By: Glenn Margraff, Executive Vice President, Wintrust Commercial Banking
Globally, governments have enacted sustainability and supply chain laws holding companies responsible for the environmental impacts of their chains and the U.S. may soon follow.
Recently, companies have taken strides in unlocking the value in their environmental, social, and governance (ESG) strategies. Still, companies face challenges in adopting sustainability practices.
During the height of the pandemic, many took a pessimistic view of not only office, retail and the hospitality asset classes, but of the broader commercial real estate market as well. What transpired instead was an unexpected boom in commercial real estate demand, whether due to increased liquidity, investors chasing yield, pent-up investor demand, opportunistic purchases of distressed asset classes, on shoring, etc. Will this resilience continue or will we see a real estate market decline in 2022? Below is a snap shot at our bullish commercial real estate market forecast and some factors at work in 2022:
The economic growth that started in the third quarter of 2020 is expected to continue into 2022. The Federal Reserve’s forecast on real economic growth for 2022 is 3.3%.
The cost of construction is expected to decrease. While there is inflation looming which has driven up the prices of building material. It is expected in 2022 that bottlenecks in the real estate related supply chain will be fixed with continued economic growth and companies restocking their inventory which will help ease costs.
Investors have a significant surplus of capital yet to deploy. Additionally, investor funds have already been planned, budgeted and raised for future projects.
Even with increases in interest rates, rates are still near historical lows. While not directly correlated, CAP rates will adjust with, but lag interest rates, meaning it may be another year before we see an impact on the market.
Changes in Office
While changes in political office could affect 1031 exchange rules by this administration and are something to watch, the U.S. office market registered positive net absorption for the first time since the beginning of the pandemic during 4Q21, as changes to the ways landlords and tenants utilize space are occurring.
Retail is Not Dead
Many left the retail store for dead at the onset of COVID, however, it came roaring back at year end with 4Q21 sales volume of $33 billion, the single highest quarterly total on record. 4Q21, asking rents for shopping centers rose broadly nationwide while vacancy fell close to its pre-pandemic level and net absorption neared the previous quarter’s high watermark. This is expected to continue lead by experiential retail.