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Covid Didn’t End The Real Estate Cycle. But A Reckoning Could Be Coming

Property cycles might be as old as civilization itself, but when they start and when they end is usually a question best answered in hindsight.

In second-century Rome, the empire’s success under emperor Hadrian caused a building boom; when the bubble burst, Roman brick manufacturers and builders simply went bust.

More than 1,300 years later, in Tudor England, the rise of the British Empire led to a dramatic expansion of London, spurring the invention of speculative development and long leases. The Great Fire in 1666 could have brought the boom to the end. Instead, it created an opportunity to rebuild the city. 

When the coronavirus pandemic delivered a shock to the world economy two years ago this month, many investors expected it to correct soaring commercial real estate values. But after an initial shaking of the foundation and a period of worried dormancy, conditions returned to something close to normal, with investment eventually flowing again in record volumes.


Global investment activity hit $1.3T in 2021, Real Capital Analytics data shows, a 54% surge over the previous year, largely driven by record-high annual volumes in the Americas and Asia-Pacific. Despite being mere months removed from the pandemic preventing people from using huge swaths of commercial real estate, the sector had an all-time record year. 

It’s a surprising situation. The potential black swan event spoken of for years, one that would herald the end of the good times, arrived with the spread of Covid-19. But other than accelerating trends already apparent in sectors like retail and industrial, not much changed. 

That’s not to say a reckoning isn’t coming. But property and investment experts told Bisnow this month the pandemic represented a pause in the real estate cycle, rather than an end and a cyclical reset. 

“The end of a cycle is typically characterized by an oversupply of space that causes rents to crash, borrowing rates spike, and that causes cap rates to collapse,” Green Street Head of European Research Peter Papadakos said.

Over the last two years, he said, the opposite happened. Borrowing costs came down, demand stayed robust or grew in some sectors, and the fiscal response of cutting interest rates and printing money from central banks and governments limited business defaults and put a floor under asset prices. 

“Even before the pandemic, in 2019, we were saying to our clients that we were expecting a mid-cycle slowdown,” Tristan Capital Head of Investment Strategy and Research Simon Martin said. “We were heading towards full employment and the prospect of rate rises, the general discourse was about high asset prices. People were waiting to see what would cause that slowdown, and it seems Covid has taken on that mantle.”

“We were carried into this present situation by a flood of money,” Cushman & Wakefield Global Head of Capital Markets David Bitner said. “One way or another, a lot of that money found its way into real estate.”

A long view of modern real estate cycles lends credence to the idea the pandemic didn’t represent a true cyclical end. In the post-war period, real estate cycles have typically lasted about 17 or 18 years. The 1970s recession, brought about by rising inflation and, in the UK, problems in the banking system, started in 1973-74. The next crash came along in the early 1990s. 

The dot-com crash and 9/11 seemed like they might instigate a full-blown real estate recession, but the sector recovered strongly — the next crash to come along was the Great Financial Crisis of 2008. In terms of a typical cycle’s length, real estate is not due for its next real crash until 2024 or 2025. 

But to some degree, talking about the real estate cycle or looking at the sector as a whole in the current market misses the crux of modern real estate investing, experts told Bisnow.

“If you look at where outperformance has come from over the past few years, it has all been structural rather than cyclical,” CBRE Chief Economist and Head of Insights & Intelligence Sabina Reeves said. “It’s been about whether you got into logistics 10 years ago or whether you got out of retail, rather than anything cyclical.”

When it comes to analyzing performance, real estate has never been so diverse, its various subsectors so divergent.

“There used to be some uniformity, things moved in conjunction,” Real Capital Analytics Head of EMEA Real Estate Research Tom Leahy said. “So in 2007, you saw everything fall at the same time, and in the beginning, everything started to recover. But today, the sectors have become completely disjointed because of the way society has changed. The way we use buildings has shifted, so the value shifts.”

Leahy said that compared to any time in recent history, it is much harder to assess where we are in the real estate cycle. Industrial values rose 40% last year in the UK while retail values dropped 10%. Given the disparity, some wonder whether it makes sense bundling them together as part of the same financial asset class.

Peter Papadakos

To that point, retail seems to have come to the end of its own cycle and started a new one. Papadakos said all the hallmarks are there — oversupply leading to rent drops, lack of credit leading to prices collapsing, and now, just maybe, a long slow climb to recovery. 

Why does the real estate cycle matter, and to whom? It matters most for big pension funds and institutional investors and their chief investment officers, who are trying to allocate tens of billions of assets between different sectors of the economy, and can put their money anywhere — stocks, bonds, venture capital, private equity, junk bonds, commodities or real estate. 

For these asset allocators, it matters a great deal where real estate is in the cycle and how that is determined. They now have to worry a lot more about which real estate asset class the firm they give their money to is investing in, CBRE’s Reeves said, and are unsurprisingly looking for great exposure to industrial, multifamily, affordable housing, self-storage and life sciences. 

The numbers suggest these big funds continue to have confidence in the sector. 

The $1.36T invested in income-producing commercial real estate last year smashed all previous records, less than two years out from the pandemic, and that shows no sign of slowing. 

“There is still huge capital out there,” RCA’s Leahy said. 

A 2021 survey of 224 institutional global investors with a total of $1.2T in real estate assets by Hodes Weill & Associates, a New York-based capital advisory firm, found average target allocations to real estate increased to 10.7% in 2021, up 10 basis points over 2020.

That’s a modest increase, according to Hodes Weill analysts, but the investors surveyed also reported that they plan bigger boosts for real estate this year.

Over the next 12 months, real estate allocations are expected to increase to an average of 11%, a bump up of 30 basis points and the largest increase since 2014, according to Hodes Weill. And investors aren’t just doing it to rebalance their portfolios.

“Positive investor sentiment can be attributed to strong operating fundamentals in certain sectors including industrial, multifamily and niche property sectors such as life sciences and data centers,” the survey stated.  

Despite this divergence, few argue we are seeing the end of the real estate cycle as we knew it. Yes, retail reached the end of one cycle and started another, while logistics has charged on. But it would be risky to say real estate won’t experience a sector-wide downturn again. 

“I think what you can say is that we have reached the end of a super-cycle of low interest rates,” Reeves said. 

Since the collapse of the hedge fund Long-Term Capital Management in 1998, global interest rates have been on a harmonious path downward, culminating with the post-GFC and post-Covid fiscal response that saw interest rates turn negative in many parts of the world.

Sabrina Reeves

That is likely coming to an end, Reeves said, and in places like South Korea, rates have already started rising. Multiple rate rises were factored in for 2022 and 2023 in the U.S. and UK to combat inflation that has risen more sharply than many experts had anticipated, though the Russia-Ukraine War may delay those hikes. When rates do rise, however, that will take some of the steam out of real estate price rises. 

But continued strength in the stock market would help sustain real estate prices and boost investment, Bitner added. Institutional investors allocate a certain percentage of their portfolios for real estate, as well as stocks and other investments. When stock values rise, those portfolios need to be rebalanced, frequently to the benefit of real estate.

How To Approach The Future 

But Bitner said there is the possibility that even the red-hot multifamily and industrial markets could soon reach plateaus. After all, industrial has seen several years of double-digit rent growth, and that can’t last forever.

“[Industrial’s] been abetted by otherworldly levels of net absorption and demand,” he said. “It’s become more complicated because of the rising interest rate environment. Nobody knows when the double-digit rent growth ends.”

Just before the pandemic hit, Bitner said he felt returns were on the verge of slowing, and cap rates had scant room to further compress. The global economy could soon experience something similar even if knots in the supply chain get untied and the Fed tames inflation with moderate interest rate increases. In this optimistic scenario, cap rates could stabilize, perhaps even edge up, and overall, the market could see more moderate returns.

This state of affairs could go on steadily for a long time, Bitner added, although there is also a possibility the global economy could react adversely to rising interest rates and fall into a recession. Still, he advises investors to approach the market with a mix of confidence and caution.

“Our view is, you should play the odds that this cycle will continue,” he said.

Michael Episcope (standing at right)

Christian Beaudoin, JLL’s director of research and strategy in the Central U.S., said he didn’t think the market was overheating prior to the pandemic and he has an optimistic take now, as long as investors are careful, especially when it comes to offices.

“It’s not as easy as it was pre-Covid,” he said.

Working from home and hybrid schedules mean higher vacancies and decreased utilization in many submarkets. That’s going to leave a lot of buildings obsolete and change investors’ calculations. But even in the office sector, there are a lot of opportunities.

“To paint the whole sector with a broad brush would be misleading,” he said. “The best buildings on the market are already outperforming, and will continue to outperform, pre-pandemic conditions.”

In the run-up to the crisis, Chicago developers had more than 7M SF of new offices under construction or planned, according to Colliers, much of it in the Fulton Market area, a former industrial zone transformed into a sleek office market, anchored by the regional headquarters for Google. The pandemic did shut the neighborhood for a while, but a full recovery is well underway. 

“Fulton Market witnessed its best-ever quarter for leasing, as new development, and Class-A buildings across Downtown remain largely unaffected by the pandemic, enjoying high occupancy rates and commanding record-high rents,” stated a Q4 report by Savills.

“The market is very clearly bifurcated,” Beaudoin said. “So, it’s a wise approach at the moment to invest in certainty and see what transpires over the next 24 months.”

Origin Investments principal Michael Episcope said he worries many investors aren’t being careful enough as they pour funds into the multifamily sector, specifically. The Chicago-based developer and investor now concentrates on ground-up development rather than competing for existing properties with buyers who seem ready to pay any price, even for older developments, especially in the Sun Belt.

“It’s scary to see product from the ‘90s, the ‘80s and even the ‘70s trading at or above today’s replacement costs,” he said.

Investment funds are also out hunting for newly constructed apartment communities developed in markets such as Dallas or Florida by companies such as Origin. Units that would cost $260K to build can sell for $400K, easily offsetting the soaring costs for labor and construction materials.

“In the Sun Belt, it’s not unusual to see 25 bidders coming to the table,” Episcope said. “We’re still capturing returns that are probably higher than they’ve ever been.”

Episcope said he’s not certain how long this can continue. But he’s also not sure it’s a bubble.

“A bubble is something that’s ready to pop,” he said. “But the fundamentals of multifamily are incredibly strong right now. We have a housing shortage and great rent growth, especially in the Sun Belt.”   

Bubbles usually expand due to irresponsible debt markets, Episcope said, but unlike the years leading up to the GFC, lenders today have remained disciplined, requiring borrowers to put lots of skin in the game.

“It may not be a bubble that’s popping, but these investors are getting into the market in what could be the wrong way, and they could eventually see negative returns,” he said.

Bitner also advises buyers not to get too exuberant and to make sure they have disciplined underwriting, being conservative on factors such as net operating income growth. That will help keep the investment market healthy and expanding.

“This is what a sustainable cycle looks like,” he said. “We want a market that is steady, conservative and rational.”

But if commercial real estate sectors have, for the most part, returned to where they were pre-Covid, investors should not expect 2022 and 2023 to be when values increase across the board, according to Bitner. Even if no new variant threatens the world economy, there are still potential pitfalls from rising interest rates to geopolitical flare-ups.  

“I would not be moving into an extreme defensive position and try to offload everything,” Bitner said. “But I would do a half-step back to a more cautious approach.”

CORRECTION, March 11, 10:30 A.M. ET: A previous version of this story misidentified Michael Episcope in a photo cutline. He is standing on the right, not the left.