Optimism and Resiliency of Real Estate Amidst Market Challenges: Q&A on the State of Commercial Real Estate
The year brings a wide range of opportunities and challenges for the commercial real estate (CRE) market. John Sullivan is optimistic about the road ahead as he prepares for DLA Piper’s 2021 Global Real Estate Summit on May 5th.
As the Chair of the US Real Estate Practice and the Co-Chair of the Global Real Estate Practice at DLA Piper, Sullivan manages the firm's 200 US real estate group and co-manages the firm's 500+ lawyer global real estate team. As someone with decades of experience in both the legal and business side of the CRE industry, he is keenly focused on the events and trends that impact that industry and on ways that DLA Piper's world-leading real estate practice can provide value-added advice to its real estate clients around the world.
Q: Post-pandemic, what is your outlook for CRE?
JS: I’m optimistic about most segments of the CRE market. For the majority of asset classes, the fundamentals were solid before the pandemic hit and leverage levels were reasonable. After getting past some of the headlines, it’s evident that in general CRE weathered the pandemic storm fairly well and the market didn’t see the significant value reductions that occurred during the 2008 global financial crisis.
The CRE market was certainly hit hard by the global pandemic, but it got up off the mat pretty quickly. We started to see a rebound in Q4 of 2020, when transaction volume rose 97 percent over Q3 of 2020. As the vaccine rollout progresses and the economy opens up, it’s reasonable to believe that this positive trend will continue and likely accelerate. Even some of the asset classes that were hardest hit by the pandemic, such as hospitality and leisure, are starting to show signs of recovery. We’ll hear from Jonathan Gray, the President and CEO of Blackstone, at the upcoming DLA Global Real Estate Summit. In the first quarter of this year, Blackstone invested over $17 billion in travel and leisure related businesses such as hotels, a private jet sponsor, a travel company and a theme park company. When you see one of the world’s savviest investment groups place bets like that, it tells you something about the prospects for a recovery. CRE is also benefiting from low interest rates, an abundance of debt and equity capital and government stimulus spending.
Q: Which trends uncovered in the 2021 DLA Piper Annual State of the Market Survey stand out the most to you?
JS: Given the severe disruption and uncertainty that existed for much of last year, I’m struck by how quickly the sentiment of most of our survey respondents shifted from bearish to bullish. Also, although it’s no surprise that investor interest in logistics, data centers and life science related real estate remains strong, it’s interesting to see some increased investor appetite for hard hit asset classes like hospitality and leisure. I also find it very interesting that there was a significant decrease in concern over the impact of global political instability on CRE markets. Finally, I was struck by the extent to which the pandemic seems to have contributed to the increased desirability of cities such as Austin, Denver, Nashville, Raleigh-Durham, Charlotte and Miami.
Q: Do any of these trends have the potential to materially disrupt the industry?
JS: Although the growth of e-commerce was disrupting the retail sector before the COVID-19 pandemic, the pandemic supercharged the demand for online goods and significantly accelerated the pace of that disruption. On the flip side, real estate that benefits from an increase in e-commerce, such as logistics and data centers, will continue to perform well.
Although it’s too early to make any hard and fast predictions, the work-from-home (WFH) phenomenon caused by the pandemic may have a long-term impact on the demand for office space. Whether it’s to save on occupancy costs or satisfy the desires of employees (or both), many businesses may decide to offer more flexibility for their employees to WFH than they would have offered but for the pandemic. Even businesses that decide it’s important to have their employees physically present may conclude that they need less space than they thought they needed before the pandemic.
Q: DLA Piper’s 16th Global Real Estate Summit on May 5th will feature Blackstone’s Jonathan Gray and the Carlyle Group’s David Rubenstein. What guidance do you think the audience is most looking to glean from these important CRE leaders?
JS: There used to be a brokerage firm known as E.F. Hutton and its tag line was “When E.F. Hutton talks, people listen.” Well, when Jonathan Gray and David Rubenstein talk, people listen. These are two true icons, not just in the CRE sector, but in the global business environment. We’re still battling the most serious global pandemic in over 100 years. As valued business partners for our clients, it’s part of our best-in-class service to offer our clients this opportunity to hear from people like Jon and David who view the world through a wide lens and with an in-depth understanding - not only of CRE - but of history, geopolitics and human nature. I know that our audience will be eager to hear Jon and David’s perspectives on the global and US economies, the CRE market and how the pandemic is likely to shape our future.