Global Research | November 10, 2020

Global Real Estate

Perspective - Highlights
Investor and Corporate
Summar y

Global economy As we approach the end of an uncertain year,

• Economic growth rebounded during the third transaction pipelines are rebuilding globally,
quarter and is expected to reach roughly 7%, although investors remain cautious with many
leaving global GDP about 4% below its level preferring to deploy capital in defensive,
before the onset of the pandemic. However, income-oriented assets.
growth is expected to diminish or even reverse in
some countries as the impact of new restrictions • The heightened focus on resilient supply-demand
combined with the ongoing unwinding of fiscal fundamentals and income stability has triggered
stimulus, and caution among households, is likely a shift in investment toward demographically-
to lead to a weaker recovery period. driven sectors. Leading beneficiaries have been the
logistics, multifamily and select alternative sectors.
Global capital flows
• Global commercial real estate investment volume • Major global investors continue to be a key
declines decelerated during the third quarter, down source of liquidity in the markets, representing
44% year-on-year to US$149 billion but slightly 8% of total investment activity this year. However,
better than the 51% contraction experienced in Q2. many investors are pivoting to domestic and
Following two consecutive quarters of weakened regional markets with the share of intra-regional
transaction velocity, year-to-date volumes have activity climbing to 14% in Q3, the highest rate
fallen 33% from the same period one year ago. The seen in more than a decade. These dynamics are
modest improvement during Q3 was led by activity most prevalent in Europe where intra-regional
in Asia Pacific and EMEA, with volumes in both investment now accounts for 30% of activity, a
regions rising more than 30% since Q2. level last seen in 2008.

Share of investment volumes by sector, 2010 – YTD 2020

100%
90%
80% 13% 12%
24% 20%
70%
17% 19%
60% 10%
10%
50%
13% 18% 22% 24%
40%
30%
20% 40% 36% 35% 33%
10%
0%
2010 2015 2019 YTD 2020
Office Residential Industrial Retail Hotel Healthcare Alternatives Mixed-use

Source: JLL, October 2020

Global Real Estate Perspective - Highlights | 2
• Record-low interest rates, government • Highly fragmented asset performance across
intervention and a diversification of lender various risk profiles, sectors and regions is leading
profiles in recent years continue to support real to a disparate pricing environment in the markets.
estate debt markets globally. Lenders remain As transaction pipelines are rebuilding global
conservative, but the number in the marketplace markets are firmly in price discovery, and we
and quoting new transactions continues to expect value transparency to improve as activity
increase, while debt pricing for high-quality assets steadily increases in the coming quarters.
is now back to pre-COVID levels for most asset
sectors. This is supporting elevated refinancing
activity and steady increases in quarterly Corporate Occupiers
investment transactions. • COVID-19 has served as the ultimate accelerant
to corporate transformation, speeding up many
• The pace of fund closings remains slow. Over the trends evident before the pandemic and pushing
year to date, US$103 billion of capital has been organizations toward change. CEOs are now
raised, on course to be the lowest fundraising realizing that their businesses may never operate
total, in both number of funds and capital raised, in the way they did prior to COVID-19. CRE leaders
since the period immediately following the Global need to address the evolution of office and
Financial Crisis. Nonetheless, the continued employee requirements, and 2021 should be used
appetite for the real estate asset class is evident as a year for responsible investments and radical
in the amount of dry powder in closed-end funds, transformation to create a better world of work
which is at near-record levels. Recent survey through real estate.
data indicating that more than three-quarters of
investors plan to invest in only one fund over the
next 12 months is likely to trigger a need to rethink
fund strategies.

Global Real Estate Perspective - Highlights | 3

 Office sector
• The global office market is struggling to fully • The flexible space sector has accounted for a
recover from the disruption and uncertainty caused substantial share of net absorption in global
by the pandemic and subsequent restrictions. gateway cities in recent years, but demand
Global leasing activity in Q3 was down 46% from a has come to a virtual halt with most deals
year earlier – while this is an improvement from Q2, representing a spillover from last year. The
demand remains subdued. Asia Pacific seems to sustainability of different flex models will be
be the bright spot with Q3 activity only down 5% tested as a result of the pandemic. Co-working
year-on-year, whereas Europe declined 52% and the space is the most impacted due to its high
U.S. 55%. Vacancy rates moved up across all regions exposure to freelancers, start-ups and SMEs.
in Q3 with the global vacancy rate now recorded at In the short term, demand for flexible space is
12.1% (+90bps). expected to fall with widespread consolidation
of underperforming centers. In the long term,
• The final quarter of the year usually provides a however, businesses will have a greater need
boost for leasing activity as companies rush to for flexible space to accommodate shifting
get deals signed before year end. A pickup in workforce practices and to provide varied
transactions is expected in Q4, though not to the workplaces for employees.
same magnitude of recent years, and a subdued
end to the year seems likely.

Global and regional vacancy rates, Q1 2005 – Q3 2020

19 18.6%
Vacancy Rate (%)

17
16.0% U.S.
15 14.7%
13.8%

13 12.7% Asia Pacific

11.9%
12.1% GLOBAL
10.6%
11
10.3%

9
7.0%
7 5.7%
6.3% Europe
5
Q4 2005

Q4 2006

Q4 2007

Q4 2008

Q4 2009

Q4 2010

Q4 2011

Q4 2012

Q4 2013

Q4 2014

Q4 2015

Q4 2016

Q4 2017

Q4 2018

Q4 2019
Q3 2020

57 markets in the U.S., 24 markets in Europe, 25 markets in Asia Pacific. Grade A space vacancy only for Asian markets
Source: JLL, October 2020

Global Real Estate Perspective - Highlights | 4

 Retail sector Logistics sector
• The recovery in retail sales that was observed • Despite the reopening of many physical stores,
from May through August has stalled in many e-commerce continues to be a strong driver of
major global retail markets due to a resurgence demand for logistics space globally, leading to
of COVID-19 cases toward the end of Q3. Notable near-record absorption levels in several major
exceptions are territories that have been able to markets. For example, in the U.S., e-commerce
keep the virus under control, such as Mainland accounted for 17% of total leasing this quarter
China and Taiwan. while 40% of the floorspace transacted in the UK
in Q3 was directly attributable to online retail. In
• Retailers continue to adjust their operations to general rental levels remained relatively stable
navigate the uncertain outlook. In addition to across all regions.
strengthening their wider omnichannel platform,
retailers have adopted store pickup services • The rapid growth of e-commerce across the
more broadly, including fully-automated stores, globe, the ongoing realignment of supply
to allow for a quick collection of purchased chains and increasing requirement for last-
goods. Major retail markets are expected to see mile warehouses is likely to continue to
more churn in occupiers as weaker operators support strong demand over the longer term.
downsize their store portfolios, although Encouragingly, the need to decarbonize logistics
well-capitalized operators and new market from both a transport and buildings perspective
entrants are selectively looking for expansion is now becoming more widely recognized,
opportunities. which is leading to the wider adoption of more
sustainable practices.

Regional logistics demand, YTD 2019 and YTD 2020

U.S. Net Absorption Europe Gross Leasing Asia Pacific Net Absorption
20 20 6
+5%
+3% 5 -2%
15 15
4
10 10 3

2
5 5
1
0 0 0
5-year 2019 2020 5-year 2019 2020 5-year 2019 2020
(2015-2019) Q1-Q3 Q1-Q3 (2015-2019) Q1-Q3 Q1-Q3 (2015-2019) Q1-Q3 Q1-Q3
Q1-Q3 Q1-Q3 Q1-Q3

U.S.: net absorption, based on 55 city markets; Europe: gross leasing (take-up), based on 11 national markets;
Asia Pacific: based on 26 city markets with staggered starting point for some markets, GFA
Source: JLL, October 2020

Global Real Estate Perspective - Highlights | 5

Hotels & hospitality sector Living sector
• The COVID-19 virus is having a profound adverse • The continued resilience of Living sector cash
impact on the hospitality industry, with an flows relative to other real estate has provided
ongoing pullback in both leisure and business justification for the ‘beds and sheds’ investment
travel. In typical fashion, the lodging sector strategy bias of recent years. Although the
observed an uptick in demand during the sector has not been unscathed - notably there
summer months as leisure travelers escaped have been material negative impacts in the
their homes to drive-to resort markets or student and seniors housing sectors - the stable
destinations easily accessible by train. With the cash flows that are its hallmark have largely
fall just beginning, lodging demand trends are continued.
uncertain as leisure travel wanes and working-
from-home arrangements continue. • In the United States, a bifurcation has emerged
in residential rents and occupancy performance
• Heightened uncertainty has impacted investor between high-cost, Class A product and
appetite for hotels, with asset valuations more affordable Class B and Class C assets.
becoming more challenging. Activity across Newer assets in oversupplied submarkets are
the globe is primarily focused on rescue witnessing larger concession packages. In
capital, capital stack positions and loan sales, Europe, the expected softening of residential
particularly in the Americas. As yet, distressed rents and occupancy has not yet materialized
activity has been very limited globally as many in lower-value segments of the residential
owners are still benefiting from forbearance market. The Living sectors in Asia Pacific are
periods and government assistance, which in their infancy except for Japan, where the
has spurred an ‘extend and pretend’ phase. well-established multifamily market has been
Nevertheless, a pickup in distress activity is characterized by resilient rents and occupancy
anticipated as we get closer to the end of the year. throughout the pandemic.

Global Real Estate Perspective - Highlights | 6

To find out how we can support your global real estate market strategy with research insights and strate-
gic advice, please contact one of the members of the global research team.

Carol Hodgson Matthew McAuley

Senior Director Director
Global Research Global Research
[email protected] [email protected]

Sean Coghlan Shawn Lambert

Global Director Senior Analyst
Capital Markets Research Capital Markets Research
[email protected] [email protected]

Jeremy Kelly
Lead Director
Global Cities Research
[email protected]

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