Ground-up economics: Slow growth, accommodative central banks and occupancy gains should support another respectable year of real estate performance
- March 1, 2020: Vol. 7, Number 3

Ground-up economics: Slow growth, accommodative central banks and occupancy gains should support another respectable year of real estate performance

by Indraneel Karlekar

Although clouds continue to hover over the 2020 global economic outlook, the commercial real estate investment landscape is quite constructive, thanks to modest growth, accommodative central banks and low rates.

Of course, careful asset selection is imperative, especially given the huge demographic shifts on the horizon.


The global economy is expected to grow at a measured pace in 2020 with economic output among developed markets more synchronized than the previous year. We place a high probability (70 percent) that the expansion will continue through the next 12 months. The outlook for slow but positive growth, along with an accommodative monetary policy environment, should keep real estate investors on track for another year of solid performance.

Four positive factors underpin our constructive view on the world economy in 2020: lower geopolitical stress, pro-growth central banking policy, strong labor markets, and ongoing strength in the services sector. Although the decline in global manufacturing is certainly a concern, that weakness has not passed through to the larger services sector. Significantly more United States service industries report expansion than manufacturing industries, while services data in China and France have also shown strength.

Risks remain on the table, however. The global outlook is the most fragile it’s been in some time. Despite successfully concluding phase one, the U.S.-China trade dispute is an ever-present threat along with rising tensions in the Middle East. An election year in the United States also presents some challenges to investors facing an uncertain political outlook in 2021.

Finally, the full impact of the novel coronavirus on the Chinese and global economies are yet to be understood.


In response to slowing growth, central banks across the globe have collectively embarked on a renewed phase of monetary accommodation, reducing downside risks across the investment landscape in 2020.

Among developed economies, the U.S. Federal Reserve cut rates again in late October. The Bank of Japan has signaled that more easing is to come, and the European Central Bank has vowed to remain ultra-
accommodative for the foreseeable future.


The Goldilocks environment of slow growth and accommodative central banks, coupled with strong occupancy gains, should remain supportive to global commercial real estate investment.

In the United States, occupancy levels are at a 20-year high. Rent growth is well above broader inflationary benchmarks. Robust occupier demand and the tailwind of e-commerce growth support a positive outlook for the industrial sector. The retail sector, however, is faced with years of overbuilding, an aging mall subsector and brick-and-mortar stores rapidly losing ground to online merchants.

Across the Atlantic, Europe remains an appealing destination for real estate investors abroad and — increasingly — domestically, who realize the benefits of the continent’s heterogeneity. Even with a slower growth outlook for the continent, office rents in many markets (e.g., Amsterdam, Madrid) have surprised to the upside, avoiding the stagnancy facing other cities. In retail, some European markets have proven more resilient against the encroachment of e-commerce, for a variety of reasons.

Still, the market remains well-balanced globally. Tenant demand should drive sustained (slower) growth at the asset-class level, while shrewd investors can identify attractive regional and subsector opportunities.


Given a scenario of weaker global growth in 2020, careful asset selection is crucial to achieve performance. A defensive tilt makes sense against this more sluggish market backdrop, leading us to favor real estate debt (with a bias toward quality) over real estate equity. The former is nuanced but well positioned to offer investors the ability to provide capital for de-gearing and de-leveraging strategies, as well as a subordinated equity cushion. We prefer private debt and continue to favor U.S. high yield; investors there can hope to realize total returns between 6 percent and 8 percent this year, making it very competitive to core equity real estate.

In the equity space, we maintain a modest preference for private core euro-zone real estate, which we forecast to outperform U.S. private equity, thanks to Europe’s lower cost of debt capital and better rent growth. We prefer approaches that offer opportunistic equity return potential with only value-add equity risk, such as certain shovel-ready projects or single-phase development strategies with specific investment outcome projections.

As relative returns and opportunities become less easy to spot, we continue to advocate a barbell strategy for investors’ real estate investment portfolios. We suggest balancing a core, low-risk exposure of high-yield debt and exposure to high-quality core private real estate with an allocation to higher-risk, opportunistic, shovel-ready development projects with strong margins.


Looking further ahead, the demographic structure of the world economy will undergo profound shifts in the coming decades, with consequences that will emerge over time for real estate investors. Fertility rates in most developed countries are at a record low, while life expectancies have increased, potentially beginning a demographic swing toward a disproportionately aged society. This has material consequences for economic growth and productivity, since a smaller working-age population means fewer people generating economic activity and supporting public infrastructure growth. Additionally, the massive number of workers moving past their prime employment years must have their evolving space needs met, generating demand for some new and alternative real estate sectors.

Policymakers can help by taking legislative steps to encourage more positive population trends. Regions with initiatives that underscore migration, job availability, basic needs, education and opportunity will likely be better positioned to face these challenges over the coming years.

In the face of evolving demographics and changing policies, prudent commercial real estate investors should focus on well-positioned assets and markets that are expected to maintain long-term value in desirable locations. With careful long-term positioning, investors can hope to not only weather but also harness one of the largest structural shifts of the 21st century.


Indraneel Karlekar is global head of research and strategy for Principal Real Estate Investors. This column was a summary of Inside Real Estate, the 2020 economic and real estate outlook from Principal. Read the full report at this link:

Forgot your username or password?