Integra’s Newly Released Viewpoint 2022 Report Highlights Challenges and Opportunities ahead for CRE
Annual Report Explores Key CRE trends, Outlook for U.S. Property Sectors and Specialty Reports for Auto dealerships, Golf Courses and Senior Housing
DENVER, CO — (January 6, 2022) — Commercial real estate investors are facing a critical crossroads in 2022. That is one of the key themes highlighted in Integra Realty Resources’ (IRR) newly released Viewpoint 2022. Investors continue to find a myriad of choices across a spectrum of price points, risk-adjusted returns and geographic preferences. At the same time, investors need to tread carefully in a market where there is a convergence of complex issues, transformative change and lingering uncertainty—all of which creates potential risk for mis-pricing assets.
Given this backdrop of challenges and opportunities, the 29th annual Viewpoint report provides a detailed overview of the commercial real estate market across five key property types: office, multifamily, retail, industrial and hospitality. Viewpoint 2022 also examines trends related to the economy, housing, capital markets, interest rates and employment, and explores how these issues will affect commercial real estate markets in the year ahead. Additionally, this year’s specialty property sector analysis covers the near-term outlook for auto dealerships, golf courses and senior housing.
“We are proud to bring this highly anticipated report back for its 29th year in production, as it’s an integral part of our clients’ annual business forecasting,” said Anthony M. Graziano, MAI, CRE, CEO of Integra Realty Resources. “The real estate market in 2021 was driven by plentiful capital availability, but it’s probably time to tap the brakes. We survived and thrived under a radical worldwide pandemic that isn’t over yet but will most certainly improve as immunity expands worldwide. There will continue to be major shifts in the employment base, and everything is going to continue to get more expensive, including debt. As we welcome the new year with strong balance sheets and good prospects, our challenge is to forge ahead confidently, but not recklessly.”
The report was produced in partnership with well-known veteran economist, Hugh F. Kelly, PhD, CRE, who added, “The perilous, twisting road travelled by Americans over the past two years brings us to a critical crossroads. A convergence of complex economic and social issues that include rising inflation, undersupply of housing and disruption in the workplace—all with COVID-19 continuing to overshadow the marketplace. Integra’s national survey amply shows a wide range of real estate choices that are sensitive to pricing parameters, appetite for risk/return, and geographic preferences.”
IRR Viewpoint 2022 Highlights
2022 National Themes
- COVID-19 remains the single most significant economic problem facing the nation. The ripple effects of COVID-19 and its variants continue to be pervasive and significant with notable impacts on supply chain disruption, inflation and transformation of the workplace.
- The economic recovery is moving closer to normalcy. The bounce-back in GDP growth that surged to 33.8% in 3Q 2020 was expected to moderate to 2% in 3Q 2021. Two percent growth was common pre-pandemic and represents the consensus forecast for the balance of the 2020s.
- Both blue collar and white-collar jobs were so profoundly disrupted by COVID-19 that it seems inevitable the future will hold substantive change in the way work is performed, and employees are clearly in the driver’s seat. According to the Bureau of Labor Statistics Job Openings and Labor Turnover (JOLTS) November report, there were 10.4 million total job openings.
- Inflation will remain a key issue in 2022 for consumers and investors. Both the housing market and the stock market are now priced in such a way that risk of a correction is inadequately reflected.
- Imbalances in the for-sale housing market is setting the stage for volatility, not only in single-family sector in 2022, but also in the surging multifamily sector. Further complicating the picture is the lifting of eviction moratoria in both the ownership and rental housing sectors.
- Liquidity supports a rebound in transaction volume, but rate risk will be an issue to watch in 2022. Interest rates have moved moderately upward in 2021, and most Fed watchers expect further tightening of rates in 2022.
- The federal infrastructure spending bill approved in November will bring needed improvements and create a multiplier effect for commercial real estate. The $1 trillion invested over 10 years is a step in the right direction, but it is not a full solution. The amount of investment needed to get the country’s infrastructure to a “good” grade is more than $5 trillion.
- An “anchoring effect” is influencing buying and selling behavior, and the resulting widespread on bid and ask prices is constraining transaction volume.
- Between 2015 and 2019, the annual transaction volume for office properties averaged $142 billion. Over the first three quarters of 2021, that volume was just $95 billion.
- The top five markets based on YOY increase in transaction volume in 2021 are: Richmond, Milwaukee, San Jose, Miami/Dade County and Austin.
- According to the Viewpoint Market Cycle Wheel, eight markets are in the Expansion phase, 15 in Recovery, 15 in Hypersupply and 21 in Recession.
- 2022 Outlook: The anchoring phenomenon will continue to be a powerful force in the office market in the coming year.
- Multifamily real estate is barreling into 2022 with enormous momentum. Transaction volume in the apartment sector surpassed all prior annual records based on year-to-date October 2021 numbers tracked by Real Capital Analytics (RCA).
- The top five markets based on YOY increase in transaction volume in 2021 are: Tallahassee, Fort Myers, Miami/So Florida, Fort Collins and Sarasota.
- According to the Viewpoint Market Cycle Wheel, only one market is in Recession (Oakland), while 45 are in the Expansion phase, six in Recovery and seven in Hypersupply.
- The initial household diaspora from city centers to suburbs and exurbs seen in 2020 ran out of steam in 2021. This is unsurprising as there has been a long-term deceleration of household migration in the U.S. dating back to the mid-1980s
- 2022 Outlook: Multifamily inventory is poised for more growth in the coming year. Developers are responding to an environment marked by ample capital and strong renter demand by increasing production. Construction data from the Census Bureau as of August 2021 shows big jumps in year-over-year permitting activity at 52.7% and multifamily starts at 60.1%.
- Retail sales activity remains subdued. According to RCA, transaction volume for 2021 through October was just $51 billion, less than half of the industrial sector and about one-fourth of the multifamily total.
- The top five markets based on YOY increase in transaction volume in 2021 are: McAllen, Fresno, Sarasota, Hartford and Oklahoma City.
- Hard-hit retail is showing a glimmer of optimism. Going-in cap rates, discount rates and reversionary cap rates for both Class A regional malls and community shopping centers are higher, on average, than the investment rates for CBD office, industrial and multifamily.
- One-fourth of American retail property markets are in the Recession phase compared to half in the 2020 survey. Twenty-five markets are in Recovery, 16 in Expansion, 15 in Recession and three in Hypersupply.
- 2022 Outlook: Although data on market rents and vacancy are mixed, the trends are no longer entirely dour. The coming year could present opportunities for selective contrarian investors to step in with acquisition capital when competitive pressures are limited.
- Our survey this year finds 90% of industrial markets in the Expansion phase of the cycle, 7% in Recovery, and just 3% in Hypersupply. Notably, not a single industrial market is rated as being in Recession.
- RCA transaction data shows rising investment volume, descending capitalization rates and sharply increasing prices for industrial property assets.
- The top five markets based on YOY increase in transaction volume in 2021 are: Polk County, Fla., Boulder, Eastern PA, Norfolk and St Louis.
- Net absorption tracked by national brokerages reached record territory during 2021, with the potential to exceed 400 million square feet by year’s end
- 2022 Outlook: Despite the remarkable run of success in the industrial sector, there are some potential warning signs to watch for in the coming year that could put a damper on demand for space, such as Fed rate hikes, lack of stimulus money to prop up consumer spending and a surge in pent-up demand that was largely exhausted in 2021.
- STR and Tourism Economics is forecasting 2022 occupancy at 63.4% (+1.1%); ADR at $130 (+1.06%) and RevPAR at $82.00 (+1.17%).
- Despite top line recovery, hotels are still struggling to return to profitability. STR/TE reported that when adjusted for inflation, RevPAR will likely remain below 2019 levels until at least 2025.
- Most of the largest U.S. markets have performed worse than the U.S. average because these markets depend on business travelers, conventioneers and international guests.
- Leisure demand is expected to boost performance in resort and remote areas; thereby skewing market statistics and the prognostication of a full recovery.
- 2022 Outlook: Although the hotel market is project to continue to improve in 2022, the COVID Omicron variant has the potential to, once again, disrupt business and leisure travel and create a significant headwind for recovery in the hospitality sector.
Specialty Property Reports
- Auto Dealerships: The general view in the auto industry is that dealership franchises are currently being priced at record levels, with pricing levels expected to continue to increase. The price allocated to the real estate as part of the going concern acquisition appears to generally follow the same trend, though it is frequently constrained by the slower appreciation of underlying land value. Moving forward, real estate value trends are anticipated to continue an upward trend as transactional activity has accelerated.
- Golf Courses: The future of golf appears to be bright, with renewed interest from both participants and investors. Profitable golf courses have sold on a 6x to 10x multiple, or a 10% to 14% cap rate. Headwinds remain, including an ongoing lack of financing, as well as the potential for increased labor costs as wages continue to increase. However, it appears that golf may have turned the corner towards a return to supply and demand equilibrium.
- Senior Housing: The rebound in occupancy levels is expected to be substantial in most markets that are not seeing large increases in supply. The increased move-ins, coupled with higher inflation, should be enough to push rents and service fees higher than seen in the past decade, if not longer. Operating expenses are likely to increase beyond the 2.0% to 3.0% annual inflation levels that have been the norm for a number of years. However, NOI at most properties is expected to rise in the coming year. The big wild cards for valuation in 2022 will be interest rates and performance of the economy in general.
For more information about this year’s report, or to access additional IRR research, please visit www.IRR.com