It’s not like 2022 isn’t bringing challenges to the commercial real estate market. COVID-19 is still here. Inflation has become a serious issue. And the commercial construction industry is still dealing with a labor shortage and supply delays.
But investors are still eager to sink their dollars into commercial real estate, largely because CRE remains a relatively safe harbor, especially during uncertain economic times. Commercial real estate marketplace and research company Crexi points this out in its recently released National Trends Report.
As the report says, investors continue to embrace commercial real estate, and are especially interested in the strongest commercial sectors of multifamily and industrial.
We spoke with Eli Randel, chief strategy officer at Crexi, about the state of the commercial real estate industry today. He, too, said that 2022 should be another strong year for the business.
Why makes commercial real estate such a safe harbor for investors?
Eli Randel: There are big challenges such as inflation and rising interest rates. But commercial real estate is somewhat insulated from some of these forces. That’s why it’s such an attractive investment right now. It’s one of the reasons why I’m so bullish on commercial real estate.
There is still an abundance of debt equity capital available, which is important. It’s also such an attractive investment vehicle. Investors need to put their money somewhere. Real estate is safer. It is tangible. It is less volatile. It’s a great hedge against inflation.
Do you think investors will continue to favor commercial real estate throughout 2022?
Randel: I do. I think commercial real estate will continue to perform well this year. I think property revenues will increase. Holding commercial real estate debt, assuming it is responsible and reasonable debt, is a good hedge against inflation. Your debt erodes with inflation. The amount you owe becomes less impactful. For many reasons, commercial real estate is a safe harbor during inflationary times, which will help make real estate an attractive investment during this year.
Are you surprised at how well commercial real estate has held up during the pandemic?
Randel: There was a knee-jerk reaction initially that with work-from-home and stay-at-home that retail and office would get crushed. But that didn’t really happen. Those sectors have been challenged, but they haven’t been crushed.
And then there are the other sectors. With all the ecommerce activity, industrial has done exceptionally well. Multifamily had a bit of a pause at the beginning of the pandemic but has done very well throughout COVID-19, too. As inflation looms, multifamily rents have increased significantly. Owners, then, are seeing increases in their property revenues. Investor demand for commercial real estate never waned. There is still an abundance of capital out there for commercial real estate.
Speaking of industrial, what do you expect from this sector in 2022?
Randel: Occupancy rates will continue to be tight. Pricing did run up a little over the last couple of years. That might start to taper somewhat this year. All in all, though, I expect industrial to remain very healthy during 2022.
Multifamily rents have been soaring. Has this surprised you?
Randel: Most people in the multifamily space anticipated this. They anticipated that there would be a greater demand for rental housing as it gets more difficult to buy single-family homes. Single-family homes are very expensive now. There is also a low inventory of these homes. These factors have led to a surge in demand for multifamily product.
I think what might have surprised people is not that apartment rents rose, but how much they rose. Many saw rents rising, but not to this extreme.
Are there other commercial real estate sectors that are capturing the dollars of investors?
Randel: I’m pretty bullish on retail. A lot of retailers are optimizing what I call their click-and-mortar strategies. They are repositioning what their storefronts mean to them. Storefronts might be a branding vehicle rather than profit centers. They are places where people can see a product before they go home and buy it online.
Retailers are embracing pick-up at their storefront locations, too. Customers can order a product online and then pick it up at a physical location. This click-and-mortar approach seems to be the sweet spot for retailers.
These retail trends have become the norm now. Customers expect them. They expect you to have curbside pick-up and enhanced delivery options. I think that will become part of our everyday lives.
What about experiential retail? Do you think this commercial sector will continue to rebound as people get more comfortable with being out and about again?
Randel: I think so. It might have some catching up to do. People did learn to avoid public or crowded spaces. But the underlying themes that made experiential retail so strong before the pandemic haven’t left. As people’s comfort levels return, experiential retail will continue to improve.
Do you see any signs of hope for the office sector?
Randel: I think a lot of the narrative surrounding the increase in working from home has perhaps been isolated to certain markets. Some markets have seen their office spaces open for quite some time. Most corporations see that productivity is optimized with the in-office dynamic. There is room here, too, to find hybrid solutions that will satisfy employees.
I don’t see companies giving up their corporate office space. There might be some dents around the edges of the office market, but this sector is slowly coming back already. It is not disappearing as a viable and attractive product type.
Are there any differences in the office market when it comes to larger and then more mid-sized markets?
Randel: There have been some. I live in Raleigh, North Carolina. I’ve seen a great amount of growth in our office market as people and companies have moved away from bigger markets. A lot of people and companies have moved here during the last couple of years. Some corporations, mostly smaller ones, have decided to pull up their space in New York City and plant a flag in smaller markets.
To sum up, what do you see for the commercial real estate sector, and investor demand, throughout the rest of 2022?
Randel: This year, in my mind, will remain an attractive year for commercial real estate. There is still a lot of capital that needs to get placed. Commercial real estate feels safer and outperforms many other asset vehicles.
