2021 commercial real estate outlook Rebuilding to enhance resilience A report from the Deloitte Center for Financial ServicesAbout the Deloitte Center for Financial Services The Deloitte Center for Financial Services, which supports the organizations US Financial Services practice, provides insight and research to assist senior-level decision-makers within banks, capital markets firms, investment managers, insurance carriers, and real estate organizations. The center is staffed by a group of professionals with a wide array of in-depth industry experiences as well as cutting-edge research and analytical skills. Through our research, roundtables, and other forms of engagement, we seek to be a trusted source for relevant, timely, and reliable insights. Read recent publications and learn more about the center on D. Connect To learn more about the vision of the DCFS, its solutions, thought leadership, and events, please visit Subscribe To receive email communications, please register at Engage Follow us on Twitter at: DeloitteFinSvcs. Deloitte Real Estate Deloitte Globals Real Estate industry group and its member firm practices are recognized for bringing together teams with diverse experience and knowledge to provide customized solutions for clients across the full spectrum of the real estate community. To learn more, visit DBreaking inertia, gaining momentum 3 Technology: Digital transformation and tenant experience are a business imperative 5 Operations: The key to enhancing business resilience 10 Finance: Treading cautiously 16 Talent: A key competitive differentiator 19 Mastering the tightrope 23 Endnotes 24 Contents2 1. The unprecedented impact of COVID-19 on the global economy and the commercial real estate (CRE) industry continues to challenge leaders. 2. Digital transformation of the business and tenant experience could become a business imperative. More than one-half of respondents (56%) believe that the pandemic exposed shortcomings in their organizations digital capabilities. Companies can strengthen operations and build trust with tenants by adopting a structured approach to digital transformation, bolstering cybersecurity and data privacy efforts, and leveraging and using analytics to make data-backed decisions. 3. The pandemic is disrupting the value proposition of CRE, especially for offices, retail, and hotels, causing most CRE companies to reevaluate existing portfolios. Meanwhile, CRE companies face cost pressures due to softening operating fundamentals: Respondents plan to reduce costs by 20% on average. Optimizing operational costs and using technology to reposition space and for facilities management can improve operational resilience. 4. CRE organizations are feeling the financial impact of the current economic environment36% of North American respondents, compared to 25% European and 23% APAC counterparts, expect rental collection declines of more than 20% in the next year. To enhance financial strength, companies could focus on bolstering their asset portfolios and digitizing the finance function. 5. More than 50% of respondents acknowledge that their ability to succeed in the postpandemic world will be hampered in the near term by employee concerns about returning to work. Planning and implementing a talent transformation to adapt to the future of work, and prioritizing diversity and inclusion will provide a competitive edge. KEY MESSAGES 2021 commercial real estate outlook3 Breaking inertia, gaining momentum T HE IMPACT OF COVID-19 on the global economy and the CRE industry has made 2020 the most memorable year in recent history. CRE companies have needed to digitize operations, close physical facilities due to extensive lockdowns, and prepare for reopening, while ensuring the health and safety of employees and occupiers and considering the financial health of tenants and end users. With economic recovery heavily dependent on a vaccine, the length of this downturn remains uncertain. As we write this outlook, economic activity is contracting due to a fresh resurgence of the virus in Europe. 1 Large Asia-Pacific (APAC) economies such as Japan and Australia havent yet turned the corner to growth, India is facing a severe downturn, and strained relationships between the United States and China are creating significant geopolitical tensions. 2 According to Deloittes economic forecast, in the United States, it is expected that “a vaccine and/or treatment will allow normal economic activity to begin to resume in mid-2021.” 3 As it will take time to deploy the vaccine, our economists expect growth to remain somewhat constrained for a period of time. 4 (Click here to read Deloittes latest US Economic Forecast.) The CRE macro environment is being impacted similarly. But there is a dichotomy in operating fundamentals among property typesindustrial 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) to US$306B in 2Q20 due to economic stagnation and an uncertain pricing environment. 5 Prices are showing early signs of stress across the more negatively impacted property types. 6 For instance, US retail and office price indices declined 4.1% and 0.5% YoY in August. In contrast, industrial property index rose 7.4% YoY. 7 Unlike the Global Financial Crisis (GFC), CRE companies had generally strong financials at the start of the pandemic and debt markets remain sufficiently liquid. Yet, troubled loans are rising; banks, fearing higher delinquencies, are tightening lending standards. 8 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. With this as the backdrop, we wanted to understand how well-equipped CRE leaders were to weather the current economic situation, how they are planning to recover over the next 12 months, and how they are preparing to remain competitive and thrive in the long term. To do this, we surveyed 200 CRE senior executivesowners/ operators, developers, brokers, and investorsin 10 countries during the summer of 2020. (See sidebar, “Methodology,” for more details about the survey.) Overall, most survey respondents felt their companies were unprepared in certain important Rebuilding to enhance resilience