Coming back from a challenging market in 2020, the commercial real estate industry began 2021 with a lot of momentum as investors showed more opportunistic attitudes and increased spending habits. However, when looking ahead at 2022, investors might need to exercise a little more caution when choosing which sectors to invest their money over the course of 2022. A newly released report, “Viewpoint 2022,” from Integra Realty Resources shows that U.S. investors should assess their risks when considering which sectors to invest in.
“I think there are going to continue to be many opportunities in the market for real estate investors. Yet, at the same time, we talked about in the report this idea of crossroads. The opportunities that are there are because of surging demand, whether they be in the residential sector or one of the many commercial real estate sectors,” Anthony Graziano, CEO of Integra Realty Resources, said. “…The prospect of inflation is driving people to speculate that real estate income and real estate economics is going to be driven by future inflationary environments. The question is are we overestimating, are we counting on inflation too much? The risk today is to be cautious, do your due diligence, and also be aware that you cannot apply some global macroanalysis to your property specifics.”
According to the report, the economy is making a slow recovery, with the bounce back in gross domestic product growth (GDP) slowing back down to two percent in the third quarter of 2021. However, the COVID-19 pandemic has continued to be a challenge for many investors due to its unpredictable nature. This has affected investment patterns in the past and will likely continue to affect which sectors are favored throughout 2022.
“A lot of the investment capital gravitated toward multifamily and industrial as a flight to safety, and because of a lot of concerns about working from home and how long COVID-19 is going to last, the office markets got battered,” Graziano said.
The report showed that across the United States., approximately 90 percent of industrial markets are expanding, and not a single industrial market is in recession. Net absorption also hit a record high in 2021, exceeding 400 million square feet. Integra suggests that 2022 will be much the same for the sector, but investors should still use caution when looking at properties to determine which are most favorable.
Across the nation, multifamily assets also are expected to perform well. According to the report, only Oakland, Calif. is in recession, while approximately 45 markets are in a phase of expansion. Transaction volume overall surpassed all annual records as of October 2021. In 2022, multifamily inventory will continue its growth trajectory, as renter demand heightens. Already, developers are responding to increased demand for housing, with the U.S. Census Bureau reporting a 60.1 percent increase in nationwide multifamily permitting activity in 2021 already.
“Across the board, in the entire United States, we saw average rates going down and multifamily rates going up quickly, and a lot of that inflation was really in anticipation that people were spending more time at home. The household formation and growth was really starting to rise, so we saw the movement of anticipation with multifamily openers really starting to pay up. This is the crossroads, though. That pricing and where pricing is today has to bear out, a lot of people bought assets in 2021 on an expectation that rents are going to grow five, 10, 18 percent per year,” Graziano said.
While some sectors saw increased momentum throughout 2021, sales volume in the retail sector kicked off with a slower start. According to Integra, transaction volume in 2021 reached just $51 billion, which was less than half of the industrial sector and about one-fourth of the multifamily sector’s total transaction volume. However, the retail sector is showing optimism due to increased consumer spending in 2021.
For the office sector, the 2022 outlook is a bit more bleak as transaction volumes are projected to continue declining. The report showed that between 2015 and 2019, the annual transaction volume for office properties in the United States averaged $142 billion, while in the first three quarters of 2021, they totaled just $95 billion.
“Office markets didn’t perform because people were going back to work. The office markets performed because tenants were obligated under longer term leases… so we didn’t see the change in the economics for offices, we saw a change in the investment appetite for office,” Graziano said.
Overall, investors should proceed with cautious optimism when heading into 2022. Nationwide, all sectors across the commercial real estate industry are expected to experience some level of growth. However, as the COVID-19 pandemic continues to be a challenge, investors should be prepared for potential shifts across all property types.
“The appetite for continued acquisition and people buying real estate is going to have to moderate at some point. I’m cautioning everybody to just do their due diligence and to not expect 2022 to continue at the same pace as 2021,” Graziano said.