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As part of the 2021 ULI Virtual Europe Conference in February, high-level ULI members from across the global finance and investment sector gathered virtually to discuss capital flows, real estate market dynamics, and debt and equity markets. The invitation-only gathering, limited to 35 attendees, was held under Chatham House rules and not for attribution. ULI Europe Chairman Marnix Galle and ULI Europe CEO Lisette van Doorn attended, along with other members of ULI Europe’s leadership team.

To kick off the two-hour discussion, an analysis by Avison Young of “10 Trends for 2021” was presented. Among the trends raised were an acceleration of deglobalization, shifting from “just in time” to “just in case” deliveries, and more interest in the hyperlocal, also characterized as “love thy neighborhood.” Other key takeaways from the event include the following:

  • Retail, student housing, and hotel properties were cited as the worst performers given the start-and-stop status of national economies and international travel, with a few exceptions. In the retail segment, grocery-anchored developments have continued to perform.
  • So far, debt markets have been healthier than might have been expected given the unexpected downturn, with few missed payments or outright defaults. In some instances, participants said, landlords proactively offered a rent holiday or a delay in payment for tenants known to be in distress. The key issue is to make assessments on the quality of the tenant. One participant anticipated an increase in defaults in 2021 if conditions do not improve.
  • Government stimulus certainly helped keep businesses afloat. Also, the larger banks were not as overextended as they had been in the 2010s, and governments have been quick to accommodate to prevent structural impact, which can help a quicker recovery.
  • Inflation is not seen as realistic a near-term concern in Europe as it may be in the United States or in the Asia Pacific region when compared with the risk of damage to the economy.
  • Since the start of the series of lockdowns in the second half of 2020, there was already less lending occurring year over year, as the Bank of England and the European Central Bank have gotten less lenient about capital requirements.
  • Some investors remained hungry for yield, willing to take on more risk and in some cases more aggressive bidding is seen. There is a lot of pent-up demand, but the question is how this will be deployed. It is all about the specifics of a deal, with a key focus on core, location, and quality of the tenant and sponsor.
  • l One of the participants said that while logistics and data centers had done very well from a pricing perspective, as everyone gravitated toward these sectors in their search for yield, it was beginning to look like markets had overshot, causing some investors to begin looking elsewhere or to sell.
  • l From a capital flows perspective, the trend was observed that real estate also seems to have come on the radar of other “allocators asset classes,” such as fixed-income and private equity, in their search for yield, which sometimes seem to operate more aggressively than their real estate colleagues.
  • l The office sector was characterized as “you can’t paint everything with the same brush.” For short-duration leases or lower-credit tenants, it would be very hard to attract borrowing in the near term. Transport and digital connectivity are important; otherwise, why would anyone prefer working in the office to working from home? The green aspects and amenities of office spaces are also more important than ever.
  • Some dealmaking and capital-raising have been delayed by the inability to travel and meet in person, while some managers have shifted to performing these functions almost completely virtually and are unlikely to shift fully back to an in-person model.
  • Some regionality is occurring where investors are less likely to invest in something on the opposite side of the globe without a preexisting relationship, and this trend is extending to design firms.
  • Environmental, social, and governance (ESG) policies and strategies are now seen as “you die if you don’t” instead of “nice to have.”