2022: Setbacks and Resets as the Market Looks Ahead with Optimism

Typically, the start of a new year brings a round of predictions and optimism—and 2022 is no exception. At this time last year, promising news of the long-awaited vaccine pointed to light at the end of the tunnel, and robust forecasts pointed toward a “new normal.” By mid-2021, economists adjusted economic forecasts upward based on solid growth in the first year. Yet by the third quarter, the COVID-19 Delta variant surfaced, followed by the fourth quarter’s Omicron variant—stark reminders that the pandemic is not yet in the rear-view mirror. Other concerns also cloud the forecast, but not enough to deflate an overall positive outlook built on a foundation of solid market fundamentals. Below are three trends that will define 2022.

1. Healthy Competition Between Secondary Metros and Gateways

The health crisis drove a migration of residents away from dense, urban areas into smaller, secondary cities that will see a new wave of investment and redevelopment. This trend is evident in output from the LightBox ScoreKeeper model that tracks the volume of environmental due diligence, a leading indicator of where commercial property investment activity is gaining steam. Year-end activity by metro reveals that the 20 strongest markets in the U.S. last year were led by Las Vegas, Houston and Miami with growth well above the U.S. average of 29% growth—yet nearly half of the highest-growth metros are smaller metros (denoted with an * in the graph below).

While these “new kids on the block” metros (to coin a phrase used by CBRE’s Spencer Levy at CREW LA’s 2022 Economic Forecast webinar) are gaining the interest of investment dollars, it is not to suggest that big cities have lost their luster. Levy’s bullishness on the draw of cities is based on the popularity of live-work-play communities and the inflow of educated, productive, talented professionals into urban areas. Austin, Nashville and Raleigh are strong emerging cities that now compete with gateways for top technology talent, corporate headquarters and development dollars. 

2. Rising Tides: The Interplay of Inflation and Interest rates

Any 2022 forecast cannot ignore the specter of high inflation, coupled with the Fed’s announcement that this year will bring three, maybe four, interest rate hikes. At CREW Network’s 2022 CRE Global Economic Forecast webinar, Cushman & Wakefield’s global head of economic analysis & forecasting Rebecca Rockey predicted that “the forces that are driving inflation, like federal stimulus and low inventories, will resolve. Not overnight, but they will.”  Although interest rates will increase this year, the long-standing low-rate environment is unprecedented, and the increases are expected and therefore already accounted for in underwriting and projections. If rates are raised higher than expected, however, capital markets could respond by pulling back on commercial real estate lending.

3. Hope Springs Eternal

The forecast is robust due to the amount of capital chasing USCRE and that conditions were healthy prior to the pandemic and the global financial crisis (GFC). The sheer force of the U.S. economy will enable CRE to weather the health crisis and the fits and starts in inflation. As Levy said, “hopefully commercial real estate deal volume rebounded to levels above where they were pre-pandemic." Looking ahead, the latest results from the LightBox Market Confidence Index survey reflect that our clients are optimistic and gearing up for a robust 2022. Despite concerns about the impact of the Omicron variant, the labor shortage and the sustainability of an overheated market, our internal barometers point to a strong start to 2022 across the environmental due diligence, valuation, lending, broker and investor segments of the commercial real estate ecosystem. The major trends I’m watching are climate risk, technology adoption as a competitive differentiator, and infrastructure spending, all of which have strong implications for opportunities in CRE.

The recovery through 2022 is going to move people back into office and retail and some hotels by end of year, and from that recovery, myriad opportunities in commercial real estate will emerge in all asset classes.
 

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