The CRE Market Is Aggressive And Investor Appetite Is Strong: Banking Executives Provide A Positive Market Outlook For 2022

The commercial real estate market experienced chart-topping growth in various sectors last year, outpacing projections set forth by industry professionals. Multifamily assets performed particularly well with a record-low vacancy rate of 4.5% and a record-high rent growth rate of 11%. 

After a year of stunted growth in 2020 due to the pandemic, it seems investors and developers are eager to get back in the game. 

Rising interest rates and supply chain setbacks, however, remain concerns for nearly every sector of the industry right now. But while the economic environment may be uncertain, banking experts assert that the future is optimistic.

“The fundamentals, in our eyes, seem very sound,” said John Hofmann, senior vice president and regional executive at KeyBank. “We are seeing the inflationary market pressures act as a barrier to entry to certain developments. We think that will be one of the drivers in keeping fundamentals intact and keeping income outpacing expenses.” 

Inflationary markets can pose both drawbacks and benefits for CRE investors, Hofmann said. While inflation may create certain economic headwinds, CRE has historically been a great hedge against inflationary pressures.

Samantha Miller, vice president of mortgage banking at KeyBank, echoed Hofmann’s favorable outlook on the current market, adding key points about investor behavior and what it indicates about the current state of the market.  

“It is important to think through all of your options when going to the capital markets, being thoughtful that the market is changing very quickly,” Miller said. “We've seen a group of investors that strongly believe that rates are going to continue to rise and they have been refinancing and moving forward to try and jump on rates where they are today. On the other hand, we're seeing some investors wait on the sidelines to let purchase prices come down, let cap rates widen and then look to jump back into the market.”

According to Miller, investor behavior can be judged by the shift in liquidity from 2021’s booming market. A sector within the bridge lending market has pulled back due to the widening in collateralized loan obligations. This coupled with higher Treasury rates has resulted in banks stepping in to become an important source of floating rate money.

“Overall, the market has still been quite aggressive,” Miller said. “Market slowdown has been based on the rising interest rates, not less liquidity. Rates have moved rapidly and it is taking time for borrowers to reset expectations, and for lenders to readjust to the rising rates as well.”

Hoffman said that in the midst of this strong, yet volatile, market, some developers may be opting for long-term fixed-rate solutions, while others are choosing short-term floating rate solutions. It is important for borrowers to evaluate their options and pick the debt that best matches their business plan while balancing interest rate risk.

Regardless of rate solution, he said, leaning on industry relationships is the cornerstone of investor success. Whether the relationship is with a bank, a life insurance company or a government-sponsored enterprise agency, stable capital sources are essential. 

“Relationships are a key theme to the commercial real estate environment,” he said. “During periods of extreme liquidity, new lenders enter the market. When things become volatile, you see them exit, but dependable sources of financing are key to any sort of investor and developer success.” 

He said that looking forward, the real estate and debt markets will continue to appeal to investors due to stable fundamentals coupled with a steady inflow of domestic and international equity. 

“The debt market looks different right now based on how you view rates,” Miller said. “In a broader sense, rates are still relatively low. The debt market still looks very good for investors. In relation to the past 10 years, we are still in a very low-rate environment. We are in a steady market, and commercial real estate is a great inflationary hedge.”

She said that while there are rising rates, investors are asking themselves, “Will those strong fundamentals outpace the rising rates?” That is going to be important moving forward and is also a key way that investors are looking at debt markets.

Though inflation is the highest it has been in 40 years, Hofmann and Miller remain confident that interest rates are still at levels where many investors are able to execute their business plans, especially in the multifamily and industrial sectors. A thriving future remains for CRE investors and developers. The CRE market and debt market are still functioning and liquidity is still abundant, even if investors and developers have to look to alternative lending sources or lean on existing relationships.

This article was produced in collaboration between KeyBank and Studio B. Bisnow news staff was not involved in the production of this content.

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