So how will 2022 shape up? Not surprisingly, it\u2019s complicated.<\/p>\n
Head of the Class<\/h2>\n
By all accounts, the industrial and multifamily sectors are on track to be investment magnets once again in 2022. Niche sectors that have also become popular with investors, notably life science, data center and medical office, will also continue to be a force.<\/p>\n
![\"\"](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/12\/Richard-Barkham-Global-Chief-Economist-Head-of-Global-Research-Head-of-Americas-Research-at-CBRE.jpg\")
<\/a>Richard Barkham, Global Chief Economist, Head of Global Research & Head of Americas Research at CBRE<\/p><\/div>\n
\u201cWe will continue to see what we saw in the second half of 2021, which was robust appetite for real estate as an investment, fueled by a mix of economic growth, recovering fundamentals, continued low interest rates and probably a desire by investors to make sure they\u2019ve got hard assets that give them some long-term protection from inflation,\u201d said CBRE Global Chief Economist Richard Barkham.<\/p>\n
Markets in the Sun Belt show no signs of slowing down in popularity with investors. Many locations in that swath of the country have experienced a population boost from the migration to lower-cost markets. Significantly, the region dominates the Urban Land Institute\u2019s Emerging Trends in Real Estate report<\/a> for 2022. Led by Nashville, Tenn., and Raleigh-Durham, N.C., in the top two spots, the Sun Belt accounts for eight of the top 10 markets.<\/p>\n \u201cThat\u2019s been a trend that was not created by the pandemic but certainly was not slowed down by the pandemic, possibly even pushed on a bit more,\u201d said Anita Kramer, senior vice president at the ULI Center for Real Estate Economics and Capital Markets.<\/p>\n While generally optimistic about the next 12 months, Barkham cautioned that the market may experience some quarter-over-quarter \u201chiccups.\u201d As an example, he cited a possible ripple effect from China\u2019s recent economic slowdown.<\/p>\n \u201cI can\u2019t underestimate the importance of lifting travel restrictions for overseas investors,\u201d said Barkham. The return of business travel will have multiple benefits by helping bring the office market back to life and, as tourism returns, revitalizing urban areas, he predicted. Observers speculate that an influx of offshore buyers in search of attractive U.S. returns may help keep cap-rate increases under control.<\/p>\n Anita Kramer, Senior Vice President at the ULI Center for Real Estate Economics and Capital Markets<\/p><\/div>\n He expects the office sector to strengthen somewhat in 2022, as more employees return to the office<\/a> and investors look for opportunities outside of multifamily and industrial, which will have relatively compressed yields.<\/p>\n Another issue for office investors is the need to invest in upgrades: filtration systems, additional elevators, windows and other features that promote safety during the current crisis and in future pandemics. New legislation aimed at cutting carbon emissions and operators\u2019 prioritization of energy efficiency is also contributing to an uptick in capital expenditures. <\/p>\n \u201cI think people are focusing on the wrong thing on the office market,\u201d said Real Capital Analytics Senior Vice President Jim Costello. He predicted that increased capex\u2014rather than the timing and scale of office workers\u2019 return\u2014will be the biggest obstacle facing many investors in the sector. <\/p>\n \u201cSome people will go back to the office, and some won\u2019t,\u201d said Costello. \u201cIt will play out, but spending issues will be a bigger challenge.\u201d<\/p>\n Despite the industry\u2019s strong performance, especially amid the pandemic, other obstacles loom. Supply-chain issues, inflation<\/a>, higher cost of capital, geopolitical issues and new virus variants could cause problems for the industry in 2022.<\/p>\n Investors must start the year by quickly sizing up the impact of the Federal Reserve\u2019s recent decision to raise interest rates three times. In the short term, the prospect of higher rates may create an upside to closing deals before the first rate increase. Increased costs of construction financing may prompt sponsors to consider delaying development, but rising costs usually won\u2019t be enough to justify scuttling new product plans in the most in-demand sectors.<\/p>\n Jim Costello, Senior Vice President, Real Capital Analytics<\/p><\/div>\n Also in the mix is how interest rate hikes will affect returns. Hugh Kelly, a real estate economist and CPE<\/em> columnist, warned about the combination of thin cap rate and mortgage rate spreads increasing rates for 7- and 10-year treasuries. That\u2019s a recipe for reducing the risk premium for real estate debt and equity, he argued. \u201cI feel that we will be in the danger zone where investors are not being adequately compensated for the risks they are taking in CRE,\u201d Kelly told CPE<\/em><\/a> at the time of the Fed\u2019s announcement in December.<\/p>\n Industry studies suggest that office occupancy continues to fluctuate and varies widely by market. In a survey of 10 major markets by Kastle Systems, occupancy in early December ranged from a high of 59.3 percent in Austin to only 28.2 percent in San Francisco.<\/p>\n Further complicating the picture is the emergence of the omicron variant, which prompted Google, Apple and other major employers to delay their return-to-office plans. \u201cObviously everyone is undergoing some omicron uncertainty,\u201d said David Bitner, head of Americas capital markets research at Cushman & Wakefield. During a late November interview, Bitner said he hoped the variant would not be a large-scale spoiler for office users\u2019 plans for an early 2022 return.<\/p>\n \u201cWe\u2019re just going to have to take a wait-and-see on that,\u201d he said.<\/p>\n Capping the year\u2019s most closely watched economic phenomenon, inflation jumped 6.8 percent year-over-year in November 2021, a 40-year high. That trend is prompting much speculation about its longer-term implications, but the effect on investment has been minimal so far, Kramer contended.<\/p>\n![\"Anita](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/12\/Anita-Kramer-Senior-Vice-President-at-the-ULI-Center-for-Real-Estate-Economics-and-Capital-Markets.jpg\")
<\/a>Factors in the Mix<\/h2>\n
![\"Jim](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/12\/Jim-Costello-Senior-Vice-President-Real-Capital-Analytics.jpg\")
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![\"David](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/12\/David-Bitner-Head-of-Americas-Capital-Markets-Research-at-Cushman-Wakefield.jpg\")
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