9 Predictions Of What CRE Can Expect In 2022
A renewed surge in coronavirus cases may have some market watchers thinking 2022 is just another sequel to 2020. Commercial real estate players, meanwhile, have their eyes on a bevy of new challenges and opportunities in the new year.
As President Joe Biden approaches his first anniversary at the helm, investors are keeping an eye on Washington for potential bills that may influence deal-making. Office players are cautiously monitoring the omicron variant, as employers get creative in efforts to lure employees back. Industrial firms, meanwhile, are wondering not when supply chain issues will ease up but how to combat inefficiencies with new strategies and innovations.
Industry leaders spoke with Bisnow about the top trends they think will play out over the course of 2022; the following is a collection of those insights, edited lightly for style and clarity.
Prediction 1: The U.S. won’t see tangible changes to the supply chain this year, but companies will be better equipped to handle delays and shortages.
Colliers National Director of Industrial Services Pete Quinn: While I do think there are some good things in the works to help with supply chain congestion — like adding a truck-only lane on highways — we won’t see those improvements this year. In the meantime, companies are getting smarter and are thinking outside of the box when it comes to combating slow deliveries and rising costs. Some companies got caught not having enough inventory, so they’re going to be thinking ahead and adding buffer or safety stock. The industry is also modernizing at a more rapid clip as a result of these challenges, and I think robotics will take a giant leap this year. Companies will turn to technology solutions to move more product with less human labor.
Wharton Equity Partners founder Peter Lewis: The demand for ever-more rapid online delivery and fulfillment services, combined with an increasingly critical lack of supply in and around the country’s major metropolitan markets, will require the deployment of more efficient technologies to ensure a more reliable and expedient supply chain. In order to keep pace, developers, owner-operators and users alike will need to adopt more automation and artificial intelligence-based tools to reduce reliance on traditional labor and expand the range of potential sites suitable for fulfillment and last-mile delivery purposes. Facilities such as micro-fulfillment centers, which are small, largely automated distribution facilities located in or near densely populated urban environments, will become an increasingly vital part of this new supply chain, facilitating more efficient delivery of goods with minimal requirements for space. These types of advancements will become inseparable from the industrial market in 2022 and subsequent years.
Chunker CEO Brad Wright: The shift to remote work and the exponential rise of e-commerce has exposed supply chains to crushing demands and major disruption. Retailers don’t know if their warehouses are going to be empty week-to-week, or if they are going to be overstocked. Supply chain challenges will only increase this year, and traditional warehousing will no longer be a viable option for retailers. The need to adapt quickly to constantly changing factors that impact inventory, customer experience and demand is driving the increased need for short-term, on-demand warehousing space.
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Prediction 2: Industrial developers will target large office campuses as new sources of industrial development opportunities.
Quinn: I’m not seeing anything that suggests this industrial demand is going to slow down. As demand continues and inventory remains limited, investors will target underutilized properties for new industrial developments, such as the case of Allstate selling its office space outside of Chicago to Dermody Properties for $232M. [Dermody plans to develop a logistics facility at the corporate campus].
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Prediction 3: Hotels will capture record sales prices in 2022.
Atlas Hospitality President Alan Reay: Hotel values will continue to rise in 2022, especially in "A" locations with huge barriers to entry, e.g. coastal and wine country. We have seen new record prices per room set in 2021 and predict we will see new records set in 2022. Drive-to markets will continue to see very strong average daily rates and occupancies, while markets that heavily rely on conventions and business travel will still struggle with low occupancies. New hotel construction will start to pick up in the second half of 2022, as the cost of materials starts to decline from all-time highs and the rising sales values of existing hotels make it more attractive to build new projects. We see the extended-stay hotel model dominating new construction.
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Prediction 4: The omicron variant, and others that may follow, will prompt employers to delay return-to-office plans and maintain flexibility with employees.
CBRE's omicron forecast: The emergence of the omicron variant, following the delta strain, sets a pattern for the next few years, so we expect Covid will remain a fact of daily life for the foreseeable future. This will lead to bouts of market volatility and heightened anxiety. The slow rebound of the office sector, alongside accelerated demand for industrial space and single-family homes, will continue to characterize the real estate recovery for some time.
JLL Director of U.S. Office Research Phil Ryan: Determining how to return to the office at scale remains the most pressing issue for both tenants and the market as a whole. After being pushed from Labor Day in 2021 to early 2022 due to the delta variant, with the emergence of omicron, there remains significant uncertainty surrounding when and how often most employees will return. Although most employers will have their offices open and available for employee use — and a large share already do — a full, five-day-a-week return policy is unlikely as companies and employees shift into hybrid arrangements. How much this affects overall demand for space is yet to be determined and will be an iterative process over the coming years and highly variable depending on company-specific needs.
Oxford Economics' Dec. 21 Research Briefing: The omicron variant is likely to take a greater toll on gross domestic product growth in early 2022 than we previously estimated. Omicron is spreading rapidly and widely and is causing some restrictions on activity to be put in place, including self-imposed restrictions. For now, we see Q1 2022 real GDP growth on course to be closer to 2.5%, lower than the 3.4% in our December baseline. Despite an anticipated rebound in activity after the winter, real GDP growth for 2022 looks to be 4.1% versus our prior forecast of 4.4%.
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Prediction 5: The infrastructure bill will not have a meaningful impact on the CRE industry in 2022.
Lewis: The scale and ambition of the infrastructure bill is expansive enough that it has the potential to positively impact the commercial real estate industry. However, while commercial real estate may reap the benefits of the infrastructure bill’s modernization efforts, it must be emphasized that it will take many years for these infrastructure projects to have a meaningful effect on the market since they are very large and require extensive approvals processes. The rollout of these projects will be further impeded by the bureaucratic processes and red tape that are associated with federal funding. What is potentially more consequential than the infrastructure bill is President Biden’s Build Back Better bill.
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Prediction 6: The passing of social spending bills, like Build Back Better, may pose headwinds to CRE demand.
Lewis: If adopted, the Build Back Better bill could introduce a number of provisions that could be detrimental to the real estate industry — mainly the introduction of tax hikes and the elimination of 1031 exchanges.
Quinn: The boom in industrial is being driven by consumer spending, and the question now is whether inflation and government subsidies have an impact on that. Proposed bills might slow that growth, so everyone is keeping a close eye on what is coming out of Washington. If consumer spending slows, industrial demand will follow.
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Prediction 7: Rising inflation will compound rising construction costs, resulting in a slowdown or cancellation of some developments.
Behring Co. founder and CEO Colin Behring: From a macro perspective, the Federal Reserve’s decision to raise interest rates has the potential to create challenges for the real estate sector. These higher interest rates will effectively mean higher borrowing costs. Materials and labor costs are already on the rise, and these various factors will make it harder to plan financially viable projects, which will lead to something of a slowdown in development. Projects that were already struggling will be shelved for the time being. That said, only certain areas and asset types will be affected materially.
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Prediction 8: Office landlords will invest in hospitality-focused office renovations to lure employees back to the office.
Connell Co. Executive Vice President Shane Connell: Nearly two years into the pandemic, employees across the nation have become accustomed to working remotely and many are still hesitant to return to traditional office settings, having grown accustomed to working from the comforts of their homes. However, studies are showing that the remote workforce is also longing for social interaction as they've been isolated from their colleagues for the past two years. As the office sector continues to be shaped by employees' evolving preferences, workspaces need to be flexibly designed to not only inspire the creation of great work, but also connection, creativity and energy.
We predict that in 2022 more commercial real estate owners in New Jersey will add coworking uses and amenities to their buildings to help companies entice employees back into the office.
CBRE Global Head of Occupier Thought Leadership Julie Whelan: An outsized share of new leasing will be in higher-quality space. 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.
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Prediction 9: As residents continue to work from home in 2022, property managers will invest more heavily in technology, specifically in amenity spaces.
Zego Chief Product Officer Stephen Baker: With the onset of the Covid-19 pandemic, we saw a large uptick in companies and their employees transitioning to remote work in 2020 and into 2021. With this came a shift in resident preferences, particularly in terms of an increase in package and food deliveries, and the need for spaces to work in and outside of the immediate home. As this continues into 2022, we expect to see property managers adopting package and food delivery management systems such as access-controlled smart rooms and lockers. As residents continue to opt for deliveries over in-person purchases, it's important to ensure that their items are safe until they can be claimed. Also, we’ll see a wave of technology and artificial intelligence brought into work-oriented spaces. This trend will manifest through retrofitting of existing spaces, both in terms of physical hardware like screens and speakers for calls and meetings, as well as reservation technology to ensure simple and fair access to these spaces.
