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2022 Commercial Real Estate Outlook

As 2021 evolved, conditions ultimately translated into higher values, rising rents, and a more stable landscape. Here are some key factors that may drive the landscape in 2022:

Rising Interest Rates

  • While rates are forecasted to rise in 2022, it may not be until the latter part of the year. A financing landscape similar to 2021 could be in the cards for the early part of the year. 
  • It seems like the historically low interest rates have been the driver of pricing and values. All-time high prices with low cap rates or yields with funding attainable at 3% or better for five years is the norm for many deals right now.
  • While interest rates could most likely stay close to their current levels for the beginning of 2022–and who knows, they can move slightly lower. The consensus is for higher rates later in the year–perhaps beginning in September.
  •  t feels like the expectations for rates moving higher later in 2022 are in the bag. What may change thinking in 2022 is when folks start to think about where rates will be in 5 years or so. That could change mentalities–and longer-term planning.

Industrial

  • White-hot industrial has led the way recently, with last-mile facilities dominating the sector. Data shows that parties are hunting for less than 100K square feet. Faster deliveries, supply issues have driven industrial rents higher and vacancy rents lower.
  • It seems like the trend could continue, with New Jersey warehouse space becoming almost nonexistent. That said, this leads to lower cap rates.
  • As valuations are sky high and everyone wants yield, money continues to get parked, but at what point will valuations hit a peak - even a short-term one? 
  • Or dare I say, are industrial valuations cheap? In 2020, industrial cap rates were in the fours and reaching fives. 2021 shows lower cap rates, but 2022 projections are up for debate.

Multifamily

  • Multifamily is hot too, and the bottom line is that the rent hikes have outpaced the inflationary hikes. That helps. The rental market is experiencing newer renters just coming of age while millennials are homebuyers - but there aren’t enough homes for sale.
  • Multifamily has been hot since the vaccination program started, and the child tax credit certainly helps matters for many renters and landlords.
  • Cap rates have fallen to 5% in many markets and seem to keep on getting lower. Valuations are different these days, with IRR having more impact than cap rates - and rent growth has contributed highly to this type of valuation.

Office

  • Uncertainty lingers in the office segment. Employees are still working remotely, even with many employers desiring workers back in the office. The recent Omicron news uncertainty doesn’t exactly help things here. 
  • The remote worker phenomenon has created a shift in office space rental patterns. Of course, this continues to have negative effects on commercial office space. 
  • Perhaps office space will have some other use case in the future, should this trend continue. 

Bottom Line Is Yield

  • Capital goes where capital is treated best. Putting money to work in any market is a risk/reward proposition - where is the safest place, and what kind of yields will be out there in 2022?
  • Hospitality has been a topic of late, perhaps taking cues of what Miami has been successful in doing. Good markets, hot locations, uniqueness, and destination locations are buzzwords. 
  • Some investors are looking for alternatives that include portions of the underlying business of the Real Estate itself, therefore diversifying risk somewhat. 

The Takeaway

  • The table is set for rates to rise - but later in the year. The lending landscape in front of us still seems much like 2021, aside from any sudden market shifts that could occur.
  • Looking ahead, attention is on the hot industrial and multifamily sectors. Hospitality deals could garner additional interest, given the right proposition. IRRs have been trumping cap rates in valuations. These phenomena should persist, in both the leveraged and un-leveraged varieties.

If you want to talk about cap rates, IRRs, pro formas, or you have a deal that you are considering, feel free to reach out!


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