Insight Article Desktop Banner
2021 Outlooks
January 19, 2021

2021 Global Real Estate Outlook: Recovery, Re-Pricing and Reflationary Fundamentals

Insight Video Mobile Banner
January 19, 2021

2021 Global Real Estate Outlook: Recovery, Re-Pricing and Reflationary Fundamentals

2021 Outlooks

2021 Global Real Estate Outlook: Recovery, Re-Pricing and Reflationary Fundamentals

Share Icon

January 19, 2021


2021 will likely mark the beginning of the next new real estate market cycle as the pick-up in economic growth begins to flow more broadly through to real estate fundamentals, which will continue to recover at different speeds by sector. 2021 will hopefully and likely be the year of Recovery vs Recession, Vaccine vs Virus and Reflation vs Deflation. Early cycle investing will require discerning investors to adopt a dual strategy that comprises income growth opportunities that leverage the acceleration in economic activity and secular tailwinds, along with deeper value opportunities that arise from expected re-pricing due to cyclical and structural headwinds. Given the depth and timing of this recovery will be more uneven across regions, cities, property types and sub sectors, investing opportunities are going to be more differentiated. Successful investors will need to be able to identify the best risk-adjusted opportunities across divergent global markets and have the local expertise to manage the interplay between macro trends and local market dynamics.


Entering the Next Phase of the V-shaped Economic Recovery; Regional Differences Persist

In 2021, the global economy will enter the next phase of the V. According to Morgan Stanley Research, global GDP will return to its pre-COVID path (i.e., what it would have been absent the COVID-19 shock) by 4Q21. In the near term, growth will continue to be constrained by lockdown measures, predominately in the U.S. and Europe, but will likely rebound from 2Q onwards as vaccines are rolled out to the broader population which will help drive a more complete reopening of economies around the world.

2021 global growth of 6.4% is expected (following a contraction of 3.4% in 2020)1 to be driven by a global synchronous recovery, with developed and emerging markets growing together in unison for the first time since 2017, albeit at different speeds and trajectories. Asia will continue to experience a faster macro recovery due to stronger government intervention during the lockdown and normalization periods and accelerated demand for exports as global growth returns. The U.S. is expected to rebound strongly due to the newly enacted $900B of fiscal stimulus and the expectation that additional stimulus will be passed under the new Administration. This, combined with renewed private sector risk appetite and acceleration in consumer activity as the $1.4T in excess savings begins to be drawn-down,2 will fuel the recovery. While, similar to other cycles, the economic recovery in Europe will likely be more protracted due to the more structured and less dynamic nature of their underlying economies and more pronounced demographic challenges.

Different speeds of economic recovery and divergent underlying regional growth drivers will continue to impact markets and sectors differently around the world.

Low Interest Rates + Return of Inflation = Attractive Environment for CRE Investing

As the economic recovery accelerates, Morgan Stanley Research believes that inflation will pick up, predominately in the U.S., rising to 2% by the end of 2021 and 2.5% in 2022 vs 1.2% in 2020.3 Higher inflation will be driven by the unprecedented amount of fiscal stimulus (23% of GDP4) and monetary policy accommodation (balance sheet expansion of $3.3T5 since March 2020). This reflation scenario would likely lead to accelerated rental growth driven by increasing occupier demand. Given the new Fed framework, interest rates will likely only increase once inflation exceeds the 2% target for an extended period of time. This suggests that even with higher inflation, rates may stay low, keeping downward pressure on yields, leading to stronger real estate returns.

Display 1: GDP Forecasts

Source: Morgan Stanley Research, data as of December 28, 2020.

All forecasts are subject to change at any time and may not come to pass due to changes in market or economic conditions.


Increased Transaction Volume in 2021 Despite Challenged Fundamentals in Some Sectors

Given the low interest rate environment, the weight of capital targeting real estate will likely continue to increase as investors search for yield. This outsized investor demand combined with low levels of financial distress faced by sellers and corporate occupiers has led to limited re-pricing so far, outside of retail and hospitality and some secondary assets and locations.

However, as the full impact of the record levels of economic contraction flow through to real estate fundamentals, it is expected that the amount of re-pricing may increase in 2021 and beyond. This re-pricing, which will most likely be reflected in lower net operating income (NOI) due to occupier weakness, and not higher yields, will be bifurcated by region, sector and asset specifications. The U.S., U.K. and potentially Australia are expected to see more and quicker re-pricing given the more dynamic nature of their economies, greater levels of price appreciation pre-COVID and greater influence of leverage in their capital markets. Additionally, re-pricing will likely be more concentrated in retail and hotels, followed by select office and apartment assets and markets, with little forced activity in industrial. Lastly, there will likely be elevated risk premiums for commodity assets that are functionally challenged or properties with operational, leasing, or repositioning risk due to lower availability of debt financing.

Display 2: U.S. Core Inflation and Rent Growth

Source: Board of Governors of the Federal Reserve System, Costar, MSREI Strategy, data as of September 2020.

All forecasts are subject to change at any time and may not come to pass due to changes in market or economic conditions.


Property Sector Fundamentals Remain Bifurcated

Across all regions, property market fundamentals have been impacted by the pandemic. The industrial sector continues to exhibit the strongest performance globally, spurred by tenant demand driven by an acceleration in e-commerce and supply chain reconfiguration. Despite elevated unemployment levels, residential sector fundamentals continue to be supported by supply shortages predominantly at affordable price points, although some regulatory risk is evident in markets where affordability is stretched. The outlook for office sector fundamentals remains uncertain given competing trends of increasing work from home and de-densification, but near term weakness in absorption is apparent due to job losses in most markets. Retail sector fundamentals remain challenged, with e-commerce, tenant bankruptcies and shifting consumer preferences all accelerating due to COVID-19. These trends have and may continue to lead to more repricing in the sector. Lastly, the hotel sector faces cyclical and secular headwinds from the economic downturn and significant pullbacks in tourism and business travel, which will likely negatively impact sector fundamentals for several years.




Operating Fundamentals

  • The industrial sector continues to see more yield compression than other sectors driven by outsized investor demand given the growth outlook
  • Rent growth has not kept pace with price appreciation, particularly in several U.S. markets, where oversupply is also becoming a risk
  • Higher e-commerce penetration (16-25% in the U.S. in one year) combined with tenant’s preference to focus on supply chain resiliency has led to significant incremental demand for well-located logistics assets
  • Possibility that eCommerce demand (which has comprised 50% of leasing in 2020)6 slows as consumers, once vaccinated, shift spending from goods to services
  • However retailers and distributors will likely add inventory and build out more ‘last mile’ locations, having focused most of 2020 on big box distribution facilities (average size of a logistics lease increased by 10% in 2020)7
  • Supply chains should continue to be reconfigured and become more fragmented, which will impact port cargo traffic and warehouse demand in different locations
Display 3: Industrial Pricing has Accelerated, Rents have Lagged ex-US

Source: PMA, CoStar, data as of December 2020


Potential Investment Strategies

  • Develop core product at attractive yield on cost in high growth markets
  • Take leasing and repositioning risk in urban infill assets where supply is constrained       



Operating Fundamentals

  • Supply shortages continue to exist at more affordable price points in many global markets
  • Shift in living preference to larger formats in suburban US locations
  • Significant bifurcation in performance with effective rents under pressure in many urban markets, e.g., New York, San Francisco, London, Sydney and Barcelona, while growing in suburban U.S. markets, Northern Europe and Japan
  • Significant recent increase in supply, particularly in the U.S. (~7% of inventory under development in prime urban U.S. submarkets compared to less than 3% in suburban submarkets8)
  • This could lead to a slower recovery in rents in urban locations ever after the workforce begin to repopulate these urban centers
  • Regulatory risk limiting rental growth where affordability is stretched
Display 4: Residential Rental Weakness in Gateway City Urban Markets

Source: Catella, Costar, Australian Financial Review, Zoopla, Savills, MSREI Research as at December 30, 2020


Potential Investment Strategies

  • Develop multifamily and single family rental product to sell into core institutional market
  • Acquire existing product where investment and asset management can drive rental growth  
  • Recapitalize assets with impaired cash flows in select urban markets



Operating Fundamentals

  • Overall, slower and weaker demand coming out of the recession and the uncertainty over potential hybrid working models may force investors to remain selective with the sector
  • Impacts will differ significantly by market and asset quality, but overall MSREI expects rent declines and repricing for office assets with near term leasing risk, challenged specifications or in secondary locations
  • Tenant and investor flight to quality should lead to outperformance for new functional and flexible office assets versus older more physically constrained properties
  • Mounting sub lease space, already-high rent levels and potentially higher costs from regulations suggests that rents and values in CBDs will be more challenged in the near term
  • Technology sector will likely lead the economic recovery across most regions. Therefore markets with a high concentration of technology demand and knowledge workers should outperform over the medium-term.
Display 5: Higher Density Markets may be More Likely to Adopt WFH, although Cultural Differences may be more Important

Source: Green Street Advisors, PMA, CoStar, MSREI Strategy, as of June 2020

Display 6: Higher Office and Housing Cost Markets may see more WFH/ Out Migration

Source: Green Street Advisors, CBRE, MSREI Strategy, as of June 2020


Potential Investment Strategies

  • Reposition existing assets to meet demands of modern occupiers and core investors (e.g., ESG, health and technology)
  • Acquire high quality assets with leasing risk at cyclical lows in select gateway markets
  • Continue to pursue smaller, off-market investments in Japan with attractive leverage



Operating Fundamentals

  • The hotel sector is undergoing significant operational challenges with the recovery of NOI back to pre-COVID levels likely to be elongated and bifurcated based on the type of hotel and market.
  • Operational challenges, coupled with the scarcity of debt financing for hotels during downturns, has historically led to significant price declines in recessionary periods followed by significant growth in valuations as operations improve and capital markets recover
  • Leisure-oriented hotels accessed by local markets expected to recover before hotels dependent on international and business travel
  • Hotel operators may be able to keep cost growth subdued due to forced innovations implemented during the pandemic, therefore supporting more robust profit growth as revenues rebound
Display 7: Performance Bifurcation between Leisure and Group Travel Hotels

Source: STR, MSREI Strategy, as of September 2020

Display 8: RevPAR Declines Forecasted to be More Severe Than Past Cycles

Source: Tourism Economics, STR, Morgan Stanley Research as of August 2020


Potential Investment Strategies

  • Acquire assets with operating challenges and impaired cash flows that are most likely to benefit from resumption of travel and increasing consumer confidence



Operating Fundamentals

  • Acceleration of all previous disruptive trends, including rightsizing of retailers’ footprints, tenant bankruptcies, and rising shopping center and high street vacancies
  • These forces should result in rents being reset lower resulting in a significant decline in NOI and continued re-pricing across the sector, bifurcated by retail product type, location and quality of center
  • High street retail likely to recover before shopping centers
Display 9: COVID Impacts Will Vary by Retail Product Type

Source: CBRE, as of September 2020


Potential Investment Strategies

  • Selectively acquire core high street assets in strategic, tourism-oriented locations
  • Selectively target shopping centers that include a convenience or hyper market element in markets where oversupply is less of a risk



Operating Fundamentals

  • Aging demographics and growing healthcare expenditure will be a secular tailwind for well-located healthcare real estate, predominantly medical office buildings (MOB) and life science
  • Continued shift to outpatient care and desire for health systems to find more affordable medical office locations has created a steady and resilient level of occupancy
  • Strong capital flows from venture capital, national and corporate sources continues to fuel lab research and real estate opportunities in specific market clusters in the U.S. and UK

Potential Investment Strategies

  • Reposition healthcare (life science/MOB) at attractive yields on cost (e.g., U.S., UK)

Dual Strategy of Income Growth and Value

MSREI believes that investors should focus on building a diversified portfolio that includes investments in more resilient asset classes, such as logistics, healthcare and residential, while at the same time, targeting value opportunities in the office, hotel, urban residential and retail sectors, where greater levels of re-pricing are expected to materialize due to cyclical and secular headwinds. Additionally, investors need to remain focused on investment issues such as how climate change is affecting real estate trends, market attractiveness and property level attributes as well as broader demographic shifts, including aging populations and shifting living preferences.

Display 10: Growth vs Value Opportunities Matrix


MSREI believes that the unique mix of recovery, volatility, and performance differentiation will present an attractive window for real estate investing. Globally diversified portfolios that balance income growth and value will be best positioned to take advantage of the divergence of cyclical and secular forces across countries, markets and sectors. In this investing environment, MSREI believes local market perspective, knowledge, presence and relationships, combined with the ability to actively manage assets to drive NOI growth will be critical to deliver attractive risk-adjusted returns.


1 Morgan Stanley Research, as at December 30, 2020.

2 Ibid.

3 Morgan Stanley Research, as at December 28, 2020

4 Morgan Stanley Research, as at December 30, 2020.

5 Federal Reserve, as at December 30, 2020.

6 CBRE, September 2020.

7 Costar, MSREI Strategy, January 2021

8 Costar, Global Trends Webinar, December 2020.


Morgan Stanley Real Estate Investing (MSREI) manages global opportunistic and regional core real estate investment strategies. The team's experience encompasses a broad array of asset classes, geographic regions and investment themes across all phases of the real estate cycle.


The document has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

The information contained herein refers to research, but does not constitute an equity research report and is not from Morgan Stanley Equity Research. Unless otherwise indicated, the views expressed are those of the research and strategy team of Morgan Stanley Real Assets and may differ from those of Morgan Stanley Equity Research and other Morgan Stanley affiliates (including others within Morgan Stanley Real Assets). These views may also differ from investment strategies implemented by Morgan Stanley Real Assets now or in the future. The information (including facts, opinions, estimates or projections) contained herein is based on financial, economic, market and other conditions prevailing as of the date hereof. As such, it remains subject to change at any time. By providing such information, Morgan Stanley Real Assets assumes no obligation to provide any update or supplement to such information following the date hereof. Although reasonable care has been taken to ensure that the information (including facts, opinions, estimates or projections) contained herein is accurate, complete and fair, no warranty, express or implied, is made as to the accuracy, completeness or fairness of such information. Certain economic and market information contained herein may have been obtained from third parties sources. While Morgan Stanley Real Assets believes that such sources are reliable, neither Morgan Stanley Real Assets nor any other Morgan Stanley affiliate has independently verified such information or assumes any responsibility or liability for the accuracy, completeness or fairness of such information or any omission of information.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. There are important differences in how the strategy is carried out in each of the investment vehicles. Your financial professional will be happy to discuss with you the vehicle most appropriate for you given your investment objectives, risk tolerance and investment time horizon.

The information contained herein is highly confidential. By accepting this document, you agree that this document (including any data, analysis, conclusions or other information contained herein and all oral information, if any, provided by Morgan Stanley Real Assets in connection herewith) may not be photocopied, reproduced or otherwise shared or distributed to any other persons, in whole or in part, without the prior consent of Morgan Stanley Real Assets. Notwithstanding the foregoing, this document and information may be provided to (a) your legal, tax, financial and other advisors who agree to maintain this document in confidence and (b) a government official to the extent necessary to comply with a judicial or governmental order.

Except as otherwise indicated herein, the views and opinions expressed herein are those of Morgan Stanley Real Assets, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

Historical information is not indicative of future results, and the historical information in this Presentation should not be viewed as an indicator of any future performance that may be achieved as a result of implementing an investment strategy substantially identical or similar to that described in this Presentation

Certain information contained in this Presentation constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors should pay close attention to the assumptions underlying the analyses and forecasts contained in this Presentation. The analyses and forecasts contained in this Presentation are based on assumptions believed to be reasonable in light of the information presently available. Such assumptions (and the resulting analyses and forecasts) may require modification as additional information becomes available and as economic and market developments warrant. Any such modification could be either favorable or adverse. Nothing contained in this Presentation may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

Real estate investments are subject to special risks, including interest rate and property value fluctuations, as well as risks related to general and economic conditions.

Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors do not provide tax, accounting or legal advice. Individuals should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving legal matters.

Morgan Stanley is not responsible for the information contained on any third party website or your use or inability to use such site, nor do we guarantee its accuracy or completeness. The terms, conditions, and privacy policy on any third party website may be different from those applicable to your use of any Morgan Stanley website. The opinions expressed by the author of an article written by a third party are solely his/her own and do not necessarily reflect those of Morgan Stanley. The information and data provided by any third party website of publication is as of the date of the material when it was written and is subject to change without notice.


This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

EMEA: This communication was issued and approved in the United Kingdom by Morgan Stanley Investment Management Limited, 25 Cabot Square, Canary Wharf, London E14 4QA, authorized and regulated by the Financial Conduct Authority, for distribution to Professional Clients only and must not be relied upon or acted upon by Retail Clients (each as defined in the UK Financial Conduct Authority’s rules).

Financial intermediaries are required to satisfy themselves that the information in this document is suitable for any person to whom they provide this document in view of that person’s circumstances and purpose. Morgan Stanley Investment Management shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary. If such a person considers an investment she/he should always ensure that she/he has satisfied herself/himself that she/he has been properly advised by that financial intermediary about the suitability of an investment.

United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland Junghofstrasse 13-15 60311 Frankfurt Deutschland (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074. This communication is only for Regulated Qualified Investors.

In addition, real estate investments are subject to a variety of risks, including those related to, among other things, the economic climate, both nationally and locally, the financial condition of tenants and environmental regulations.

Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”), (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. In particular, for investment funds that are not authorized or recognized by the MAS, units in such funds are not allowed to be offered to the retail public; any written material issued to persons as aforementioned in connection with an offer is not a prospectus as defined in the SFA and, accordingly, statutory liability under the SFA in relation to the content of prospectuses does not apply, and investors should consider carefully whether the investment is suitable for them. This material has not been reviewed by the Monetary Authority of Singapore. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

Saudi Arabia. This document is not and does not purport to be any of the following: (a) a marketing communication, (b) a securities advertisement, (c) a financial promotion. Material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, recipients or viewers of this document should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Rules of Offering Securities and Continuing Obligations and the Securities Business Regulations issued by the Capital Market Authority. The disclosure of this presentation is restricted to sophisticated investors.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective purchasers should conduct their own due diligence on the accuracy of the information in this presentation. If you do not understand the contents of this document you should consult an authorized financial adviser.



It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.