US real estate market and real estate investment

High inflation, soaring interest rates and a volatile US market have us wondering where the real estate industry is headed. The economic outlook does not look good for 2022, and it looks like we are heading for a bumpy ride.

David Bitner, Global Head of Capital Markets Intelligence at Cushman & Wakefield, recently shared his outlook on the current US market and real estate industry trends at EisnerAmper’s Real Estate Directors Luncheon.

Current sightings

  • Economic growth will soon begin to slow. Anemic growth is a certainty for 2023 and recession in the second half a distinct risk.
  • Job growth remains robust with nearly 1.8 jobs open for every unemployed person today. This is a good sign for the economy in the short term, but the Federal Reserve will have to push up unemployment in order to contain inflation.
  • Consumer finances are still in very good shape, supporting spending. However, inflation has led to a sharp decline in consumer and business confidence, which will eventually dampen spending.
  • Supply chain tensions remain elevated but appear to have peaked.
  • Consumer inflation remains widespread. Much of the recent inflation has been driven by energy and goods inflation. These forces are starting to subside, but services inflation alone is still enough to push inflation above the central bank’s target. In addition, housing market inflation is only beginning to affect the inflation figures. Inflation is unlikely to return to target without a sharp rise in interest rates.

Trends in different sectors of the real estate industry

  • Office: The pandemic has hit the office sector hard in the United States, resulting in high vacancy. Although people are not fully back in the office, office usage has increased in 2022. Regardless of the work-from-home (WFH) dynamics, there is hope that buildings will repopulate. This is mainly because millions of office jobs are being created which will drive demand. Desktop performance is heavily bifurcated between trophy and commodity, and this distinction will only grow stronger as the permanent transition to hybrid working continues.
  • Multifamily: The number of people aged 25 and over (those most likely to rent or own)

exploded in the United States as the net change in housing stock failed to keep pace with the past decade. In short, the United States has underbuilt homes. 1.3 to 1.5 million new households are expected in 2022 and 2023. Pent-up demand due to the pandemic and demographic factors will fuel the surge. Vacancy in the United States will remain stable, generating healthy rental growth; it would be cheaper to rent in most markets. The multifamily sector has several years of solid fundamentals ahead of it. Indeed, the growth of the NOI should remain positive even during a recession.

  • Industrials: Changes in consumer spending have benefited the industrial sector. Supply is expected to exceed demand again by 2023; however, the impact on the vacancy will be minimal. The vacancy rate will remain at or below 4% for the next two years. Over the next five years, rents are expected to increase by 32.4%. The increases will be greater in the coming years. Even more so than multi-family properties, industrial fundamentals should be recession-proof in the sense that NOIs will continue to grow. However, the recent high rate of ENI growth is not sustainable and will moderate in the coming years under all economic scenarios.
  • Retail: Vacancy for 2021 ended the year 70 basis points below the ten-year historical average of 6.5%. Retail foot traffic has essentially returned to normal, but the recovery has varied significantly by region. Sunbelt markets were the fastest to recover. Disciplined construction and increased occupant demand will continue to drive up asking rates. Indeed, after years of underperformance, there is reason to believe that core retail assets could offer some of the best returns in the years to come.

We started 2022 with strong liquidity. Apartment and industry remain the favourites, but the capital is starting to return to office and retail.

What do rising rates mean for CRE stocks?

The relationship between interest rate and values ​​is not determinative; there was no clear relationship between interest rates and cap rates. Cap rates are influenced by a range of factors such as NOI growth, capital supply, interest rates and risk aversion. The market believes that the government will contain inflation, but with substantial rate hikes. Core trends for CRE loans will fall between the BBB and BB corporate bond segments. Rising yields and spreads suggest that the outlook for economic growth and the willingness to take risk are not offsetting rate hikes. This results in enormous upward pressure on capitalization rates. These risks have already materialized in the REIT market and are increasingly being felt in private markets. A major price adjustment is underway, particularly for multi-family and industrial properties, but also for offices and retail. It is unclear how long the private market adjustment will take, but we expect the data to show significant increases in cap rates by 2024. The data will lag reality, as during some time, the price adjustment will be enveloped by reduced liquidity.