About this episode:
Will commercial real estate’s momentum continue in the new year? Investment Research Directors Kara O’Halloran and Andrew Korz talk CRE in 2022 and tackle the topics of inflation, interest rates, and offices in a post-COVID world.
Kara O’Halloran (00:06):
Welcome back to FireSide, a podcast from FS Investments. My name’s Kara O’Halloran. I’m a Director on our Investment Research team here, and we are continuing on with our 2022 year-ahead content. On today’s episode, I’m excited to talk all things commercial real estate. Joining me is Andrew Korz, another Director on the team, who is here to talk about his top five big ideas for 2022. Andrew, welcome.
Andrew Korz (00:32):
Thanks for having me, Kara.
Kara O’Halloran (00:34):
So, Andrew, in 30 seconds or less, catch me up on what happened to commercial real estate in 2021.
Andrew Korz (00:39):
Sure. So, I think just like the broader economy, the commercial real estate market rebounded spectacularly in 2021, after, obviously, a significant downturn during the COVID pandemic in 2020. We saw record transaction volumes in 2021 for a full year. We saw a two-decade high in property price growth, specifically apartment and industrial sectors were the key drivers of both of those areas of growth. So, I think as we head into 2022, it’s a really interesting starting point. And I think there’s some really interesting things for us to go through today.
Kara O’Halloran (01:20):
Awesome. Let’s get into it then. I want to start at the macro level. Inflation was clearly a very hot topic this year. We’re recording this before the latest CPI is released, but we are expecting another strong sprint and this inflation topic naturally brings up the Fed. As of right now, markets are pricing in two to three rate hikes next year. I know this is something you are closely watching when it comes to commercial real estate, so talk to me about what you expect in 2022 when it comes to inflation and the Fed.
Andrew Korz (01:50):
Sure. So, I think inflation just like it has been in the second half of 2021 is going to be the top macro topic, especially to start the year. And because of that, the discussion is underway around how do investors protect their portfolios against the potential for persistent, durable inflation. And traditionally, we’ve certainly seen real estate thought of as an inflation hedge for a portfolio. Now, investors haven’t necessarily needed that type of hedge in a long time, but there’s two reasons that we see real estate as a theoretical hedge. First, landlords are generally able to raise rents as inflation rises. When operating costs rise, when costs of financing rise, landlords are able to increase rents, which can offset those cost increases.