Commercial Real Estate sector struggles to adapt to behavioural shift
New Real Estate M&A deals saw 0% growth QoQ, but an 11% increase over the FY23 financial year.
By AnsaradaMon Sep 25 2023Due diligence and dealmaking, Industry news and trends, Environmental Social and Governance
New Real Estate M&A deals saw 0% growth QoQ, but an 11% increase over the financial year (up to 30 June 2023).
Real estate M&A activity has been subdued due to ongoing challenges caused by rising inflation, shifts in monetary policy, and interest rate hikes.
Dramatic changes in the way businesses operate and the ways people live, work, and play post-pandemic are significantly impacting commercial real estate.
New bankruptcy or insolvency transactions increased by 56% this quarter (QoQ) and were up 114% over the full financial year (YoY), according to the latest Deal Indicators report. Of all the open bankruptcy/insolvency deals run through the Ansarada platform last quarter, 29% occurred in the Real Estate sector.
In the US, the near collapse of the mall industry is one example of this playing out, with commercial real estate lenders starting to move aggressively against property owners in order to preserve value (Bloomberg). This could be viewed as a warning to office building owners and lenders as to the challenges they may face in coming years.
Smaller US companies that took risky loans to fund office buildings are facing difficulties due in part to the slowing commercial real estate market, the rise of remote work, and prolonged office vacancies. For banks with assets ranging from $1 billion to $10 billion, around 33% of their loans were invested in commercial real estate. Comparatively, larger banks with total assets exceeding $250 billion only had about 6% of their loans dedicated to commercial real estate by the end of last year (Reuters).
These smaller local banks have become more cautious, reducing their involvement in these sectors by being stricter with requirements and making fewer loans – especially following the collapse of Silicon Valley Bank and similar incidents.
In Australia, commercial property insolvencies and restructures are also on the increase, with rising construction costs and high interest rates the main culprits. Colliers Restructuring Property Services team reported more insolvency assets in the first quarter of 2023 than in the whole of 2022.
"The substantive growth in real estate M&A deals is reflective of the impacts of the COVID-19 pandemic on the property and construction industry in Australia. In particular, the industrial and logistics sector has been a standout performer. High demand for these properties, which is driven by changes in work culture and consumer habits and the growth of e-commerce, has led to strong industrial rental growth. As vacancy rates remain tight, this asset class has become highly sought-after by investors seeking stable and attractive returns," said Sarah Roettgers, Partner in the Property team at Hamilton Locke.
In Vietnam, the number of bankruptcies among property developers increased by 38.7% last year, driven by inadequate cash flows and soaring raw material expenses. These developers faced challenges in obtaining loans, issuing corporate bonds, and mobilizing capital from customers, leading to a shortage of funds that forced many businesses to postpone or halt various projects.
While bankruptcies in the sector have increased, t’s not all doom and gloom – new M&A opportunities will arise as behavioural trends evolve and normalize; investors will seek to capitalize on emerging investment themes and transform their operating models. Capital is still available for M&A, with private capital and select public company investors looking to accelerate deployment activity in real estate.
"We are not surprised to see the significant step change in the occurrence of ESG in the data, up from only 7 references in the July 22 data to 147 references in June 23… ESG is relevant across many sectors, but it is unsurprising that the uptick in the occurrence of ESG language in the data coincides with… a 68% increase in the real estate sector [in FY23 compared to FY21] where there is a significant exposure to carbon liability and demand for green building stock," says Meg Lee, Partner at Hall & Wilcox, referring to Ansarada’s latest Deal Indicators data.
Real Estate will continue to be a sector heavily influenced by sustainability, particularly as technologies supporting smart buildings and boosting properties’ environmental credentials continue to advance.
Real estate M&A activity has been subdued due to ongoing challenges caused by rising inflation, shifts in monetary policy, and interest rate hikes.
Dramatic changes in the way businesses operate and the ways people live, work, and play post-pandemic are significantly impacting commercial real estate.
29% of bankruptcy & insolvency transactions occurred in property
New bankruptcy or insolvency transactions increased by 56% this quarter (QoQ) and were up 114% over the full financial year (YoY), according to the latest Deal Indicators report. Of all the open bankruptcy/insolvency deals run through the Ansarada platform last quarter, 29% occurred in the Real Estate sector.
In the US, the near collapse of the mall industry is one example of this playing out, with commercial real estate lenders starting to move aggressively against property owners in order to preserve value (Bloomberg). This could be viewed as a warning to office building owners and lenders as to the challenges they may face in coming years.
Smaller US companies that took risky loans to fund office buildings are facing difficulties due in part to the slowing commercial real estate market, the rise of remote work, and prolonged office vacancies. For banks with assets ranging from $1 billion to $10 billion, around 33% of their loans were invested in commercial real estate. Comparatively, larger banks with total assets exceeding $250 billion only had about 6% of their loans dedicated to commercial real estate by the end of last year (Reuters).
These smaller local banks have become more cautious, reducing their involvement in these sectors by being stricter with requirements and making fewer loans – especially following the collapse of Silicon Valley Bank and similar incidents.
In Australia, commercial property insolvencies and restructures are also on the increase, with rising construction costs and high interest rates the main culprits. Colliers Restructuring Property Services team reported more insolvency assets in the first quarter of 2023 than in the whole of 2022.
"The substantive growth in real estate M&A deals is reflective of the impacts of the COVID-19 pandemic on the property and construction industry in Australia. In particular, the industrial and logistics sector has been a standout performer. High demand for these properties, which is driven by changes in work culture and consumer habits and the growth of e-commerce, has led to strong industrial rental growth. As vacancy rates remain tight, this asset class has become highly sought-after by investors seeking stable and attractive returns," said Sarah Roettgers, Partner in the Property team at Hamilton Locke.
In Vietnam, the number of bankruptcies among property developers increased by 38.7% last year, driven by inadequate cash flows and soaring raw material expenses. These developers faced challenges in obtaining loans, issuing corporate bonds, and mobilizing capital from customers, leading to a shortage of funds that forced many businesses to postpone or halt various projects.
While bankruptcies in the sector have increased, t’s not all doom and gloom – new M&A opportunities will arise as behavioural trends evolve and normalize; investors will seek to capitalize on emerging investment themes and transform their operating models. Capital is still available for M&A, with private capital and select public company investors looking to accelerate deployment activity in real estate.
ESG impacts on the Real Estate sector
"We are not surprised to see the significant step change in the occurrence of ESG in the data, up from only 7 references in the July 22 data to 147 references in June 23… ESG is relevant across many sectors, but it is unsurprising that the uptick in the occurrence of ESG language in the data coincides with… a 68% increase in the real estate sector [in FY23 compared to FY21] where there is a significant exposure to carbon liability and demand for green building stock," says Meg Lee, Partner at Hall & Wilcox, referring to Ansarada’s latest Deal Indicators data.
Real Estate will continue to be a sector heavily influenced by sustainability, particularly as technologies supporting smart buildings and boosting properties’ environmental credentials continue to advance.
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