Developments in offices, AI, and operational real estate are driving expectations for a rebound in commercial real estate.
A sense of optimism pervaded the air at Goodwin and Columbia University's annual Real Estate Capital Markets (RECM) conference on March 27.
Attendees discussed a wide array of real estate trends, including investment opportunities in offices, advancements in AI that could transform data analysis, and heightened interest in data centers and other operational real estate. Some pockets of real estate—such as luxury hotels—are poised to grow particularly fast, they noted; dry powder remains elevated for certain areas, including closed-end real estate funds.
We surveyed conference attendees about their outlook for commercial real estate (CRE), and about two-thirdsof respondents said they thought the CRE market would be stronger a year from now. The overall positive outlook for the real estate industry comes amid expectations that the Federal Reserve will cut interest rates later this year. CRE has so far evaded the crisis that some analysts projected would materialize in the wake of higher interest rates and 2023's bank failures.
Here are five takeaways from the event:
Office Market Shows Signs of Life
In-person work drives productivity, which means more workers will return to offices, said Roy March, CEO of Eastdil Secured.
"Office is not dead," March said. "Being in person, in place, is a difference-maker."
Brian Steinwurtzel, co-CEO and principal of GFP Real Estate, was also bullish on the trajectory of the office market.
"Over the last thousand years, people have been moving to cities en masse," he said. "I don't think that trend will dissipate."
While demand for office space rises, supply will remain limited. The convergence of those two market forces will likely drive price appreciation and aid economic viability in the office market, Steinwurtzel said.
Steinwurtzel's firm—New York City's largest landlord for small and medium-size businesses—is also finding opportunities to convert vacant office spaces into residential buildings. He emphasized the need to pursue conversion projects for buildings that comply with all relevant zoning codes, have a clear path to vacancy, and ultimately generate returns for investors and lenders.
AI Could Transform Real Estate by Drawing on Industry Data
AI stands at the brink of revolutionizing real estate, despite the industry's slow uptake of the technology in recent years, said Matt Anderson, chief digital officer of The Carlyle Group.
"AI models thrive on data," he said. "And this industry has a lot of very structured, really interesting information."
There is a massive amount of data on buildings and their locations, as well as information about the people working, living, or meeting in buildings, Anderson said. AI can leverage this data to ultimately help real estate professionals understand the health of individual real estate assets. Machine learning and other AI tools can also help improve industry forecasting, Anderson said.
"There's just too much data for someone to not figure out how to get their hands on it and make better predictions," he said.
Improvements in Capital and Transaction Activity Propel Optimism in Real Estate Outlook
Sixty to 70% of respondents to our Outlook for CRE Survey said they expect the availability and cost of capital to improve over the next year. Capital is already becoming more abundant amid a stock market rally, March said. Many investors and analysts expect the Fed to cut rates later this year, which will aid the cost of capital.
The improvements in capital could push up transaction volumes. In a representation of the greatest source of optimism for the industry, nearly 90% of survey respondents said they expect transaction activity to pick up over the next 12 months.
Data Centers and Other Operational Real Estate Remain Attractive Investments
Investors are pouring money into alternative assets, including data centers. Over the past two years, the supply of data centers has doubled as vacancy rates have trended sharply downward, March said. He pointed out that data centers offer a trillion-dollar investment opportunity.
Underscoring the enthusiasm related to data centers, respondents to our survey were more optimistic about opportunities over the next year for data centers and other digital-economy properties than any other type of asset class.
There's an enormous capital need for data center development, and investors now have pricing power, said Adam Gallistel, GIC's head of Americas, real estate.
PGIM Real Estate's portfolios are increasingly looking to buy alternatives, said Soultana Reigle, PGIM Real Estate's head of US equity. Market opportunities and growing investor interest have driven the firm's shift to alternatives such as senior housing, student housing, life sciences, and data centers, she said.
Operational real estate, which includes many of these property types, is growing quickly because it offers attractive returns to investors who can meet consumer appetite for new services and amenities.
Real-estate leaders engage in conversation on a panel about
global flows of capital at RECM on March 27.
Experiential Luxury Travel Carries Big Investment Potential
The luxury travel market is benefiting from strong consumer and investor interest, said Allen Smith, managing partner of Mohari Hospitality.
"We have not had any trouble lining up capital because there is a tremendous amount of interest for this space," Smith said. "For the very high-end consumer, there is not much resistance to price; what's more important is access and quality."
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