After safely celebrating the beginning of a new calendar year, it’s important for us all to complete a retrospective of 2021, as the triumphs and challenges of the past year serve as a directional compass of what’s in store for the real estate industry in 2022.
Although the road to the ‘normalcy’ the world enjoyed prior to the pandemic has been a winding one, 2021 did pave the way to recovery. At the time of writing, the U.S. has fully recovered from the recession of 2020 in terms of GDP, and the commercial real estate industry recovery is in full swing.
2021 brought about a remarkable readjustment that economic optimists had hoped for: a V-Shaped recovery wherein the U.S. has returned to pre-COVID levels and growth is forecasted to be at its highest rate during 2021 (and 2022) in the past decades. Specifically, the U.S. government’s 2021 federal infrastructure program coupled with the Fed’s low-interest rates have bolstered American consumers’ financial health.
Many Americans even stacked away their stimulus checks, hoping to spend their savings after state shutdowns ignited a period of pent-up demand for services and goods. The U.S. real estate industry is poised to capture this demand and the country’s economic growth.
#1 Destination for Global Cross-Border
Knight Frank, a global real estate consulting firm, accurately predicted that the U.S. would be the number one destination for global cross-border real estate capital in 2021. And this trend is expected to continue in 2022. The firm forecasts the U.S. to remain the top destination for global cross-border real estate capital in 2022, in both inbound capital and the largest deployer of capital globally.
What does this look like precisely? The firm has forecasted that a total of $94.2 Billion in investment will flow out of the United States, while $44.1 Billion will flow into the country. For comparison, the United Kingdom is slated to take the second spot for global cross-border real estate volumes, with inbound investment flows of $38 Billion and outbound flows of $15.7 Billion.
Moreover, the ample global capital flows and healthy investor demand (global M&A activity grew about 85% year over year in the first half of 2021 ), aided the rise of U.S. commercial real estate activity in 2021. In 2022, the trend is expected to continue: CBRE Research reports that total investment volume is predicted to increase 5-10% over the 2021 levels, which are on track to roughly equal 2019’s pre-pandemic volume—the highest annual total on record the U.S. has ever seen.
Commercial Estate Activity
Of course, commercial real estate activity varies by sector and trends are even more so pronounced amid a global pandemic that has pivoted consumer behaviors and attitudes permanently. Consumers’ new-found reliance on e-Commerce channels and changes in physical movement patterns have propelled industrial and multifamily assets investments. CBRE Research projects industrial and multifamily to increase 10-15% in 2022 compared to 2021.
Single-family rentals (SFR) also continue to rise in demand from residents and investors, as SFR communities have grown 25% in size over the past three years. And, while office spaces and retail locations have come to bear the brunt of consumer behavior change during the pandemic, the prediction of investment into the sectors is slated to rise by 5-10% in 2022. Even the volume in the hotel industry has recovered to 2019’s pre-pandemic levels in the first three quarters of 2021.
Projected Increases in 2022
With 2022’s projected increase in investment and subsequent demand across the above sectors, it is important to note the effect on pricing this will cause. With higher pricing, cap rates will likely hold steady. Even as the U.S. prepares for interest rate hikes in 2022, real estate spreads are expected to remain wide by pre-pandemic and historical standards.
In fact, CBRE Research states, “the all-property average cap rate is expected to be 280-300 basis points (bps) higher than the 10-year Treasury yield during the first half of 2022, on par with the 290-bp average from 2013 to 2018 before narrowing to 250 bps in H2 2022.” Rents are also expected to continue their rise, thereby supporting net operating income (NOI) that is higher, which is more influential to real interest rates in the short term than cap rates.
Although the U.S., and the globe, must continue to cope with new COVID-19 variants, the overall outlook of the U.S. real estate industry is optimistic. Increasing global capital flows, greater investor demand, higher pricing, and compressing cap raps all point to the fact that the industry is well on the road to recovery—or even surpassing it.