As we move into the closing weeks of the year, I want to share three commercial real estate predictions every investor should consider for 2022. There are, of course, a lot of variables in play going into the New Year, most notably, the risks posed by COVID variants. But assuming we don’t have a major severe deadly vaccine resistant version of hit us, the trends I’m about to share should come true.
My first prediction is that we will see increasing momentum in the recovery of the urban core. This will not be a bounce back, but more of a slow march toward recovery. It will also look different in each city. Local city policy, like mask mandates, vaccine mandates, rules on public gatherings, etc, will have a big influence on this. So, cities like New York and San Francisco will likely recover more slowly than cities with less stringent codes. The broader urban recovery will be strongly influenced by a movement back toward working in the office. Now I know a lot of people are saying that working from the office is an outdated concept, but I see two powerful sources pushing toward a return to the office.
First, companies have been seeing a slow degradation of productivity, corporate culture, collaboration and staff development. Second, more and more workers are indicating that they want to go back to the office, at least part time. A lot of employees miss being together and getting together with their piers missing out on training, collaboration, engagement and career tack development. Ultimately, this will be an important driver returning to the office. Younger employees, especially, are beginning to push for a return to the office. As a result, we should see a slow but steady strengthening of urban housing, downtown amenities and services and office space demands.
My second prediction is that housing shortage will be persistent. The housing shortfall will continue to put upward pressure on single family home prices, keep apartment vacancy rates low and push rents upward. Again, there will be a lot of variance by market. Vacation destinations like Las Vegas and Orlando that were severely impacted by COVID will generate outside momentum. And migration trends will favor secondary and tertiary cities, particularly in the southern portion of the country. Although housing construction w will accelerate in 2022, it will likely still fall short of overall demand, and rising construction to focus development on upper price tier housing units. Much of this construction will be concentrated in suburban areas, boosting suburban retail centers and suburban office space demand. I want to add that traditional workforce housing won’t see a substantive inventory increase, keeping class B and C apartments particularly tight.
My final prediction will be influenced by the other two that I already shared. Returning to the office will place additional pressure on the already tight labor market, creating more wage pressure across a broader swath of employment sectors. At the same time, housing shortages will drive up home prices and rents. Together with other factors like the continued supply chain challenges, shortages of r.aw materials like lumber and steel, and of manufacturing inputs like computer chips, these drivers will continue to elevate inflation. This is placing additional pressure on the Federal Reserve and as they have announced, they will be accelerating the taper of quantitative easing and we should expect at least three interest rate hikes in 2022. Although many believe that rising interest rates align with upward rising cap rates, the consensus I among the real estate analysts I talked to is that strong market liquidity cap rates will keep down. That means the yield spread between the cost of capital and commercial tight estate returns will likely tighten.
These three predictions should they come to pass will make an interesting climate in 2022. But remember, real investors need to play the “long game” and keep their eyes on the horizon.
John Chang – Senior Vice President, Director Research Services
Marcus & Millicap