What Lies Ahead for Commercial Real Estate in 2022?

Commercial Real Etsate trends 2022

Commercial real estate was significantly impacted at the beginning of the COVID-19 pandemic. The impacts included physical distancing measures, lockdowns of a broad spectrum of businesses, non-payment of rent, employee layoffs and remote work.

Business closings and stay-at-home orders created a feeling of isolation during these disruptions and a significant degree of pent-up energy grew that made people eager to go out, dine at restaurants, attend concerts and more upon reopening.

The sheer magnitude of the pent-up demand revealed that businesses lacked the supply to meet increased customer demand. There were major disruptions to supply chains during shutdowns and the disruptions continue as re-openings occur to varying degrees. The supply chain disruptions impact the function of all industry sectors in one way or another.

Additional challenges are present with the effects of new virus strains such as Delta and Omicron, which are casting doubt on the areas of growth potential in 2022. Reconsideration of travel plans may impact the hospitality sector. Businesses may delay their scheduled back-to-office plans. A reduction of in-person meetings and continued construction material price increases, limited supplies and long lead times for delivery could impact multiple sectors of commercial real estate.

Nearly every segment of the commercial real estate industry has shown recovery from the initial shock of the pandemic-induced shutdowns, but some segments improved significantly more than others. So, what is to be expected in the 2022 commercial real estate market?

The good news, despite the challenges, is that the commercial real estate outlook for 2022 still seems bright. The National Association of Realtors’ Commercial Real Estate Outlook 2022 report suggests that there is a steady demand for industrial and retail space. Coldwell Banker Richard Ellis Group Inc. confirms that specific niche real estate sectors have grown during the pandemic. These include cold storage facilities, data centers, and life sciences. Cautious optimism indicates that commercial real estate will continue to grow, but recovery will be uneven at first.

Industrial Sector

Logistics real estate has been in high demand for years. A surge in e-commerce created a need for more inventory storage and management facilities. Niches such as cold storage and data centers have also grown.

Retailers of all sizes are driving the growth of distribution facilities. Manufacturers will also be requiring more space as they look to start keeping more parts in stock on-site or nearby, going from a “Just In Time” to a “Just In Case” inventory model.

Multifamily Sector

Many Americans decided to relocate to the suburbs during the pandemic. This movement resulted in a drop in rents and valuations within the multifamily sector. This situation primarily affected urban areas. Yet, some markets have experienced growth and increased rent during the pandemic. Housing is a primary need even during an economic crisis.

Multifamily apartment complexes have the lowest bar to entry and are expected to grow. Home ownership challenges continue because of rising mortgage rates and home prices, as well as the trend of many “build-to-rent” projects in 2021 that will continue in 2022. These projects include housing units within a community that are under professional management.

Hospitality Sector

Non-essential travel during the pandemic caused a dramatic drop in revenues in the hospitality sector. Suburban hotels are likely to recover faster than urban ones. Interstate and suburban hotels have seen modest occupancy levels throughout the pandemic, while the urban ones saw a drastic decline. This pattern suggests that hotels will recover sooner in some areas and later in others.

Office Sector

Some employees started returning to the office with the vaccine rollout, while others continued to work remotely. The future of the coronavirus pandemic and potential for lockdowns is still in a “stay tuned” status. Predictions indicate that employers will implement a mixed working model. Employees that return to the office will likely require more personal space. The densely-populated open-office plan will become obsolete.

The demand for more personal space at work may cause business owners to consider office relocation to larger and cheaper premises in suburban areas.  Remote work will likely decrease the need for office space, but it still can be expected to grow over time.

Retail Sector

The pandemic was exceptionally damaging to brick-and-mortar retail with the shift to online shopping that was well underway before the pandemic. Thousands of retail stores closed. The trend has slowed down, but there are still estimates that indicate about 80,000 or 9% of total stores in the country will close by 2026.

Grocery stores and drug stores are stable tenants and anchors and along with individual entrepreneurs will be the right choice to fill strip mall and downtown space that was previously unaffordable to them.

Alternative Niche Sectors – Senior Housing, Student Housing, Self-Storage and Life Sciences

Demand for senior housing is up thanks to effectiveness of vaccines and the demographics of a large segment of the population.

Multifamily housing of any type, including student housing, was often said to be recession-resistant. Remote learning took its toll on student housing in 2020, but the demand for new leases surged in summer 2021, and occupancy rates and rents have increased as students headed back to school in the fall.

The shift to remote work and subsequent household moves, precipitated by the pandemic, created increased demand for self-storage facilities.

A focus on vaccine development, greater demand for consumer healthcare services and new technology have driven demand for the life sciences sector over the past 18 months. The uncertainty surrounding the role of the traditional office has also shifted attention to life sciences, labs and medical office buildings.

Healthcare providers are trying to be closer to consumers. The new model moves away from old-school hospital campuses into a transformational trend to off-site medical buildings or to retail spaces.

The Bottom Line

The commercial real estate outlook for 2022 is promising. Commercial real estate faces challenges but continues to recover. The recovery is uneven depending on property types and geographic markets. The strongest sectors in 2022 are set to be self-storage, multifamily complexes, industrial, and data centers due to strong e-commerce and housing demand brought on by remote work.

Four very important words to remember for commercial real estate heading into 2022 are: Agility, Convenience, Resiliency and Strategic.

-Glenn Ebersole, Director of Business Development

 

*Photo by Sean Pollock on Unsplash