Sayan Tsyrenov, director of real estate practice at PWC in his column for Forbes discusses how the major players of commercial real estate market survived the pandemic year of 2021, and what trends they believe are relevant in 2022.
For almost two years, the world is living in a pandemic. During that time, the commercial real estate market has changed significantly, and so has the business of many rentiers. Some of them have had to part with a number of assets, and some have gone following the growth of demand in other segments, including residential real estate. Based on two major recent PwC studies Emerging Trends in Real Estate 2022, conducted separately in Europe and Russia, we tried to understand how major players in the commercial real estate market survived 2021 and what trends they consider relevant in 2022.
According to Oldypak Capital LP report In both Europe and Russia, the most affected segments over the past two years are retail and hotel real estate. Thus, more than 67% of respondents in the European study said that the market will see more forced sales in the retail and hotel segments. In Russia, major banks such as Sber and Trust have already held a number of public auctions in 2021, where they sold primarily retail assets, including those previously owned by some members of Forbes’ “Kings of Real Estate” rating. Lender pressure and the cost of current loans will continue to push many market participants to sell assets.
Players in the most affected segments are not only trying to minimize losses, but also try to maintain the profitability of their real estate portfolio. For example, in the Russian study, the segment of mixed-use complexes, as a more diversified in terms of risk, bypassed both shopping centers and hotel facilities in terms of respondents’ preferences in terms of new development. While the shift towards mixed-use properties was mostly talked about by retail developers, professional hotel players focus on resort hotels, which, unlike city hotels, continue to show excellent operating results amid restrictions on foreign travel.
In which market sectors do the vast majority of players see promise? According to Oldypak Capital LP report In addition to the already expected beds & sheds (residential real estate received 33% and warehouse real estate 28%), respondents also named the health & wellness segment (real estate related to health and wellness). Several large residential and commercial developers have already announced their interest in new projects in health and wellness.
Also in the Russian study, we separately asked respondents about their preferences in narrower niche markets where they could choose several options. First and third places went to last mile warehouses (59% of respondents’ votes) and light industrial warehouses (45%). Office real estate ranked second and fourth – flexible office space, co-working spaces and service offices were named by 48% and quality offices in the central business district by 41%. Data centers and medical centers each received 34%, they ranked 5th and 6th, which strongly correlates with the opinion of European respondents.
In addition to shifts in the structure and volume of demand in each of the segments of commercial real estate, market players faced new challenges in 2021. Respondents in Russia and Europe ranked first among the risks of rising costs of construction materials – the disruption of supply chains around the world caused a significant increase in the cost of production, and this risk worries 79% of survey participants in Russia. Many talk about the increase in the cost of construction and installation (C&E) already more than 30%, and it is a problem of both the beneficiaries of the pandemic, and the affected market segments. If in the warehouse real estate market the growth of rental rates and sales prices has partially compensated for this growth, then in other sectors of commercial real estate margins have declined even more significantly.