Corporate merger & acquisition (M&A) activity and commercial real estate (CRE) investment volume have a strong correlation, particularly when market sentiment is buoyant.1
Global M&A rebounded very strongly in H2 2020, reaching $2.2 trillion—the highest half-year total on record.2 This put 2020’s full-year M&A volume just 7% below the 2019 level. The pace of activity has continued to recover rapidly in 2021. Debt and equity markets have continued to improve, as has business confidence, especially in the technology, media and telecommunications (TMT) sector.
The M&A momentum bodes well for CRE investment activity. Figure 1 shows the global volume of M&A and CRE investment in trailing-twelve-month (TTM) periods. The correlation between the two series is high (0.77 or 77%), with CRE investment typically lagging M&A activity by three or four quarters. This correlation suggests a robust rise in real estate investment volume in the months ahead.
Figure 1: Global M&A and Real Estate Investment Volume (Trailing-Twelve-Months, US$ Billions)
Source: CBRE Research, Real Capital Analytics, Q4 2020.
M&A activity has other implications for real estate:
- Most corporate consolidations occur when earnings are strong, confidence is high and the cost of capital is low. Strong earnings also benefit real estate by boosting investment, hiring and demand for space. Confidence and low cost of capital boost demand for capital assets of all types. While the 10-year Treasury yield has increased recently, money supply is at an all-time high and both the federal funds rate and commercial loan spreads will remain low for the foreseeable future.
- Retail, hotel and some office assets suffered greatly during the height of the pandemic. Many REIT prices have yet to recover to pre-COVID levels. Emerging opportunities to acquire "oversold" REITs (when the share price is lower than underlying value of the assets) will lead to increased M&A activity in the real estate sector. Growth in entity-level transactions is an important driver of global real estate capital flows, which, in turn, lift overall M&A volume.
- Some M&A activity is fueled by an underlying real estate play. The acceleration of flexible working, labor migration and advances in technology will necessitate evolving business solutions, including workplace design, market expansion and professionally managed facilities. M&A will absorb some of the impacts and help businesses transition through different real estate strategies.
We expect an increase in global M&A activity will lead to an increase in global real estate investment volume. In a period of strong economic expansion and asset price discovery, it is important to monitor this precursor of investment activity.
1 See our previous analysis on M&A and CRE capital markets in October 2018.
2 See Mergermarket’s 2020 Global M&A Report.
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