Top 10 Key Trends to Watch in 2022

While there is some concern that supply chain delays and increased wages will sustain inflation well beyond 2022, CONTI believes inflation is at or near its peak and will soon ease. However, inflation over the next few years will likely be higher than the pre-pandemic average of 1.6%. Based on our analysis, we forecast a 2022 inflation rate of 4.4% and a 2023 inflation rate of 2%.

We’re already seeing supply chains readjusting, and consumers are receiving less stimulus money than they were during the height of the pandemic. Consumer spending habits are further shifting as people become more comfortable going out to pay for services, rather than primarily buying goods and staying home.

We already know that the Federal Reserve plans to increase interest rates in response to inflation and the rapidly recovering labor market, and now it’s just a question of how much. Raising the rates too much would be adverse to investors of all sorts. However, CONTI believes the rate increases will not be as unfavorable to commercial real estate as some investors worry. If we look at interest rates from a historical perspective, interest rates will presumably remain relatively low.

When thinking about how far investment dollars go, we have to account for inflation. If we subtract the rate of inflation from the current nominal interest rate, we get the “real” interest rate, which paints a clearer picture of what our money can do in the current economy. Looking at it through this lens, our “real” interest rates have actually been negative more often than not since the Great Recession, and are likely to remain so. All in all, this is supportive of high real estate values, and we believe commercial real estate is still a strong investment.

Thanks in large part to the aging up of the millennial generation, a huge amount of housing demand is waiting to be tapped, and construction simply hasn’t kept up. This is principally because the construction industry, which never fully recovered following the Great Recession, has been further hampered by the recent material shortages and labor scarcity.

Because of this, and because of investors buying up housing to create single-family rental communities, prices have made a steep climb, according to data from Redfin. Eventually the rate of price growth will have to ease to meet the purchasing abilities of the people who want homes. However, CONTI does not believe this price moderation will be drastic, and homeownership will remain out of reach for many.

The pandemic has drastically changed the way we work, and CONTI believes the shift away from office work to remote and hybrid work has further encouraged the existing trend of workers moving away from costlier Gateway markets like L.A., with workers often settling in the more affordable Sun Belt where they can get more bang for their buck.

Businesses have also relocated to take advantage of overall lower costs of operation in the Sun Belt, bringing heaps of jobs with them, according to statements from relocating firms. In view of this, in addition to Sun Belt markets’ quality of life and more lenient COVID-19 restrictions, CONTI believes conditions in these markets will remain favorable for investment.

Although total employment is 15% below the pre-pandemic peak as of December 2021, CONTI is confident in predicting a strong job market for 2022, given promising signs such as falling unemployment, rising labor force participation, wage growth and the increasing number of people switching to better-paying jobs.

CONTI forecasts that every U.S. employment sector will have fully recovered all lost jobs by the end of the year. Leading the way will be the more COVID-exposed sectors of the economy: arts, recreation, accommodation and food services. COVID-insulated sectors such as professional and business services will continue to see strong growth in 2022, though not at the same rate of acceleration seen in 2021. The U.S. is expected to add anywhere from 3.5 to 4.0 million jobs this year.

The U.S. commercial real estate (CRE) market continues to show resiliency in the face of enormous challenges. Some asset types are outperforming others – multifamily and industrial are flourishing while office and retail have experienced more difficulties. Overall, our outlook for 2022 predicts continued recovery across the four primary CRE asset types.

These asset types demonstrated relatively little distress as the U.S. was pummeled with a once-in-a-generation health crisis. Unlike during the Great Recession, which had its roots in a financial crisis, the simultaneous demand- and supply-side shock caused by the COVID-19 crisis left the financial sector in generally good shape. Accommodative fiscal and monetary policy also helped tenants to make rent payments across CRE asset types.

Although interest rates are expected to increase in 2022, they will remain low from a historical perspective. We believe red-hot underlying demand drivers will more than compensate for any increase in interest rates this year.

Rent growth will moderate somewhat compared to its breakneck surge in 2021, but we expect rent prices to continue ascending at a significant pace. Rent growth averaged 2.9% from 2012 to 2019, according to data from CoStar, and then skyrocketed by 11.3% in 2021. Rent is forecasted to climb a respectable 6.6% in 2022, according to data from CoStar.

While rents are expected to increase in the U.S. overall, some Gateway markets such as San Francisco and New York have seen rent prices fall recently, according to the National Multifamily Housing Council.

Meanwhile, we believe current remote work trends will continue to favor the strongest rent growth in suburban areas, with less growth expected in the urban core.

U.S. Census data tells us that the number of renters in their 30s and 40s is growing as cultural attitudes about renting and homeownership shift. Renters in this age bracket have a greater ability than their younger counterparts to afford higher rents. In addition, renters employed in white-collar jobs making good salaries have the luxury of being picky when it comes to apartments.

Largely because of these shifts, the number of renters in the top income quartile has been increasing steadily. These renters who could afford to buy a home but choose to rent could be called “renters-by-choice.” Accounting for this expansion in financially comfortable renters, CONTI believes conditions favor investment in Class A luxury apartments.

Some would-be homeowners, meanwhile, prefer the perks of a single-family home without the onus of a mortgage on their shoulders. Investors are pouring more and more money into single-family rental communities to meet this demand, according to CoreLogic.

As of December 2021, 97.5% of professionally managed apartment units across the U.S. were under lease contract, according to RealPage. The U.S. apartment market is essentially full, and demand for apartments is at an all-time high. CONTI expects this occupancy rate to drop somewhat, but some movement of renters between apartments is a good thing, as it allows room for property managers to bump up rent prices.

We expect multifamily to be the top performing asset type in 2022 because it carries the most promising demand- and supply-side drivers out of all the CRE types. Demand for apartment units in 2021 exceeded all of CONTI’s expectations, and we forecast continued record-high growth in demand.

A primary driver of multifamily demand is employment gains. As the economy continues to recoup all jobs lost during the onset of the pandemic, multifamily will reap the benefits, drawing people to business-friendly markets. Additionally, the aging up of the millennial generation and a housing shortage are also major contributors to demand for multifamily.

Multifamily real estate investment is a powerful hedge against inflation – multifamily properties are more insulated from issues created by vacancies than other assets since hundreds of apartments are being leased at different times for relatively short lease terms, giving property managers the ability to capture quick rent increases. CONTI believes that multifamily funds are a particularly persuasive investment since these benefits are spread across multiple properties and thousands of units.

Investors have taken note of multifamily’s strengths and have pumped capital into the market. CONTI believes this enthusiasm for multifamily investment will continue in 2022.

During such an exciting time for multifamily investment, CONTI offers a word of caution: Investors would be wise to be conservative when it comes to leverage. Avoid investing in assets or funds that carry a high loan-to-value (LTV) ratio. While some funds are attempting to purchase properties with 85% loans and a small portion in equity, we believe these types of deals offer unnecessary risk for investors.

Americans have been through a great deal of upheaval in the last couple years, and the current consumer view of the economy is starkly negative, based on consumer survey results released by the University of Michigan. But if 2021 was a year of recovery, 2022 looks to be a year in which consumers settle into a new normal, and multifamily stands to prosper. CONTI, in taking a meticulous, all-encompassing look at which way the financial winds are blowing, believes that multifamily real estate in the Sun Belt will remain a strong asset in investors’ portfolios.