As we hit the mid-year mark of 2022, many are wondering what will happen with inflation and its influence on the economy, and commercial real estate. With inflation at an all-time high since the 1970s, CRE is changing. There has been a 20% rent growth in most American cities, and cap rates are at a record low.
What will happen before the end of the year, and in the years to come? A number of economists are sharing their predictions on the economy and how it will affect CRE. Here are some of them.
1. Lawrence Yun, NAR Chief Economist: Industrial Strong, Hotel and Retail on the Rise
“Outside of the office sector, which is lagging behind as employers allow increased remote work flexibility to keep and attract talent, commercial real estate continues to strengthen,” Yun said in a statement. “The industrial sector is booming, retail is turning positive, the hotel industry is recovering, apartments are doing very well, and rents are rising in all commercial sectors. With strong demand, industrial rents are likely to keep rising solidly in the next two years while vacancy rates will remain below 5%. While the overall office market is wobbly, some variance exists depending on location. We’ve seen improvement in some midsize markets as companies seek more affordable office locations away from major U.S. cities.”
2. Mark Zandi, Chief Economist at Moody’s Analytics: No Overinvestment, Offices in Trouble
“While some cities are better than others for investors, there’s no overinvestment happening anywhere. Interest rates will rise, and cap rates will rise, so we’ll see a widening spread between risk free rates and cap rates,” Zandi told Greystone. “Some CRE prices may flatten because of that, but the main sector that causes concern is for offices, especially in gateway cities.” He predicts inflation will moderate even more to 2.25% to 2.5% by mid-2023.
3. Global Economist Dambisa Moyo: CRE Will Persevere and Adapt to Climate Change
At a recent lecture with NAIOP’s I.CON East: The Industrial Conference, Moyo said she sees “commercial real estate persevering because of its ability to adapt to climate change and energy needs, while creating demand for infrastructure which will help grow the economy and improve standards of living.”
4. Hessam Nadji, President and CEO of Marcus & Millichap: Northeast and West Coast Recovery After Ending COVID Restrictions
“The commercial real estate outlook varies significantly by property type and location. Areas of the country that just recently ended COVID restrictions, like the Northeast and West Coast, could offer particularly compelling opportunities since they have lagged in the recovery,” he recently told Wealth Management.
“Growth markets such as Florida, Texas, Georgia, the Carolinas, Nevada and Arizona may see some slowing compared to the past few years but will continue to benefit from favorable immigration. Similarly, hard hit property types like office, retail and full-service hotels may get a lift in the second half of this year. Markets and property types that surged earlier in the recovery cycle like Sunbelt apartments, self-storage and industrial properties can also still offer compelling returns for investors with the right skills and vision. Real estate is a sector where operators can personally create value, boost returns and capitalize on inefficiency. The market dynamics remain well-positioned for investors to pursue value creation strategies.”
5. ULI Global CEO Ed Walter: 2022 Growth Might Not be Like 2021
“Looking at the Spring 2022 Forecast, we can anticipate post-pandemic growth will be rooted in strong regional markets and robust opportunities in the build-to-rent segment,” said ULI Global CEO Ed Walter in a statement. “The projections tell us that although the prospects of a recession have increased, the impact on real estate should be limited. It should also not be overlooked that while the downtown office market continues to face challenges, well-located, newer office space is expected to bounce back in the next twelve months.”
Projections from their semi-annual survey, which forecasts 2022 to 2024, predicted that commercial real estate transaction volume reached an historic high of $846 billion in 2021, almost double the pandemic-year low of $431 billion in 2020. Meanwhile, levels are expected to moderate during the forecast period, but still exceed pre-pandemic highs, with $800 billion in 2022, $725 billion in 2023 and $750 billion in 2024.
The report also claimed that price growth increased by 19.5% in 2021, almost triple the price growth in each of the five previous years when growth in those years was already above their long-term average. Price growth in 2022 is expected to moderate to a strong 10%, before moderating further to 6.0% in 2023 and 5.9% in 2024.
6. Sabina Reeves, Chief Economist of CBRE Investment Management: Lower Leverage, Refinancing Riskier
“The rise in interest rates — and volatility more broadly — has led to a sharp uptick in cost of funds for both borrowers and lenders. As a result, lenders are reducing leverage, primarily out of concern for refinance-ability,” Reeves told Commercial Property Executive. “This latest move will drive further tightening.”
7. Rebecca Rockey, Economist, and Global head of Economic analysis and Forecasting at Cushman & Wakefield: Falling Income Could Cause Migration to Lower-Cost Markets
“Multifamily seems well-positioned for continued growth in cash flows, with low vacancy supporting effective rent growth across most markets,” Rockey told WealthManagement.com. “The caveat here is that with real incomes now falling, tenants will push back, and this could lead to further migration to lower cost markets and crimp household formation. There is also a supply wave coming in multifamily. Office is exposed to any slowdown since its recovery is ultimately contingent on job growth, regardless of where one falls on the wild card of hybrid work. Retail depends on consumption, which is extremely high right now and is going to be engineered down through monetary policy. As with overall growth, it will be coming down from a higher level, and offsetting slower growth or even a decrease are signs of a shift back to services in consumption. This will benefit retail. The other thing retail has going for it is an almost non-existent pipeline—the same cannot be true for any of the other major property types.”