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Capital markets activity accelerates

Global Real Estate Perspective, August 2021

With many segments of the market exhibiting operational resilience, allocations to real estate are still intact and strengthening further. Hovering above US$360 billion globally for the second consecutive quarter, dry powder remains near all-time highs. Secular increases to capital flows are resulting in upward pricing pressure, deployment challenges and heightened levels of frustrated capital. Abundant dry powder coupled with the desire to expand and diversify portfolios is supporting liquidity for opportunities of scale at the platform and asset level. The volume of portfolio, large-ticket single-asset and M&A activity increased during the quarter.

Logistics, living and alternative sectors continue to gain from increasing allocations, with transaction activity in these growth sectors highly concentrated in select markets. The U.S. plays the largest role across the sectors (comprising 55% of the market in Q2). However, Germany, the UK, Australia and Canada are also driving global momentum. Given the competition and limited investible stock in many markets, alternative strategies are coming to the fore to access product, with forward sales or funding, joint ventures and M&A activity increasingly utilized.

An abundance of available debt is fueling the capital markets environment. In particular, institutional lenders – insurance companies and investment managers – have meaningfully increased market participation during Q2. Lenders are becoming aggressive in more segments of the market with increasing clarity on rent rolls and leasing fundamentals for more challenged property types. Favorable debt terms are no longer confined to the logistics and living sectors, and are also improving in higher-risk and lagging segments of the market.

The increased competition and depth of capital targeting the real estate asset class is benefitting pricing and accelerating discovery in lagging segments of the market. Across sectors, the bid-ask spread improved considerably during Q2 2021. Buyer and seller pricing expectations for core and core-plus assets are now nearly aligned across sectors, and risk appetites are improving for higher-risk strategies in the logistics and living sectors.