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M&A Surge Predicts “Robust Rise” in CRE investment Volume

Since corporate M&A activity and commercial real estate investment volume have a strong correlation, the current M&A momentum bodes well for CRE investment activity, says CBRE. Global M&A rebounded very strongly in the second half of 2020, reaching $2.2 trillion for the highest half-year total on record, and the pace of activity has continued to recover rapidly in 2021.

CRE investment typically lags M&A activity by three or four quarters. This suggests a “robust rise” in CRE investment volume in the months ahead, according to CBRE.

CBRE notes the following as harbingers of an uptick of investment sales volume:

• Most corporate consolidations occur when earnings are strong, confidence is high and the cost of capital is low. Strong earnings also benefit real estate by boosting investment, hiring and demand for space. Confidence and low cost of capital boost demand for capital assets of all types.

Although the 10-year Treasury yield has increased recently, money supply is at an all-time high and both the federal funds rate and commercial loan spreads will remain low for the foreseeable future.
 

• Retail, hotel and some office assets suffered greatly during the height of the pandemic. Many REIT prices have yet to recover to pre-COVID levels. Emerging opportunities to acquire “oversold” REITs (i.e. those on which the share price is lower than the underlying value of the assets) will lead to increased M&A activity in the real estate sector.

“Growth in entity-level transactions is an important driver of global real estate capital flows, which, in turn, lift overall M&A volume,” says CBRE.
 

• Some M&A activity is fueled by an underlying real estate play. The acceleration of flexible working, labor migration and advances in technology will necessitate evolving business solutions, including workplace design, market expansion and professionally managed facilities. M&A will absorb some of the impacts and help businesses transition through different real estate strategies.

“Capital continues to target the real estate sector with significant dry powder in private equity, recovering public equity pricing and good liquidity in the credit markets,” said James Scott, managing principal of CBRE Capital Advisors. “Despite lower real estate M&A volumes in 2020 due to the impact of the pandemic, we expect the continued appetite for the space to drive increased activity in 2021 as we start the next economic cycle.”

Potential investors will have “a wide variety of opportunities, including growth in well-performing sectors such as industrial and multifamily, continued expansion in specialty sectors like life sciences and data centers, and recovery plays in lodging and leisure,” Scott continued. “Activity is likely in both the public market—notably SPAC transactions—and private markets, highlighted by further scaling of investment managers through acquisitions.”

Pictured: Saleforce Tower in Atlanta. The company’s $27.7-billion deal to buy Slack was among the M&A highlights of H2 2020.

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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