Real Estate Development & Construction

The overall outlook for the residential Real Estate Development industry is bright. Real Estate Development industry growth has been bolstered by a promising investment environment and openings from tech-driven disruption. In recent years, real estate investments have generated a stable cash flow and returns substantially greater than traditional sources of yield. However, due to the COVID-19 outbreak, the Real Estate Development industry has seen a shift from concern across the value chain. As the global economy continues to recover, activity within this industry is anticipated to surge as attention is directed towards the real estate market.

The Commercial Real Estate (CRE) macro environment has been impacted negatively in the wake of COVID-19. There is a dichotomy in operating fundamentals among property types—industrial real estate, health care, data centers, and cell towers have been positively disrupted, while offices, hotels, and retail have felt the negative effects. Global CRE deal volume declined 36% year over year (YoY) in 2Q20 due to economic stagnation and an uncertain pricing environment. Prices are showing early signs of stress across the more negatively impacted property types. For instance, U.S. retail and office price indices declined 4.1% and 0.5% YoY in August. In contrast, the industrial property index rose 7.4% YoY.

Unlike the Global Financial Crisis, CRE companies had generally strong financials at the start of the pandemic and debt markets remain sufficiently liquid. As troubled loans have risen; banks, fearing higher delinquencies, are tightening lending standards. In several sectors, rent collections have remained healthy, but largely because of higher tenant incentives and leasing concessions. Along with the evolving financial landscape, the pandemic has resulted in tectonic shifts in the way people live, work, and play, which has put unique pressures on certain property sectors.

The Real Estate Development industry has experienced unordinary circumstances due to the COVID-19 pandemic. Mergers and Acquisitions (M&A) activity among this industry is anticipated to be slow due to a recovery that is expected to be gradual, uneven, and erratic as well as the significant capital that awaits in the investors pockets. Investors are expected to look for yield against reduced interest rates and decline of gross domestic product growth. As companies continue to emerge from the pandemic, an elevated amount of M&A activity in the industry is predicted throughout the projection period to 2026. Exhibit 1 shows the performance of the Real Estate Development sector since 2016 relative to the overall economy, comparing sector revenue change to GDP growth from 2016-4Q2020.

Real Estate Development revenue totaled $1.1 trillion in 2020. While average annual growth totaled 2.3% from 2016-2021, the industry is expected to grow at an annualized rate of 0.1% from 2021-2026. Industry growth is expected to be driven by an increase in the number of household projects and the growth of disposable personal incomes. As COVID-19 continues to draw toward an end, real estate leaders must centralize cash management to focus on efficiency and change the make of portfolio and capital expenditure decisions. This industry heavily depends on macroeconomic trends, which include interest rates, population growth, and economic strength due to the cyclical nature of the industry. Exhibit 2 shows the trends in investing activity from 2015-2020.

More effective transition plans are anticipated to integrate real estate assets into immediate M&A objectives and businesses’ long-term goals. The COVID-19 pandemic has permanently altered the habits that affect the demand for other real estate assets including hospitality properties and short-term leases. M&A activity is anticipated to increase as several real estate investment trusts continue to trade at a significant discount to net asset value.

As of the end of FY2020, Real Estate Development M&A deals worth $36 billion had been announced, which include SmartStop Self Storage and Strategic Storage Trust IV, U.S. Concrete and Coram Materials, PGT Innovations and NewSouth Window Solutions, Exchange Income and Window Installation Specialists, and ADT & Defenders. SmartStop Self Storage acquired Strategic Storage Trust IV for $370 million to achieve further economies of scale and potentially create greater value as it takes advantage of the benefits of a larger aggregate portfolio. U.S. Concrete’s acquisition of Coram Materials for $142 million is part of their strategic push to provide the Company with self-sufficiency to meet supply needs as well as provide external sales to third party customers. PGT Innovations purchased NewSouth Window Solutions for $92 million to provide growth opportunities to better serve the southern coastal markets. Exchange Income’s acquisition of Window Installation Specialists for $45 million was a strategic decision to further their vertical operations of subsidiaries. ADT added the largest independent dealer in Defenders for $381 million to create numerous strategic, financial, and operational advantages. In sum, the overall outlook for M&A in the Real Estate Development industry appears to be positive due to the successful COVID-19 vaccine deployment, low interest rates, and a relative attractiveness to real estate.

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