CRE's Strong Outlook for 2022
Commercial real estate is in store for another great year, according to panelists Richard Kalvoda, Bryan Doyle, Timothy Savage, and Brian Bailey of Reonomy’s first-quarter webinar, The Current State of CRE. The panel was a detailed discussion on the current landscape of commercial real estate, discussing timely issues from inflation to the potential impacts of interest rate increases.
By Jeff Hamann
Commercial real estate is in store for another great year, according to the panel of Reonomy’s first-quarter webinar, The Current State of CRE. Richard Kalvoda, senior executive vice president of Altus Group, Reonomy’s parent company, facilitated a discussion on the current landscape of commercial real estate, discussing timely issues from inflation to the potential impacts of interest rate increases.
The other panelists included Bryan Doyle, managing director at CBRE Capital Markets, Timothy Savage, professor at NYU’s Schack Institute of Real Estate, and Brian Bailey, subject matter expert in CRE from the Federal Reserve Bank of Atlanta.
Clockwise from top left: Richard Kalvoda, Timothy Savage, Brian Bailey, Bryan Doyle.
Quarterly Returns Up
Overall, total quarterly returns across property sectors hit 6.6% for stabilized assets in the fourth quarter last year, among the most rapid growth on record. This was led by major appreciation in assets, according to Kalvoda, which accounted for 5.6% of the return.
Different asset types fared very differently, however. Industrial, long the darling sector, outpaced all other property types, with returns around 15%, followed by multifamily returns, which hovered around the 7% mark during the quarter. While office and retail have recovered, growth has fallen far short of that associated with distribution and logistics space and apartments — though the sectors still remain attractive in many areas, depending on location, asset type, and property quality.
Quarterly returns for all property types. Image courtesy of Altus Group.
Long-Term, Industrial Keeps Soaring
Unsurprisingly, the industrial sector’s strengths aren’t just apparent on a quarterly basis. “It’s just phenomenal when you look at it on a two-year annualized basis,” said Kalvoda, “Essentially through the pandemic period, industrial with a 26.7% total return is just well above the other sectors.”
But will industrial’s gains endure in the coming years? CBRE’s Doyle anticipates they will. He discussed how e-commerce — the largest driver of industrial demand — will continue onward, even if consumer spending isn’t pushed by government policy like stimulus checks. And widely reported supply chain issues may actually drive demand even higher. “The idea of onshoring and holding more stock to mitigate supply chain issues — these are factors that are going to push the continual need for more industrial, more warehouse space,” Doyle commented, highlighting ongoing spikes in demand for last-mile distribution centers.
While the massive development pipeline may give investors pause, the level of demand for industrial space will ensure that all new space is rapidly absorbed, leaving vacancy low across the country.
For context, Brian Bailey from the Atlanta Fed highlighted that Amazon alone has been responsible for leasing more than 100 million square feet per year for the past two years. Yardi Matrix’s January industrial report pegged December’s national vacancy rate at 5.7%, and projects under construction totaled 572.8 million square feet, equal to 6.9% of the country’s inventory.
Quarterly returns by asset type. Image courtesy of Altus Group.
In looking at macroeconomic patterns, all of the panelists noted that commercial real estate is a strong hedge against inflation. As inflation continues to hit 30-year highs — with Russia’s invasion of Ukraine potentially driving the consumer price index even higher, The New York Times reports — investment in strong assets is important, but one thing to keep an eye on is a property’s rent rolls.
NYU’s Savage commented, “The shorter duration the lease, the better the inflation hedge,” carrying on to note that multifamily is a strong mitigator due to the standard 12-month leases at most communities. He also noted that, depending on how office space in urban cores is reconceptualized, coworking or flexible space with typically daily or monthly agreements could also act as an effective hedge.
What to Watch?
Doyle noted that, in 2021, two-thirds of new commercial real estate financing packages were floating-rate loans, a drastic change from years past. Savage noted that variable interest structures may make a lot more sense going forward, particularly as LIBOR is phased out in favor of SOFR, but it isn’t yet clear how this may play out during times of economic stress.
In terms of investment patterns, Doyle expects 2022 to look similar to last year — at least in terms of private client investments. He commented that it seems unlikely the 1031 exchange program will change in the near term, and that investors will continually be looking to deploy capital. However, it may not be occurring in the most visible of venues: “If you’re looking for what’s available, you’re probably missing what’s actually happening,” he concluded.
What are the key trends in commercial real estate for 2022?
The key trends in commercial real estate for 2022 include a strong economic growth, low interest rates, increased costs associated with industry products and services, a rise in demand for investors, and an influx of foreign capital if travel restrictions are eased.
According to this article, the country’s GDP is on track to grow by over 4% in 2022, and the government should be easing back on its quantitative easing policy by mid year. This strong economic growth, when combined with the low interest rates that govern the industry at the moment, should support a strong commercial real estate market. There will still be increased costs associated with industry products and services to contend with, but the continued rise in costs is not expected to exceed 2.5%.
The article also states that 2021 was a phenomenal year for the commercial real estate industry, and 2022 looks to improve on that synergy. U.S. real estate is a key target for equity capital, showing record growth in popularity from pre pandemic levels. In the best case scenario, if travel restrictions are finally eased, then there should be an influx of foreign capital as investors seek affordable precautions against possible depreciation of the U.S. Dollar.
What are the most promising markets for commercial real estate in 2022?
The most promising markets for commercial real estate in 2022 are those with strong economic growth, low interest rates, and high demand for investors. According to the 2022 Commercial Real Estate Forecast, the U.S. real estate market is a key target for equity capital, showing record growth in popularity from pre pandemic levels. Additionally, the government should be easing back on its quantitative easing policy by mid year, which would lead to an elevated federal funds rate. This, combined with the low interest rates that govern the industry at the moment, should support a strong commercial real estate market.
What are the biggest challenges facing commercial real estate in 2022?
The biggest challenges facing commercial real estate in 2022 are the effects of the ever-persistent COVID-19 pandemic and the fiscal and monetary policies yet to be announced or adopted as a result of it. Additionally, there may be increased costs associated with industry products and services to contend with, but the continued rise in costs is not expected to exceed 2.5% as the nation adapts to the latest obstacles COVID has to introduce. Lastly, there is still uncertainty regarding the impacts of the new COVID strain and what that means for foreign investors.
What are the best strategies for investing in commercial real estate in 2022?
The best strategies for investing in commercial real estate in 2022 depend on the investor's goals and risk tolerance. Generally speaking, investors should look for properties with strong fundamentals, such as a good location, strong tenant base, and potential for appreciation. Investors should also consider the current market conditions, such as interest rates, inflation, and the availability of capital. Additionally, investors should consider the potential for tax benefits, such as depreciation and cost segregation.
In terms of financing, investors should consider the current low interest rates and the availability of capital. Many lenders are offering attractive loan products, such as fixed-rate loans, adjustable-rate loans, and bridge loans. Additionally, investors should consider the potential for tax benefits, such as the ability to deduct interest payments and depreciation.
Finally, investors should consider the potential for long-term appreciation. Many investors are looking for properties that will appreciate over time, as this can provide a steady stream of income. Additionally, investors should consider the potential for capital gains, as this can provide a significant return on investment.
What are the most important factors to consider when financing commercial real estate in 2022?
The most important factors to consider when financing commercial real estate in 2022 are the type of property and the condition of the asset. Property types such as retail and hospitality properties are generally considered higher risk than a multifamily or industrial facility. A dated, Class C suburban office park will generally yield a higher interest rate than a newer trophy asset in a major downtown area.
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