CBRE Predicts Robust CRE Recovery In 2022, Though Omicron Tops List Of Wild-Card Threats

Despite the continuing coronavirus pandemic, surging inflation and supply chain kinks, CBRE execs struck an optimistic tone about the future of commercial real estate in a Wednesday virtual conference, coinciding with the release of the company's 2022 U.S. Market Outlook.

Even so, the firm hinted at wild-card threats to the full recovery of the economy and commercial real estate.

Top of mind for CBRE is the impact of the omicron variant, which Richard Barkham, global chief economist, head of global research and head of Americas research, called a threat to the firm's 2022 outlook, adding that it would probably further delay return to office plans.

"I stress that we don't know yet what that holds," he said. "But the early evidence suggests that while omicron is more infectious, it is less deadly. We don't think it will derail the economy, where there is a powerful recovery underway."

Inflation also poses a threat to the recovery, Barkham said, though CBRE believes it will not last at the current high rate, as supply issues are worked out and the unsustainable spike in consumer demand eases.

Overall, the company is predicting 4.6% GDP growth for 2022, with inflation tapering off somewhat but still a factor in the economy, rising 2.5% by the end of 2022. 

"We see the U.S. economy growing above trend in 2022 and 2023," Barkham said, a trend driven by three factors: the huge fiscal and monetary expansion in response to Covid-19, the further reopening of the economy from pandemic restrictions and a revival of consumer and business spending.

The panelists had no doubt that industrial will remain the strongest property type in terms of development, rent growth and investor interest next year. Despite a surge of properties expected to come onto the market, it won't be enough to put a lid on rent growth, Senior Director, Global Head of Industrial and Logistics Research James Breeze said. 

"In 2022, industrial vacancy rates will remain near or at the all-time low of 3.6%, despite a record-breaking year for construction completions," Breeze said. "There will be even lower vacancy rates in markets near major ports of entry and large population concentrations."

That dynamic will drive industrial rents up more than 10% next year compared with this year, Breeze said.

Meanwhile, panelists expect return-to-office trends to continue on a hybrid basis, in which workers come to the office about three days per week, pushing down demand for office space by about 9% per employee.

That might be a downer for office space owners, but on the other hand, economic growth will buoy demand for office space as a whole, helping to mitigate the impact of potentially permanent work-from-home trends. CBRE also expects companies to continue to persuade workers to return to the office.

"An outsized share of new leasing will be in higher-quality space," Global Head of Occupier Thought Leadership Julie Whelan said. "The reason for that is a lot of occupiers are focused on creating an environment to draw their employees back to the office and giving them a great experience."

Office vacancy in most markets will continue to climb next year, Whelan said, as projects that started before the pandemic come online. That will continue to pose downward pressure on office rents and help keep concessions high.

As for multifamily, panelists expect the sector to remain red-hot, with recovery expected for segments where occupancies and rents actually have declined since last year, according to CBRE. 

"You might not know it, but the multifamily sector does have something to recover from," Research Director and Senior Economist Matt Vance said. "We expect even New York and San Francisco to be fully recovered by the second half of next year."

Retail, which took it in the jaw during the pandemic, isn't going to be the strongest commercial property sector next year, but consumer spending and limited development will reinvigorate the sector somewhat in 2022, CBRE predicts, even in malls.

"The mall sector, which was thought to be in deep peril, is experiencing increased foot traffic," Breeze said. "While real estate fundamentals haven't improved for malls at the same rate as for neighborhood centers, as more people become more comfortable shopping, those fundamentals will improve next year."