Despite the ongoing pandemic, the US is seeing a surge of some of the biggest commercial real estate trends in 2022 that are remarkably paradigm-shifting.
The current circumstances of inflation, demand and supply, affordability, interest rates, capital flows, and continued volatility in the stock market-all present unique challenges and opportunities for the CRE industry. However, CRE industry experts believe that the sector will navigate the changing dynamics with a positive outlook overall and eventually gain momentum this year.
In this blog, Lilypads examines some of the biggest commercial real estate trends in 2022.
1. Multifamily fundamentals remain steady
Multifamily properties have recovered a lot since the beginning of the pandemic. In the first two quarters of 2020, the urban regions witnessed a huge spike in vacancy rates. Fast forward to today, the net rent and occupancy rates have surpassed pre-pandemic levels.
As people are returning to work, the demand for apartment complexes is skyrocketing. The vacancy rate of multifamily properties in 2021 was 4.7%, which is the same as the pre-pandemic levels.
COVID-19 has left a huge impact on the real estate industry, the economy, as well as on our lifestyle. In light of recent events, people are preferring housing options that provide more open spaces, workspace areas, and wellness areas.
CBRE anticipates that in 2022 multifamily properties will see a 10% increase in investment volume from the previous year.
2. Offices Return, Hybrid Work Is The New Normal
COVID-19 has resulted in the disruption of the office industry with nationwide lockdown and social distancing protocols. Work from home (WFH) gained huge popularity and appreciation among employees.
Office spaces are one of the asset classes that have seen vacancies for the longest period. Today, most employees feel reluctant to return to their office and prefer working from home. As a result, companies are adopting hybrid work models that allow employees to maintain a balance of work and social life. A study shows that 87% of companies are willing to adopt a hybrid work model.
Moreover, office spaces need to adopt the latest trends for growing office demands and properly implement the hybrid work model. Offices must have proper collaboration tools and activity-based workspace to enforce remote working as well increase productivity. In addition to that, employees prefer more open workspaces along with relaxation and wellness areas.
3. The World Is Digitalizing And So Is The CRE Industry
Before COVID, the commercial real estate market was lagging behind capital markets and equity markets in terms of the adoption of technology. The last two years have made clear the importance of implementing technology and the growth of the Proptech revolution.
By implementing technology, real estate agents can save a lot of time and effort from paperwork by automating the whole process. Real estate investors can accurately predict the valuation of a property by analyzing data from historical trends. From data analysis to providing Customer Relationship Management software for real estate brokerage firms, technology has transformed the CRE industry.
In addition to that, the CRE market has skyrocketed with the use of various Proptech tools such as-
- Artificial Intelligence
- Virtual reality and Augmented Reality
- Cloud Storage
- Internet of Things (IoT)
- Data Science and analysis tools
You can read Lilypads’ article on various Proptech tools and how technology is re-shaping the CRE industry here.
4. Effect Of Rising Interest Rates And Inflation On CRE
Research shows that the US has completely recovered from the pandemic recession in terms of GDP. Because of strong economic growth, labor shortages, and hampered supply chains, US inflation reached a record high in 2021.
According to CBRE, interest rates are highly unlikely to rise out of proportion this year. CBRE anticipates by the mid of 2022 the interest rates will be the same as now. By the end of 2022, the Federal Reserve is expected to begin limited increases in short-term interest rates. However, commercial real estate financing is expected to continue smooth sailing due to low long-term interest rates.
5. Affordable housing- Secondary Markets are The New Attraction
With the pandemic and nationwide lockdown, a great extent of people migrated to the suburbs and the sunbelt region. Most employees are utilizing the benefits of work from home trend and have flocked to the smaller market.
Where housing prices and rental rates had little to no growth in metropolitan cities, Secondary markets like Phoenix, Atlanta, and Charlotte saw a huge spike in rents and occupancy rates. The primary reason people choose to relocate to secondary markets is the price of housing in first-tier markets. Moreover, the cost of living in such places is much lower.
Also, the property tax rates of certain states are significantly lower. As a result, this created a spur of commercial real estate investment in secondary markets.
With the lack of inventory in affordable housing space, housing prices are expected to rise vastly. Shortage in the construction of new houses will eventually drive up house prices. As a result, people turn to rentals units driving up the demand for multifamily apartments.
6. Survival Of Retail Stores In The World Of Ecommerce
Even before the pandemic e-commerce was growing rapidly, and in lockdown, it just blew out of proportion. The retail industry except few emergency services was hit hard by the lockdown and social distancing.
Even after lifting the lockdown, a decrease in foot traffic and sales resulted in lots of stores closing down. Big retailers like JC Penney, Lord & Taylor even filed for bankruptcies.
While several indications may portray the decline of the retail asset class, however, retail isn’t dead. At the end of the third quarter of 2021, e-commerce only accounted for 13% of total retail sales. Shopping malls witnessed the highest foot traffic in the mid of 2021 and reported double-digit sales.
With an omnichannel sales approach, retailers aim to drive up sales by engaging customers in-store and online. In addition to that, some retailers are turning their physical stores into dark stores, distribution centers, and others. Thereby, staying relevant in the game than packing up shop.
Read more on Lilypads’ blog on Retail predictions for 2022 here.
7. Data Center And Warehouses- Two Rapid Growing Industrial Real Estate Asset Classes
As you know there has been a high demand for logistics real estate. The growth in e-commerce has increased the demand for storage spaces and management facilities. The demand for warehouses is likely to increase in the future and their long-term rentals make it a good investment opportunity.
As most businesses are digitizing, the demand for cloud storage and services is increasing. Moreover, with advanced technological innovations like 5G, AI, and bitcoin mining, the increasing demand for data centers is no surprise.
Commercial Real Estate Trends That Will Turn Opportunities Into Better Investment
Although it’s been 2 years since the pandemic started, the commercial real estate market had to face many challenges during this period. As the CRE industry has slowly started to recover, the future of the industry looks quite promising for investors. Although the future holds improvement for CRE, investors must consider both the risks and benefits of commercial real estate trends before investing.