In their latest forecasts for the commercial real estate markets in 2022, brokerage firms CBRE and JLL, as well as the National Association of Realtors, are upbeat on the prospects for most sectors of the commercial real estate market.
They also seem to agree that any recovery of the office market will be determined in large part by the impacts of COVID-19 and any emerging variants.
CBRE in its “U.S. Real Estate Market Outlook 2022” report, released last month, stated that it is “maintaining a positive outlook for the economy and commercial real estate in 2022, despite uncertainty over potential impacts of the COVID omicron variant and other risks. While the new variant will impact the timing of a large-scale return to the office, fiscal and monetary policy remains highly supportive of economic growth. There may be other bumps along the way, notably from the ripple effects of an economic slowdown in China and rising oil prices, but the factors that held back growth in 2021—labor shortages, supply disruptions, inflation and other COVID variants—will ease.
The brokerage firm also noted that monetary policy will tighten to keep longer-term inflation pressures in check, which may trigger some short-run volatility in the stock market, but it will not be enough to dampen investor demand for real estate.
“We foresee a record year for commercial real estate investment, enabled by high levels of low-cost debt availability and new players drawn to real estate debt’s attractive risk-adjusted returns. Commercial real estate values will rise, particularly for sought-after industrial and multifamily assets. Investors will sharpen their focus on emerging opportunities in the office and retail sectors in search of better returns.”
In terms of the office sector, CBRE said that while the supply-demand imbalance will remain highly favorable for occupiers, “the pace of recovery will pick up following a sluggish 2021. With hybrid work the new normal, office properties with amenities that enhance employee collaboration, connection and wellness will fare best.”
CBRE noted that in the retail sector, sales-to-square footage ratios are surging and the demographic- and pandemic-induced shift to the suburbs will favor grocery-anchored and neighborhood centers. CBRE said it anticipates a decade-high level of retail investment volume in 2022.
In terms of industrial and logistics, CBRE predicts slower demand this year for physical goods as the service sector reopens and attracts more consumer spending. “This will give supply a chance to catch up with demand. Third-party logistics operators are beginning to dominate the sector and are looking to get ever closer to the end consumer,” the report stated.
Multifamily will continue its recovery in 2022, while single-family rentals in the suburbs will also perform well as some millennials leave the city to raise families, CBRE predicted.
Brokerage firm JLL recently identified five emerging trends entering 2022.
1. Hybrid Working Takes Off
As lockdowns gave way to hybrid working programs, people trickled back into the workplace.
For some, flexible home and office arrangements remain an experiment. For others, it has now become a feature of the working week.
“This year has seen companies begin to fully grasp the fact that hybrid is something that will not go away,” said Marie Puybaraud, global head of research at JLL. While it’s now accepted by companies as a long-term strategy, “it’s really off the back of employees seeking greater flexibility and not wishing to return to old habits”.
JLL’s Workforce Preferences Barometer, which surveyed 3,000 office employees, found that a majority identify a work-life balance and the ability to work from either the home or office as more important than pay.
2. Sustainability Risks Got Real
With the built environment accounting up to 40% of the world’s carbon emissions, the pressure is on companies and investors to take action.
In recent years the focus had been on “green premiums” for buildings with certifications, which can boost asset values by more than 12%, according to JLL.
But the conversation was reframed in 2021, with the real estate industry and governments increasingly focusing on the risks of a so-called “brown discount.”
There are more examples of brown discounts emerging, said Guy Grainger, Global Head of Sustainability Services & ESG at JLL.
"We're just starting to see it," Grainger told Fortune on the sidelines of the COP26 climate conference in Glasgow. “I think over the next few years, we’ll see more examples of ‘brown discount,’ and it’s significantly larger than a ‘green premium’ for those buildings that have been made sustainable.”
3. Real Estate Moves Deeper into the Digital Age
Analyzing sustainability performance is just one area where commercial real estate is turning more to technology.
The industry, which in some ways has been slow to integrate technology in recent decades, has been showing signs of quickly catching up.
For instance, consider space and occupancy management systems such as Dealpath, which deliver real-time insights into real estate portfolios. There are also technologies like Skyline AI that use unique data sets, artificial intelligence and machine learning algorithms to process data quickly and offer deeper insights for real estate opportunities.
While harnessing data can remain a challenge for some companies, there’s a growing realization that change is required to avoid falling behind.
“Leveraging data to make better decisions has been something the real estate industry has always done, but it’s now getting to grips with the technology that is helping unlock new opportunities,” said Richard Bloxam, CEO of global capital markets at JLL. “Investors are reaching more-informed decisions than before.”
4. City Centers Have Proved Resilient
Bustling city centers famously went quiet at the start of the pandemic. But 2021 saw many central business districts (CBDs) show more signs of life.
“Predictions that CBDs will go into terminal decline have proved to be wide of the mark,” said Jeremy Kelly, Lead Director of Global Cities Research at JLL. “There’s a new energy to be found, most notably in the CBDs of major gateway cities, and where there are solid amenities and accessibility.”
Rents for premium office space are generally holding up better than in decentralized areas.
“Urban living is back in vogue, while tech companies, law firms, e-commerce firms are taking space in CBD locations,” Kelly noted. “It’s clearly still a journey in terms of full recovery, but investors and companies are following and 2021 has been very much about confidence in the core.”
5. No Longer An Alternative
This year raised questions around how long it will be until “alternative” real estate sectors shed their namesake and are fully embraced as part of the mainstream.
Life sciences investment has more than tripled in 2021, according to JLL. Data center investment rose 60% globally. The living sector – which includes build-to-rent multifamily, student housing, age-restricted housing and single-family rentals – have seen increased demand with transaction volumes climbing 80% during 2021.
“Investors are seeking to increase their exposure to growing, resilient asset types, which is exhibited by particularly strong net inflows for living, life sciences and data centers,” said Sean Coghlan, Global Director, Capital Markets Research, JLL. “We don’t see this longer-term focus on diversification slowing.”
JLL research estimates that drug makers, medical-equipment manufacturers and other life-sciences firms have raised a record $103 billion in venture capital in 2021. Up to $87 billion is now being directed towards life-sciences worldwide.
“As development pipelines broaden and investible inventory increases, transaction activity will undoubtedly accelerate,” Coghlan said.
Scholastica Gay Cororaton is the Research Economist for the National Association of Realtors, stated in a blog post on Dec. 23 that “commercial real estate market exceeded expectations in 2021, as the multifamily and industrial property markets outperformed historical trends while improving vaccination rates drove foot traffic back to retail brick-and-mortars and led to increased personal and business travel. The strong growth in these sectors made up for the weak and tenuous recovery in the office market.”
She continued, “Given the level of sales volume deals in the first 10 months, 2021 is poised to be the strongest year in terms of investment acquisitions, surpassing the peak sales volume of 2006 and the pre-pandemic level. NAR expects the demand for commercial real estate to strengthen in 2022 given the strong underlying demand fundamentals in the core property markets. While interest rates are expected to broadly rise by about 75 basis points, interest rates will still be low compared to historical levels and should not cause a severe decline in investment activity and the ability of companies to service their debt.”
