of logistics and living assets reflects a strategic response to market signals and an anticipation of future economic developments.

Investors with strong liquidity begin to see opportunity to deploy across the capital stack with a top focus on credit strategies and sector diversification

CHICAGO, Jan. 11, 2024 /PRNewswire/ -- Clarity across markets has been in short supply recently but signs that investors are starting to reengage through a broader set of strategies are beginning to emerge. By the end of 2025, $3.1 trillion of real estate assets globally will have maturing debt, according to JLL's Global Capital Outlook research. The current refinancing shortfall for these loan maturities is an estimated $270-$570 billion, which will catalyze transaction activity and provide a clear first-mover advantage for well capitalized investors in 2024.

Currently, substantial liquidity exists, with dry powder for commercial real estate (CRE) totalling $402 billion sitting on the sidelines. However, a clearer picture is already emerging as real estate has seen a growing number of bidders re-enter the market according to JLL's proprietary Bid Intensity Index. This movement is being driven particularly by activity from private investors and select institutional capital with the U.S. being furthest along in its price adjustment cycle, followed by Europe and Asia Pacific.

JLL's proprietary Bid Intensity Index shows improved market trends since year-end 2022, despite the late summer run up in bond yields. Bidding activity was on the rise in late 2023, with the average number of bids per deal increasing by 16%, narrowing the bid-ask spread.

"This reset in values will both challenge capital and catalyze liquidity," said Richard Bloxam, CEO, Capital Markets at JLL. "There is absolutely uniform understanding that pricing has changed. Given the quantum of dry powder, there will be a considerable first-mover advantage for capital that can deploy quickly and mobilize around opportunities as market fundamentals improve."

While the current nature of the markets remains fragile – as evidenced by the recent volatility in bond yields – the long-term attractiveness of CRE investments remains largely intact. From a 10-year return perspective, real estate has held up consistently well against other asset classes.

"In our view, while the current higher-rate environment has created a cooling effect on real estate's attractiveness in the short-term, strategic allocation targets into real estate are expected to remain stable and, in some cases, trend higher, especially in the long run," noted Bloxam. "We anticipate this will materialize initially in sectors, such as living and logistics, and in markets with strong rental growth expectations where values also appear to be bottoming out."

As was the case for many trends, the COVID-19 era was an accelerant, but not a catalyst for portfolio diversification strategies – which began shifting in the decade leading up to the pandemic. Collective exposure to the logistics and living asset classes across the largest core funds has grown by $138 billion, an increase of 263%, since 2016. These sectors now account for around 62% of core fund exposure in the U.S, 52% in Asia Pacific and 46% in Europe.

"While we will continue to see this reallocation of capital as investors reengage with the market, it's important to note that it is more about diversification of portfolios than wholesale shifts," said Bloxam.

Bloxam expects to see growth in emerging sectors as well. "Looking beyond these more established sectors, alternative assets should also be in focus for investors. Technological and societal changes will create longer term opportunities in areas such as renewable energy, infrastructure and advanced manufacturing, to name a few."  

About JLL
For over 200 years, JLL (NYSE: JLL), a leading global commercial real estate and investment management company, has helped clients buy, build, occupy, manage and invest in a variety of commercial, industrial, hotel, residential and retail properties. A Fortune 500® company with annual revenue of $20.9 billion and operations in over 80 countries around the world, our more than 105,000 employees bring the power of a global platform combined with local expertise. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAY^SM. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com. 

Contact: Abigail Goldsbrough
Phone: + 447902115887
Email: abigail.goldsbrough@jll.com

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SOURCE JLL

FAQ

What are JLL's (Jones Lang LaSalle Incorporated) focus areas for investors?

JLL is seeing opportunities for investors to deploy capital across the capital stack with a focus on credit strategies and sector diversification.

How much will real estate assets globally have maturing debt by the end of 2025?

By the end of 2025, $3.1 trillion of real estate assets globally will have maturing debt.

What is the estimated current refinancing shortfall for real estate loan maturities?

The current refinancing shortfall for these loan maturities is estimated to be $270-$570 billion.

How much dry powder exists for commercial real estate?

Substantial liquidity exists, with $402 billion in dry powder for commercial real estate.

What has been the trend in bidding activity for real estate deals?

Bidding activity has been on the rise, with the average number of bids per deal increasing by 16%.

Which sectors show long-term attractiveness for CRE investments?

Sectors like living and logistics show long-term attractiveness for CRE investments.

How much has collective exposure to logistics and living asset classes grown since 2016?

Collective exposure to the logistics and living asset classes across the largest core funds has grown significantly since 2016.