Market forecast CCIM Feature

Positive Outlooks

Major CRE sectors enter 2022 with optimism of varying degrees, ranging from robust recovery to continued record-setting performance.

Stated plainly, the outlook for commercial real estate heading into 2022 looks good. But as with any economic forecast, such a straightforward statement comes with an asterisk — one, in this case, that looks a lot like a spikey coronavirus particle that has become all too familiar in the last two years

Following a 2021 where sectors like industrial and multifamily outpaced pre-pandemic performance, and struggling markets like retail and office found some footing, many industry experts are expecting good things in 2022, provided the U.S. and global economy don't face an unforeseen calamitous event.

“There's a bit more realization that [COVID-19] is here — that it's going to be more of a constant,” says Jim Costello, CRE, senior vice president of Real Capital Analytics. “We are in a situation where we have to figure out how to adapt as opposed to the pandemic being something that will have a definite end.”

While many initially saw COVID-19 as something that would have a beginning and an end, the tail of the pandemic seems to be longer than expected. But this realization isn't entirely demoralizing. The market fundamentals in commercial real estate provide reason for optimism — despite the continued threat of new variants, social disruptions, and global supply-chain difficulties.


Commercial property prices in the United States rose 6.48 percent year over year in 2Q2021, up from 3.94 percent the previous quarter, according to the International Monetary Fund. In the year running through 2Q2021, deal volume grew 81 percent, to $243.5 billion, according to Real Capital Analytics.

“My expectation is that industrial and multifamily markets will continue to run very hot,” says David Bitner, head of Americas Capital Markets Research at Cushman & Wakefield. “I don't think that they're going to have anything like huge double-digit increases in volume that we saw last year, but that the pace of last year was completely unsustainable. … But there's only so many times these assets can trade hands, right? As we head toward 2023, there's going to have to be some passing of the torch to office and retail.”

Let the Good Times Continue

Industrial rents spiked in 2021, jumping up 6.7 percent compared to 4.8 percent the previous year, according to the National Association of REALTORS®. NAR's forecast for 2022 includes rents jumping another 7.4 percent in 2022, with vacancies expected to stay at or below 5 percent.

“The vacancies are so low — and even lower among higher quality product — that it's difficult to even know what the rents are because you just don't have availabilities,” Bitner says. “That's how strong the market is."


Considering the robust demand, industrial construction is trying to keep up. Absorption isn't an issue, unsurprisingly, with nearly 70 percent of new product being preleased in 3Q2021, according to a JLL report. Speculative development increased to 315 million sf, a record high for the industrial sector, but continued rent growth signals that the sector is hungry for more supply.

“We are at a record pace for industrial construction,” Costello says. “And even with that high pace of construction, availability is still tight. It's firing on all cylinders — and there's nothing impeding it. If leasing starts to taper off, that could be a sign that the demand has been satisfied, but that's not something I see happening soon."

To put the sector in perspective outside of COVID-19, the commercial property price index for industrial in late 2021 was up 18.9 percent over one year, 44.2 percent over three years, and 67.5 percent over five years, according to Real Capital Analytics. 

“Vacancies are going to stay low, though maybe they'll rise modestly with some supply coming online,” Bitner says. “Rents are going to continue to grow at a great pace. And if I had to say what's going to be the best [CRE] sector over the next three years, it's still going to be industrial.”

While labor shortages continue to be a problem, industrial appears to be a case of the strong getting stronger. The changes from COVID-19, including the reliance on e-commerce and last-mile logistics, are hardly temporary, with industrial assets being a big winner in the pandemic reorganization.

Housing Remains Hot

The housing shortage in the U.S. — and particularly in major markets like New York and San Francisco — creates a basic friction in supply and demand, a general trend that extends back well before any discussion of quarantines and social distancing.

“Nationwide, rents have increased by 40 percent from 2010 through 2020, whereas income has only increased by 22 percent,” writes Steve Guggenmos, Freddie Mac's vice president of multifamily research and modeling, in the government-controlled company's 2022 outlook. “This implies that, in 2010, the average rent was affordable to households making 59 percent of the [area median income], whereas in 2020, the average rent was affordable to households making roughly 68 percent AMI. Applying the forecasted rent and income growth trends to 2022, we project that gap to widen out further, up to roughly 72 percent AMI.”


Multifamily vacancies dropped from 6.7 percent in 2020 to 5.1 percent last year, according to NAR, with that figure forecasted to dip to 4.8 percent in 2022. Accordingly, rents grew 7.8 percent in 2021 and are expected to continue to increase at an accelerated rate of 10 percent in 2022.

“The home ownership market and the rental market are deeply out of balance,” Bitner says. “In a lot of locations, the rental markets have rebounded very strongly overall, particularly in the Sunbelt and suburbs, but home prices have been even stronger. 

“If you think of rents versus home prices as being in some kind of equilibrium in terms of the attractiveness of paying rent or a mortgage, it's more favorable to rent. I don't expect home prices to creep back downward to any meaningful degree in 2022, which points towards continued growth for multifamily, although a bit slower growth than 2021.”


Supply is ticking slightly upward, with 364,700 completions coming online in 2020, according to the National Multifamily Housing Council. But fundamental obstacles to supply, including zoning ordinances and other state and municipal regulations, don't appear to be dissipating, though regional migration trends align with locations more accommodating to developments. The Sunbelt, Texas, and Rocky Mountain states are seeing inbound migration, while the Midwest, Northeast and California saw net losses in from January 2020 to June 2021. 

“There are great reasons for people to move to Florida — it's a consumption economy, a great vacation destination, and a great retirement spot,” Costello says. “It just makes sense for Florida to be seeing population growth. But it's not something where every investment bank in New York is going to pick up and move all their staff down there.”

The Return of the Office?

The office sector had another roller coaster of a year in 2021, as the growing momentum toward workers returning to offices across the country was wiped out by the midyear arrival of the delta variant. While that hiccup, along with the ensuing omicron surge, extended remote work for millions of Americans, leasing activity sustained an upward trajectory. 

After bottoming out at 25.8 sf in 4Q2020, leasing space nudged up in the following three quarters, eventually reaching 39.2 million sf in 3Q2021, according to JLL Research. More than 100 million sf of office space is under construction, which is a decrease from 2019's 126 million, but any new supply in a market that saw -7.3 m sf of absorption in 3Q2021 tilts the deck further in favor of tenants.

“With a large construction pipeline through the end of 2022, however, conditions will remain tenant-favorable for the foreseeable future, while an accelerated rate of relocations to newer supply will lead to even greater divergence in performance across office assets,” according to Phil Ryan, director of U.S. office research for JLL. “Even with a more gradual reentry process and potentially more balanced hybrid plans than initially expected, the crucial role that physical offices play in fostering corporate culture, productivity, and innovation will underline the longer-term need for space that meets evolving tenant and employee preferences.”

“The office recovery is going to take longer as people return to work, but investors are going to deploy capital into that sector,” Bitner says. “And as long as you're putting new money in, you can ride that wave.”

While one deal doesn't mean a complete recovery for the sector, Google's $2.1 billion purchase of 1.3 million sf of space in New York in September 2021 is a signal that capital will return. The deal could be the biggest in the U.S. since COVID-19 hit, and it highlights interest in major urban markets. Usual suspects like New York (20 million sf), Boston (7.53 million sf), and Silicon Valley (5.9 million sf) lead the way in construction, according to JLL Research.

But capital expenditures in the wake of a global pandemic are a bit more complicated. Public health and safety, ergonomics, and worker comfort are necessary considerations in developing new or renovating old assets.


“The capex issues are just huge,” Costello says. “If you do come back to the office, someone is spending a lot of money on new filtration systems and healthier settings for the building. You want to make sure the elevators can run in a rapid fashion and try to [minimize] crowding. That's significant spending. Who's paying for that?”

That question remains to be answered in a broad sense, but it will not be a deal-breaker for capital looking to be deployed in a sector that's showing signs of recovery.

“Even with this bump in the road, macroeconomic indicators remained optimistic, albeit slightly downgraded compared to forecasts from earlier in the year,” Ryan reports. “The office market showed signs of promise and the beginnings of tenants firming their longer-term utilization plans.”

Back in Business

For a CRE sector that can be linked to the day-to-day news of COVID-19, retail looks to be in a promising position entering 2022 according to a number of industry experts. Largely overshadowed by stellar performances in multifamily and industrial, the sector saw its share of overall investment transaction activity in CRE drop to a historic low of 9 percent in 2021, according to CBRE data.

But after last year, where capital continued to flood those stronger sectors, retail may have found its footing and could attract more attention in the next 12 months.

“Investors have been a little slow to pick the ball up on the improvement in the retail,” Bitner says. “I'm not talking about the ghost malls or strip centers in economically challenged areas. Investors have been a little slow in returning to retail in areas that are strong, where there's an emphasis on personal services and grocery-anchored centers.”

By late 2021, the discount rate in public REITs for shopping centers was -2.3 percent and regional malls was -8.3 percent. Retail boasts the highest cap rates — 6.4 percent — compared to office, industrial, and multifamily, but they are starting to compress as investors reevaluate the market. 

“The improvement in the discount ratio to net asset value shows [the growing confidence of investors] in the retail sector,” writes Daniel Diebel, a retail economist with CBRE, in a December 2021 report. “Stock prices for major retail REITs have bounced back since early 2021. Rising stock prices reflect investors' optimistic expectation for the performance of retail properties going forward.”

While e-commerce was the story of 2020 as lockdowns and quarantines rolled across the U.S., its share of overall retail sales ebbed in 2021. According to seasonally adjusted U.S. Census Bureau data, e-commerce has steadily declined from 13.8 percent of all retail sales in 3Q2020 to 13 percent in 3Q2021. Brick-and-mortar retail is hardly doomed, but not all assets are equal.

“Retail was already under a lot of stress before COVID-19,” Costello says. “For example, malls are having a lot of trouble in the older industrial cities in the Midwest, where jobs were already leaving and income was moving away. But there are high-income areas across the country where retail is thriving, where you have wealth and plenty of in-person shopping.”

Knowing the Variables

As every economic forecast for 2020 taught us, the unforeseen can change everything in an instant. Accordingly, entering 2022, many CRE experts still include disclaimers about uncertainty around COVID-19. Just as the delta variant dashed hopes for a smooth reentry to the workplace for millions of workers last summer, omicron is presenting a reminder that the pandemic may not have an expiration date.

Inflation grabbed its share of headlines as well in the back half of 2021, with economists trying to understand if it will prove to be transitory or endemic.

But outside of transitional investments on a tight timeline, CRE has the ability to look at the longer term. Analysis and modeling can include potential adverse public health events — and investors are well aware of market fluidity.

“If I'm an investor looking at [omicron and other potential variants], it's unclear what will happen,” Costello says. “If in this first year, say it's a worst-case scenario [that includes] going to more lockdowns. Ask yourself, what's that going to do to income and how is that going to impact my returns? You need to play out scenarios to make sure that you're comfortable with the potential downsides. That's all you can do right now — play out scenarios because, realistically, nobody knows what may happen and how bad it'll be.”

Inflation grabbed its share of headlines as well in the back half of 2021, with economists trying to understand if it will prove to be transitory or endemic. 

“Most forecasters believe that inflation may be peaking around now or it could be elevated through the end of the year, but the idea is that it's normalizing,” Bitner says. “Given where cap rate spreads are, inflation shouldn't be a problem in terms of stressing valuations. I did rigorous statistical analysis of historical return data looking at public and the private markets. I saw that commercial real estate really does act as an effective inflation hedge. My message [is], if you're really worried about inflation, definitely go buy real estate.”

Nicholas Leider

Nicholas Leider is senior content editor for Commercial Investment Real Estate. Contact him at

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