Despite setbacks in some markets due to the pandemic during 2020 and 2021, the commercial real estate industry has a more promising outlook going into 2022. Physical distancing and restrictions changed the way people inhabit and interact with physical space, and the cumulative effects of the COVID pandemic have made the demand for many types of space go down, including retail and office buildings, while others saw an increase in 2021. As we head further into the new year, it may benefit investors to keep an eye on how commercial real estate’s resilience as an investment has put it at the forefront of economic recovery.
Although there have been some surprises and setbacks across property types, investors and companies are adapting. Office employers are balancing productivity and safety as people return to work. Retailers, meanwhile, are facing critical turning points in their rapidly evolving industry, and residential real estate properties are competing for tenancy. Companies need to build flexibility and the capacity to adapt quickly to market changes during the year.
Based on predictions from the likes of Forbes and PwC, here are some of the trends professionals recommend keeping an eye on in the new year.
Forbes predicts property transactions will continue to rise in 2022, as the economic recovery gains momentum. Commercial real estate prices are projected to maintain growth in the mid-single digits, and REIT mergers and acquisitions could increase compared to 2021 as well.
In 2021, commercial real estate markets rebounded. Transaction volumes rose 64% in the first ten months of 2021 compared to 2020. Purchases of industrial and multifamily units increased by 30% compared to levels in pre-pandemic 2019.
Despite the lag, retail and office prices have been rising, albeit slowly. They show signs of recovery from the declines they suffered early in the pandemic. Investor interest continues in industrial assets and multifamily units due to the high demand for these spaces from prospective tenants. Limited opportunities and high investor demand has pushed some investors into alternative property types, such as life sciences, data centers, self-storage, student and senior housing, and hotels. REITs and private equity firms around the country have also been quicker to embrace these alternative sectors, which also includes a boom in demand for medical offices.
Climate urgency is shaping the way businesses are operating, including private equity firms and REITs. Environmental, social, and governance requirements (ESG) are now being expected by some tenants from the properties they rent.
For some private equity firms, ESG ratings are becoming an important part of their strategy as they compete in asset acquisition and management. Some companies have even begun to assess the climate risk of their portfolios using climate-risk analytics consultants and climate-risk software companies. This risk is now being worked into their investment decisions, but industry-wide, the adoption of these metrics is set back by the lack of standardization.
Businesses, including private equity firms and REITs, can benefit from taking a holistic approach and creating a strong overall strategy for creating sustainable advantages and value while considering ESG standards. For example, some tenants have begun to view their buildings as extensions of their brand. This makes newer, energy-efficient buildings more attractive to potential tenants.
In addition, there have been changes made to the standard scope of work for Phase I Environmental Site assessments effective January 1, 2022. Most commercial real estate transactions require a Phase I Environmental Site Assessment, which identifies existing and potential environmental contamination liabilities at a property. It includes changes to historic research and title search requirements, as well as revised definitions, which can affect the cost of investing in a property.
Commercial real estate may increasingly become a customer-centric business. Many tenants now expect technologies like online platforms to improve their user experience. In addition, technology is already being used by some companies to better understand and manage their properties. The pandemic continues to drive technology adoption industry wide. It may benefit both the REITs and private equity firms using it, and the tenants renting the properties.
From a property management perspective, the technology allows for the automation of energy, HVAC, air ventilation, and air filtration systems. This reduces costs and supports healthy indoor environments, which more tenants are looking for in their living and working spaces. Property managers have been measuring the success of this technology by noting reduced costs to the tenants and investors of commercial properties.
In the 2021 edition of PwC’s report, Emerging Trends In Real Estate, experts predicted property technology, or ‘proptech’, would help the return to offices nationwide and become a competitive advantage in attracting and retaining tenants. For example, some companies have turned to virtual reality tools that allow prospective tenants to tour the space without having to visit the area in person. Other examples of proptech in use include allowing prospective tenants to access the entire leasing process online, making it easier to go from viewing the space to signing a lease contract.
Proptech has also seen the rise of tenant engagement tools for both commercial and residential properties. These programs include platforms that allow for tenants to make room bookings in their apartment complex and request for personal services. In companies, the technology has made it easier to adhere to current pandemic restrictions through programs that allow employers to visualize schedules and office layouts.
From an investment perspective, a new generation of data analytics seems promising, allowing companies to use AI to proactively identify opportunities rather than sift through deals individually. With the popularization of this AI technology, data analytics as a technology industry has room to grow and become better over the course of the year. The pandemic made it clear that quarterly or even monthly data was often not frequent enough to record how markets were changing. Using AI, investment firms may be able to better visualize market trends.
Despite numerous setbacks, including staffing shortages and closures during the early days of the pandemic, retail managed to survive the worst of the pandemic-induced downturn. Quick adaptations on the part of retailers kept them afloat, along with assistance from the federal government. Retailers reengineered the in-person shopping experience, ramping up curbside pickup and home delivery services, which helped buoy them throughout the pandemic.
Notably during 2020, consumers bought a lot of goods online, causing a sharp decline in brick-and-mortar stores. However, 2021 saw a bit of a return toward growth in physical retail spaces as restrictions loosened. Though the retail property sector continues to struggle, there’s still signs of recovery. Grocery stores and home improvement retailers have been thriving throughout the uncertainty of the pandemic-era market. In addition, many consumers still prefer shopping in-person, especially for items where size, fit, and appearance are important. Overall, sales both online and in-store have risen, though growth for brick-and-mortar properties is projected to be slow.
The future of office properties rests partially on the adoption of technology and the shift in how people are heading back to work. Employees are slowly returning to their offices, but many employers are embracing a more flexible, hybrid work-from-home (WFH) model. Investors may benefit from keeping an eye on how the hybrid WFH model impacts office properties further.
Like the retail industry, the office sector is still adapting to the changing conditions. Investors might consider looking at how employers are using the hybrid model of work and how it relates to the market. As companies grow more flexible in their working models, their needs regarding space and design may change. Buildings with flexible space options, touchless technology, and improved indoor air quality will likely be most favorable for new leases.
Desirable suburban areas are also expected to see an increase in demand for office space, while older office properties have seen a decrease. The flexible WFH model has led some employers and their employees to prefer offices closer to their own homes in suburban areas rather than the densely packed major metropolitan locations. With an increasing focus on overall employee wellness and the adoption of better technology, employers are using these as selling points to attract more workers.
Due to an increase in the aging population and the pandemic, there has been a higher demand for medical and healthcare facilities to accommodate people’s needs. Included in this trend are life sciences buildings, which vary from labs to medical office buildings. Unlike other offices, which have suffered due to the increased amount of people working from home, medical offices continue to do well, and are expected to continue to be in high demand for 2022.
The increased attention to the healthcare industry is also causing a shift within that sector of commercial real estate. Healthcare providers are increasingly trying to be closer to their patients, whether in off-site medical buildings or inhabiting former retail spaces. The shift away from traditional hospital campuses has furthered the demand for spaces catered to medical tenants.
Travel restrictions initially resulted in a decrease in overall hotel demand, as both leisure and business travel were largely put on hold. Further variants during the pandemic caused short-term dips in demand as well. Recovery in this sector has currently been driven by leisure travel, specifically from domestic travelers. Hotels in strong fly-to and drive-to leisure markets are recovering faster than other properties. Metropolitan, group, and business hotels are seeing slower growth as companies practice caution over travel restrictions.
Despite this, hotels that cater to business travelers will likely see a stronger recovery as 2022 progresses. Business travel and conventions are beginning to open up as international travel restrictions loosen. Increased adoption of technology and hotel campaigns to establish them as clean and safe places to visit will also allow hotels to see increased recovery in the latter half of the year.
Multi-family properties are seeing tenant demand and rental prices reaching record levels throughout most of the country. As the cost of single-family homes continues to rise, more people are looking at apartments. This, along with some limits to new construction due to supply chain problems, is keeping rent prices strong.
Urban areas will likely see some growth in this sector as higher vaccination rates, the growing popularity of public transit, and the reopening of college campuses have driven occupancy rates near pre-pandemic levels. The suburban areas will also continue to see increases in multi-family demand as people look to begin their families and need more space, but are cautious about buying a house in the current market. This is especially true in areas further inland, rather than on the coast.
Increased time spent at home has also translated into demand for larger, high-end units. Like other commercial real estate, new technologies for property management and tenant experience have made multi-family properties more popular in recent years and will continue to do so. This is because proptech has made it easier for tenants to perform such tasks as paying their lease and reserving spaces within an apartment complex, attracting individuals looking for hassle-free experiences. Newer buildings that focus on ESG standards will also likely see increased demand for tenants as health and wellness continues to be a focus during pandemic uncertainty. Upgraded HVAC units that regularly filter and circulate air and touch-free technology, among other improvements, have risen in popularity.
The pandemic affected many residential healthcare facilities, with safety measures limiting move-ins and facilitating a drop in occupancy rates. While occupancy rates began to rise again in the second half of 2021, growth continues to be slow, but shows promise. High vaccination rates among those 65 and older will drive recovery in senior housing and skilled nursing in 2022. Forbes predicts a full recovery will likely happen in 2023.
Historically, certain cities within the Sun Belt have been considered secondary markets for investors, though that has changed in recent years. During the pandemic, they have become some of the markets to watch as they showed potential due to people migrating out of metropolitan areas looking for work and less expensive real estate. Primary and secondary market cities include Nashville, Raleigh/Durham, Phoenix, Austin, Tampa/St. Petersburg, Charlotte, Dallas/Fort Worth, and Atlanta. Outside of the Sun Belt, Seattle and Boston continue to be popular markets.
These types of cities are considered gateway cities. Gateway cities are urban metro areas that act as the foundation and hub for the economic industry for the state, region, and sometimes country. They typically house the economy’s transportation, manufacturing, and industrial infrastructure.
Due to supply chain problems, companies are retooling their supply chains, due to manufacturers, retailers, and third-party logistics partners moving toward sites near population centers, highways, and airports. This explains the move of companies toward gateway cities.
The pandemic will continue to affect the different sectors of the real estate market, especially with any surges or sudden variants. Despite this, economic prospects for the commercial real estate industry are still mostly positive as everyone adapts to the new way of life. As the pandemic moves into an endemic phase the demand for commercial real estate is likely to increase.
Meanwhile, ESG standards and technology are expected to change the way in which private equity firms, REITs, and private investors choose their investments and manage their properties. Proptech is rising in popularity and will likely continue to see widespread use.
Retail and traditional office spaces continue to see slow growth, although as they adapt, their recovery may speed up. Adaptable strategies on the side of companies and employers are expected to lead improvement in these sectors.
Multi-family properties continue to be favorable investments among private equity firms, REITs, and private investors. The projected demand for space may lead to higher occupancy rates than those seen pre-pandemic and increased technology use will benefit property management.
Loosening travel restrictions also promise continued recovery in the hotel sector. While leisure travel has largely driven the economic recovery of these properties, business travel is likely to join in the effort and boost occupancy rates nationwide. Hotels are also focusing on building their reputation as safe and clean spaces to drive more guests to their properties.
With increased opportunities in the hotel sector, consider diversifying your portfolio by investing with Avistone. Our rapidly growing firm focuses on the acquisition and operation of multi-tenant flex/industrial properties, as well as the acquisition and asset management of hotel properties nationwide. We acquire properties located in dynamic markets with historically high occupancy rates, proven demand, strong economic indicators, and the potential for consistent in-place cash flow. Accredited investors have the opportunity to purchase equity shares with the potential for distributions from in-place cash flow and capital appreciation upon sale.
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