The year ahead is likely to see further improvement in commercial real estate markets as the economy continues to recover from the Covid-19 pandemic. There are both upside and downside risks to the outlook. Here are the top ten developments to follow, ranked in order of increasing importance.

Commercial transactions volumes, property prices, and cap rates

Property transactions will rise further in 2022 as the economic recovery gains momentum, and CRE prices will maintain growth in the mid-single digits. REIT mergers and acquisitions could top 2021 as well. Purchases of industrial properties and apartments may be above 2021 levels, while retail and office market transactions can be lagged.

Cap rates may be better than those of 2021 with the low interest rate environment and stimulus packages.

Healthcare amenities

The pandemic will drive further recovery in healthcare services and facilities in 2022. The demographic wave of Baby Boomers will fuel longer-term demand.

Apartment and housing markets

The markets for apartment rentals and for home purchase usually move in opposite directions, with a strong housing market generally accompanied by soft rental markets, and vice versa. During the pandemic, however, the desire for more living space while people are working and studying from home has driven both rental and ownership markets to record highs.

Meanwhile, limits to new construction will keep both rents and home prices strong. Affordability is creating growing challenges for many households, however, and is likely to limit both rent growth and home price appreciation.

Self-storage

Self-storage REITs have been a star performer during the pandemic, as strong housing markets and home purchases have spurred demand for storage. Ongoing strength in the housing and apartment markets will support another strong year for self-storage.

Business travel and conventions

Business travel has lagged the recovery in leisure travel as many meetings and business conventions remain online. Negotiating a major contract or selling a new product line often is more successful with a face-to-face meeting. Therefore, hotels, restaurants, and entertainment that caters to business travelers will see an accelerating recovery as 2022 progresses.

Digital real estate

Digital communications provided a lifeline during the pandemic, from online conference meetings for work to e-commerce purchases by consumers and streaming movies online for entertainment. Use of these conveniences has continued to rise even as the economy reopens, generating robust demand for digital real estate sectors like data centers, infrastructure/cell towers, and industrial/logistics facilities in 2022.

Interest rates and inflation

Inflation will remain above trend during 2022, but will ease gradually as the year progresses. The supply chain bottlenecks aren’t going away quickly, however, and shortages in key goods and commodities will continue to fuel price pressures in the medium term - but in the longer term, inflation rates are likely to cool. Besides, long-term interest rates will remain low, providing attractive financing conditions for commercial real estate.

Brick-and-mortar retail sales

Consumers bought a lot of goods online during the early months of the pandemic, while sales through brick-and-mortar channels declined as social distancing requirements were put in place. In-store sales rebounded strongly, however, to above pre-pandemic levels, as many consumers still prefer shopping in person for items where size, fit, and appearance are important. 

With a choice of online purchases or buying in a brick-and-mortar store, consumers are saying “more of both”. New leases from new tenants will reduce vacancy rates in the brick-and-mortar retail property sector.

Return-to-office

The office will remain the hub of business activity, but flexible work-from-home will allow many employees the convenience of skipping the commute a few days a week.

The key development to watch is not how many employees make the commute each month. Rather, keep an eye on the peak space needs for the days when all employees are in the office for teamwork and communication, as this will drive overall demand for office space. In addition, watch whether employers redesign the office space to eliminate individual office or work stations, or whether there is simply decreased density within the office on the days that employees work from home.

Covid-19

The emergence of the new Omicron variant of Covid-19 in late November 2021 serves as a reminder that the threat of new waves of infection looms over all aspects of the global economy. However, the economy and CRE markets will continue to recover in 2022, and setbacks from flareups of Covid-19 will be short-lived.