The 16 Deals And Trends That Defined 2022

Amazon has been a massive driver of real estate demand for years, both in the industrial and office sectors, but partway through 2022, everything changed.

Spurred on by the pandemic’s explosive impact on online shopping, the company put construction on hyperdrive and was on track to reach 457.3M SF by the end of 2022, a 370% increase in its footprint in six years, according to MWPVL International data. Its breakneck pace of construction was making it difficult for anyone else to get materials.

But in April, the company said it had overdone it, accumulating too much space and too many employees, which contributed to a $3.8B net loss in Q1. By May, it reportedly started looking to sublease out at least 10M SF of warehouse space and had an eye on perhaps triple that much. From there, the hits kept coming through the year — it halted construction on six office towers, it canceled or postponed the opening of 66 warehouses, it closed existing facilities and laid off thousands of people around the country. The pullback has infuriated some residents who saw their towns shell out tax dollars to lure the e-commerce giant in and have nothing to show for it.

Despite the dramatic impact these moves have had on the market, Amazon is still closing deals, including acquiring land as part of its continued shift toward owning instead of leasing property. Most of the space it has put on the sublease block thus far — just under 8M SF — has been in smaller, secondary locations and for short terms of a year or two. And experts say the industrial market will adapt, with landlords diversifying their portfolios and smaller users finally able to lock down space.

Everyone expected interest rates to rise in 2022 to combat inflation, which hit its highest level in 40 years over the summer, but no one expected them to increase quite this much, this fast. The impact on CRE has been dramatic.

Property values have declined 13% in the last 12 months. Deals under contract are falling apart. The spike upended the business model of taking out mortgages with floating-rate debt — 28% of CMBS loans were in negative leverage in Q3. The real pain of that may be yet to come, but loan assumptions are already on the rise and there could be a wave of landlords handing back the keys voluntarily or facing foreclosure if they find their loan balances are higher than their property values and interest payments outstrip their income. It is still possible to make money when interest rates are high, and veterans of the industry are quick to remind everyone they are still well below historical averages, but more increases are likely on their way and a recession may be in their wake.

CRE got its hopes up time and time again in 2022 for a wholescale return to the office, but the dust has settled enough to call it: Five-days-a-week office attendance is not coming back. But neither are offices entirely desolate. Kastle Systems has consistently logged U.S. office usage at 40%-50% of pre-pandemic levels through the year, and the market where it tracked the most in-person work — Austin — is at 65% in mid-December. The data is skewed by the new tendency to a four-day in-office workweek, as offices are largely empty on Fridays.

Small and midsized cities are seeing less remote work than their larger counterparts, and recent reversals in remote work policies by a few large firms could push the return-to-office numbers up a bit, but at this point, experts almost universally agree hybrid work is the new normal. That has led to some killed office deals through the year and put continued pressure on the wounded office market.

Vibrant office markets are seen as important to the economy of cities at large, especially since they are a large source of tax revenue and feed other uses like nearby retail. But for the most part, the only way to get people to come in daily has been to absolutely mandate it, which many employers are hesitant to do since remote and hybrid work have become more important factors for employee attraction and retention. Remote work can also save businesses serious money. Meanwhile, the shift in how offices are used has sparked a rise in occupier services as a business line in CRE, especially for brokerages. 

Russia’s invasion of Ukraine on Feb. 24 has led to the deaths of tens of thousands of civilians and soldiers alike, and it continues to affect the real estate industry in Europe and beyond 10 months later. The impacts on the global supply of energy have particularly plagued power-intensive properties like data centers, and the war increased supply chain pain over things like steel in Europe.

Real estate was in the spotlight as many countries introduced or ramped up sanctions on Russian oligarchs, seizing their holdings. CRE companies including CBRE, Savills and Knight Frank shut down their Russian offices and firms like Hines worked to divest properties they owned in the country.

But perhaps the most visible impact has been on housing, as millions of Ukrainian refugees sought shelter in countries already dealing with housing shortages. Ireland expected to take in 200,000 Ukrainians, but was already struggling to home an initial wave of 10,000 refugees in March and April. On the other hand, things are going surprisingly smoothly in the United States, which took in 100,000 Ukrainian refugees within five months. Landlords, many already accustomed to working with resettlement groups after the U.S. took in 70,000 Afghan refugees last year, saw the financial and social value of working with refugees and bent their rules to bring Ukrainians in the door.

Multifamily landlords have enjoyed unprecedented double-digit rent increases for a few years, as a significant housing crunch has kept demand high and supply low. But that has come at a cost, not just to residents who saw their rents go up as inflation chipped at their paychecks but to the broader economy. Housing has been a primary driver of inflation this year, and it was the last segment to ease up in the face of interest rate hikes.

But it took a hard U-turn in the third quarter. From July to September, usually peak apartment-hunting months, landlords saw negative absorption for the first time in at least three decades. Apartment rents declined in October after five months of decelerating growth, and single-family rents appear to be following suit. Experts say residential rents may be finally returning to regular seasonal patterns and rates of rent fluctuations. Apartment valuations spiked along with rents over the last two years, but now may likewise decline as transactions fall in the face of rising interest rates. 

2022 was a big year for environmental, social and governance policies. Sustainability was especially under the spotlight, with scores of companies announcing carbon net-zero targets, and cities, states and countries passing new regulations around emissions and other environmental issues. The August passage of the Inflation Reduction Act of 2022 is expected to support many of those initiatives in the U.S. The $430B legislation tripled a tax credit and doubled a tax deduction meant to spur sustainable development, particularly decarbonization projects.

Tracking is a significant part of making progress on ESG, and the Securities and Exchange Commission in March released a new rule requiring public companies to publish disclosures about climate-related risks and greenhouse gas emissions. The rule drew confusion and pushback from the commercial real estate industry, with one group calling them “overly burdensome and unworkable,” and much of the frustration focused on companies’ responsibility for Scope 3 emissions, or behavior not directly controlled by the companies but instead by tenants or producers of materials. The SEC aimed to finalize the rules by October and have them begin to take effect in 2023, but it extended its public comment period and has yet to issue its final guidance. And the Supreme Court’s decision in West Virginia v. Environmental Protection Agency over the summer that agencies need clear permission from Congress to create regulations could prevent the SEC from implementing the new rule. 

Meanwhile, pushback against ESG in all its forms has been rising, especially from Republican governors Ron DeSantis and Greg Abbott. Still, many property owners and investors say it will only grow in importance.

Manufacturing also got a big leg up from the federal government this year, and a land rush for factories may be on the horizon. The CHIPS and Science Act, signed in August, directed $53B toward the manufacturing of semiconductors in an attempt to reverse the effects of decades of offshoring by funding the development or expansion of plants. The Southeast is expected to see much of this activity, particularly in locations with plentiful low-cost power and water. Arizona is already seeing billions in new development as a result.

Electric vehicle producers can be a major beneficiary of the funds, and those manufacturers indeed had a busy year. Georgia has been one of the epicenters of activity, with Rivian, Hyundai Motor Group and SK Innovation announcing major factories near Atlanta and the state prepping more large sites to attract these users. 

Riding high on record rent growth, institutional investors started the year snapping up single-family homes. In February, 28% of all home purchases went to investors. But that turned out to be the peak, and activity dwindled in the middle of the year as interest rate increases started to take hold. Major firms like Blackstone and American Homes 4 Rent announced significant reductions in acquisition volume, if not outright pauses in some cases.

But experts say institutional investors will come back to the space in even stronger force once the market settles, and a struggling economy and potential recession is expected to increase demand from residents for SFR. And the pause is by no means absolute, as new ventures and funds continued to be announced through the year, such as JLL Income Property Trust’s launch of a program with Amherst to acquire $500M in SFR over the next two years. 

A bill introduced to Congress in October could have a more permanent chilling effect — the Stop Wall Street Landlords Act would tax transactions of companies with more than $100M in assets in a stated attempt to rein in the corporate ownership of SFRs, though the measure is less likely to pass now that Republicans control the House. Still, local pushback against institutional ownership of homes is on the rise — critics cite a variety of concerns, from worsening rental affordability and landlord responsiveness to a negative effect on communities and even society at large — and some cities have imposed limitations on how many rental homes can be in an area.

A handful of nontraded REITs, including the two largest, run by giants Blackstone and Starwood, put a cap on withdrawals in November for the first time. A surge of investors trying to pull their money out and limit their exposure to CRE put the funds at risk of a “liquidity mismatch,” as Blackstone put it, and this pressure to meet redemption requests could push nontraded REITs to sell assets. If they do so, the market will closely watch the valuations of those properties.

Nontraded REITs, which had been bringing in investment at record levels and distorting property markets, have continued to report net asset value growth while the rest of the industry has been dropping valuations.

The year brought bad news after bad news after bad news for Chicago and San Francisco’s office markets. Both cities captured national attention for increased crime levels, real or perceived, and major corporate departures. Chicago saw Boeing announce its relocation to Arlington, Virginia, Citadel to Miami and Caterpillar — which had been based in the region for a century — to the Dallas metro in 2022 as the city’s office vacancy reached record highs.

San Francisco has been hit hard by large cuts from tech companies, including widespread reductions in office space. Its office market, which has around 25% vacancy, is in so much pain it is affecting apartment rents and may cause a municipal budget problem. 

Meanwhile, Miami raked in corporate relocations through the year and was a bright spot in the national economy. Fifty-seven companies moved to or expanded in Miami-Dade County in 2022 through November — its best year ever — and another 150 are in the pipeline. Besides Citadel, Aer Cap opened its Western Hemisphere HQ in Brickell and Blockchain.com moved its Americas HQ to Wynwood. While most markets in the U.S. are fighting a glut of office space, local experts say Miami doesn’t have enough, and vacancy is below 10% while rents are reaching new heights.

One of the starkest indications that CRE may already be in a recession came at the beginning of Q4, when many of the largest global brokerages said they were looking to cut costs, including by laying off staff. CBRE’s Q3 earnings report included plans to reduce costs by $400M, a significant percentage of which would come from staff reduction. JLL spent $9.4M in the third quarter on severance and other employment-related charges, a sizable jump from the previous quarter and the previous year. About two weeks later, it did another wave of layoffs.

Most brokerages saw revenues drop as deal flow fell in 2022, and they are steeling up for a rough 2023 with fewer transactions as interest rates slice into profit margins and uncertainty around the economy makes businesses hold off on decisions. The pervasiveness of the pain, which is more tied to seismic shifts in behavior than past downturns, may drive some brokers to leave the industry altogether.

Investment sales deal flow has slowed to a drip as a combination of increased interest rates and a looming recession have decreased profit margins, increased risk and pulled lenders off to the sidelines. Property prices were down 13% for the year in November, and Cushman & Wakefield predicted in August valuations could fall another 20%. Big banks like Wells Fargo, Bank of America and Morgan Stanley have said they will reduce their lending to commercial real estate and will have stricter terms for the deals they do. The uncertainty in the capital markets stands in contrast to the Global Financial Crisis, leaving some would-be borrowers feeling as though they are in uncharted waters. 

All-cash buyers have stepped into the void in a big way. Behind them are a slew of investors lining up opportunistic funds to buy distressed assets at big discounts when they begin to emerge.

After two years of intense pain from pandemic shutdowns and limited travel, hotels found their footing in 2022. Most of the improvement came from pent-up leisure travel — dubbed "Covid revenge travel" — which surged enough in the second quarter for some hotel REITs to earn a profit for the first time since 2019 and for experts to revise their recovery timelines up. The average daily rate for a room hit a new high this year, though inflation was a large contributor to that growth. Without business travel, many hotels still weren’t reaching full recovery, but that, too, rebounded in the late summer. Suddenly, projections for the industry got a whole lot rosier. 

But the celebrations could be short-lived. As recession fears grew in the latter part of the year and layoffs accelerated, corporate travel budgets started to get scaled back. The Global Business Travel Association pushed back its estimate for a full recovery of business travel from 2024 to 2026. Hotel development is expected to stay suppressed for the near future, limiting new supply and real growth in the sector.

Meanwhile, the forces behind the deals are shuffling, as there were some notable M&A deals in the hospitality space in 2022, such as Choice Hotels buying Radisson Americas for $675M, Highgate buying Viceroy, Hyatt’s purchase of Dream Hotel Group and Brookfield Asset Management acquiring Watermark Lodging Trust.

Prologis was already the largest industrial owner in the world before its acquisition of its rival REIT Duke Realty this year, but the megamerger put some space between the industrial specialist and Blackstone, which has been nipping on its heels with a steady stream of acquisitions of its own.

The deal, agreed to in June and closed in October, valued Duke at $25.6B. It added 165M SF of U.S. industrial property to Prologis’ portfolio, which tops 1B SF globally. The combination didn't go over smoothly — hundreds of Duke employees were laid off, and former Duke CEO Jim Connor reportedly called the day he told his staff of the deal "the worst [expletive] day of my life."

RealPage, a property management software firm, is facing lawsuits and a Department of Justice investigation after an explosive ProPublica article analyzed the impact RealPage’s YieldStar software has on setting apartment rents.

YieldStar uses artificial intelligence to recommend pricing to RealPage’s property manager clients based on rates being achieved at nearby properties. Residents in apartment buildings around the country filed a class-action lawsuit in October accusing RealPage and a cadre of major landlords of sharing information in an anticompetitive manner, leading to rents that are inflated beyond what the market truly supports. A few weeks later, a similar suit was filed regarding student housing properties that use YieldStar. In the face of pressure from Congress, the DOJ's Antitrust Division opened up an investigation into the proptech firm in November.

No companies filed to become a public real estate investment trust this year — the first time that has happened since 2001. The stock market has had a rough year, with the S&P 500 clocking a 16% drop in performance this year, but REITs had it even harder. The FTSE Nareit All-REIT index, which tracks the performance of all U.S. REITs, is down more than 25%. REIT IPOs had been on the decline in recent years as real estate companies moved away from the volatility of the stock market and as they protected their net asset values. U.S. publicly traded REITs traded at an average 19% discount to their net asset value as of August, while nontraded REITs have moved in the opposite direction — Starwood’s nontraded REIT reported a 13.2% increase in its NAV through September, for example.