In today’s dynamic commercial real estate (CRE) landscape, long-term investment strategies must consider key forces that can significantly impact the global economy and real estate markets. These forces, referred to as megatrends, drive technological innovation, transform societies, and reshape the investment environment. The recently introduced Commercial Real Estate Megatrend Resilience Index highlights four such megatrends—demographics, technology, geopolitics, and climate—which will play a pivotal role in determining the future of CRE.
When creating this index, it was essential to examine the interconnectedness of these megatrends. They do not operate independently but frequently intersect, leading to unexpected outcomes for investors. For example, Florida, a popular retirement destination due to its ageing baby boomer population, has seen a sharp rise in insurance costs linked to climate change. This has affected the return potential for investments that had previously been promising.
The index evaluates the resilience of CRE markets across various locations, projecting their performance through 2050. It assigns scores from 0 (least favourable) to 100 (most favourable) across different property sectors, providing a comprehensive view of key markets’ long-term prospects. Research shows that advanced economies, such as Australia, Singapore, and the UK, are generally better positioned to face these megatrends. Australia ranks highest, driven by robust demographics and advantageous geopolitical conditions. However, its challenging climate transition path poses a significant risk.
The index also analyses property sectors based on the factors most relevant to each one, allowing for the evaluation of their relative attractiveness across various countries. Residential property emerges as the most promising sector in relation to these megatrends, followed by industrial, hotels, and retail. Office spaces, on the other hand, are considered the least favourable, though there are exceptions where certain markets show stronger potential.
The residential sector benefits significantly from favourable demographics and anticipated productivity growth. Countries with balanced exposure to labour markets and readiness for AI implementation are expected to experience long-term productivity increases. This will lead to higher wages, ultimately supporting the residential market. Additionally, population growth, societal shifts towards smaller households, and increasing urbanisation all contribute to the sector’s prospects. Notably, Sweden, the UK, and Finland are identified as the most resilient residential markets.
A growing or large population boosts the demand for goods and enhances a country’s productive capacity, supporting the industrial sector. In developed markets like the US and the UK, the ongoing shift towards localised supply chains and the re-shoring of manufacturing activities are expected to increase demand for industrial spaces. The industrial sector’s climate transition risk is relatively low due to its lower energy intensity and the potential for incorporating on-site renewable energy solutions. Singapore, the UK, and Australia rank as the top three most resilient industrial markets.
The hotel sector benefits from strong digital infrastructure and an innovative workforce, which have boosted productivity in accommodation and food services. Digital platforms have made it easier for people to discover new travel destinations, and rising global incomes, particularly in emerging markets, are driving tourism. Meanwhile, ageing populations in developed economies provide a growing consumer base with both wealth and leisure time. Australia, Malaysia, and the UK are seen as the most resilient markets in this sector.
Retail is driven by demographic factors such as population growth and income levels. Countries like Australia, Sweden, and Malaysia with robust population growth, and those with high incomes like Sweden, Singapore, and the US, are well-positioned for retail growth. In emerging economies, rising incomes and an expanding middle class are also contributing to increased demand for higher-value goods, particularly in countries like Malaysia, China, and South Africa.
The office sector is the least attractive in the index, though there are regions with better long-term prospects. Markets with growing working-age populations are better placed, though only seven of the 25 countries in the index are projected to see such growth. The top markets in this sector benefit from advancements in generative AI, which is expected to have a significant impact on office-using professions. In particular, the financial and business services sectors are well-equipped to implement AI technologies, boosting output without drastically affecting the labour market.
The findings and projections within the Commercial Real Estate Megatrend Resilience Index are powered by our Real Estate Economics Service, a trusted resource for CRE professionals worldwide. This service provides insights into the effects of macroeconomic, geopolitical, financial, and climate changes on the performance of private and public real estate markets.
The future of commercial real estate is set to be profoundly influenced by the intersecting forces of demographics, technology, geopolitics, and climate. Advanced economies and certain property sectors are better positioned to withstand these megatrends, while others will need to adapt to shifting realities.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
