U.S. Real Estate Market Outlook 2022
Investment volume approaching record territory
Commercial real estate investment activity roared back in 2021 thanks to strong investor demand and abundant capital flows. Capital availability will continue to support a buoyant acquisition market in 2022, with equity capital targeting U.S. real estate near all-time highs and low-cost financing readily available. More foreign capital is expected to target U.S. assets in 2022, as international travel restrictions ease and costs to hedge against dollar depreciation remain very low.
Total investment volume in 2022 is projected to increase 5%-10% over 2021 levels, which are on track to roughly equal pre-pandemic volumes from 2019 (currently the highest annual total on record). Although industrial and multifamily assets will likely continue to capture the most investor interest given the tailwinds of e-commerce and demographic shifts, investment in office and retail assets should also pick up. Industrial and multifamily volumes are projected to increase 10%-15% over 2021 levels, while office and retail volumes will rise 5%-10%. Meanwhile, hotel volume in the first three quarters of 2021 recovered to pre-pandemic levels, a positive sign for the sector heading into 2022.
Figure 4: Total U.S. Capital Investment Volume
Source: CBRE Research, Real Capital Analytics, October 2021.
Total investment volume in 2022 is projected to increase 5%-10% over 2021 levels, which are on track to roughly equal pre-pandemic volumes from 2019.
Cap rates to hold steady
Strong demand for assets will push pricing higher, helping to hold cap rates generally steady even with minimal increases in long-term interest rates. We expect real estate spreads to remain wide by historical standards, helping to offset the impact of rising interest rates. 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. In addition, rents should continue rising, supporting higher property net operating income (NOI) for most asset types. Although cap rates typically follow the direction of real interest rates in the long run, NOI expectations are more influential in the short term.
Despite some lingering challenges for certain retail, hotel and office segments, real estate fundamentals are expected to strengthen throughout 2022. Economic and employment growth in 2022 will drive NOI higher as landlords fill vacancies and raise rents, though this will vary by asset type, quality and market. Overall, NOIs are forecast to increase for the multifamily (8%), industrial (4%) and retail (2%) sectors. The hotel sector will see a material improvement in NOI, though the omicron variant could impact by how much. NOI is expected to decrease modestly for the office sector (-1.5%), as lower-quality assets contend with a flight-to-quality to Class A properties by occupiers adopting hybrid work arrangements.
Overall, as real estate values appreciate, real estate investors will be rewarded by the high yield spread versus risk-free Treasury rates. Additionally, we expect that inflation will average 2.4% for the year, a level below our forecast NOI growth. Consequently, the opportunity for relatively low-risk yields, coupled with the ability to hedge against inflation, will make real estate a particularly attractive investment option in 2022.
Figure 5: Spread Over Risk-Free Rate Narrowing but Still Significant
Source: CBRE Econometric Advisors, U.S. Federal Reserve Board, October 2021.
NOI growth is expected for the hotel sector next year, as it rebounds from particularly steep declines during the pandemic.
Alternative lenders driving debt market
Loan origination volumes will likely remain elevated through 2022—building on the marked increase in 2021—as borrowers seek to lock in lower rates ahead of the Fed’s tightening of monetary policy. 2021 saw a surge in activity from alternative lenders, particularly debt funds making use of collateralized loan obligations (CLO). This shift reflects a growing risk appetite from both borrowers seeking bridge loans and other transitional financing and investors who are eager for the higher yields, especially given current corporate and government bond spreads. CLO and traditional commercial mortgage-backed securities (CMBS) issuance should remain high in 2022 assuming the Fed tapers its asset purchases in a way that does not roil credit markets.
Life insurance companies have been very active as well, finding good value in commercial real estate lending, particularly for multifamily and industrial assets. At the same time, private equity firms have increasingly been interested in acquiring loan portfolios from life companies, as their investment parameters (which can be more aggressive than the low-risk, low-yield life company approach). Life companies are expected to remain active lenders in 2022, though some portion will likely continue moving into private equity.
Also notable is the growth in single-asset, single-borrower deals. Many investors are still cautious about segments of the office and retail sectors and prefer the security of evaluating a single property and sponsor rather than combing through the financials of a larger conduit deal. We expect that both investors and lenders will become more comfortable underwriting office and retail deals in 2022 as fundamentals improve and the impacts of remote work and e-commerce become clearer.
A good year ahead for capital markets
Putting the pieces together, 2022 is set for a record level of investment activity, fueled by ample liquidity and stable cap rates. Improving economic conditions will support both asset value appreciation and NOI growth, boosting returns. The largest risks to this outlook are from a COVID-19-caused disruption, an unforeseen spike in interest rates or elevated inflation that proves more durable than currently anticipated. At this point, these factors do not appear to be major threats to the outlook.
Trends to watch
- Bifurcation of investment strategies.
As investors rebalance risk and return in the post-pandemic real estate environment, both core and opportunistic investment strategies are expected to accelerate further in 2022. Given the strength of underlying fundamentals, multifamily will likely make up a large share of opportunistic acquisitions. The flight-to-quality trend will likely be most apparent for office assets, including demand from institutional investors that paused acquisitions during the pandemic and now are under pressure to efficiently deploy large amounts of capital.
- Increased debt fund activity fueled by strong resurgence in CLO
Demand for shorter-term, floating-rate financing is growing amid increased interest in acquiring properties that need renovation or other upgrades. Investors searching for higher yields are eager for this type of product, and large private equity firms are becoming active CLO issuers to accommodate this demand.
- Transition away from LIBOR
Beginning in 2022, LIBOR-indexed loans and derivatives will no longer be available, and both borrowers and lenders will need to make decisions when evaluating both existing and new loans. As lenders adjust their processes and borrowers figure out what their risks are under a new benchmark, there could be some confusion in credit markets, though the transition is not expected to significantly impact liquidity.
- Growing interest in ESG for long-term investors
The pandemic has reinforced the need for investors to proactively think about insulating their portfolios against unforeseen externalities, such as climate change and shifting societal norms.