Commercial real estate outlook

Q1 2022 Commercial real estate outlook

As we head into 2022, the market in general appears quite strong, but there will likely continue to be significant dispersion, offering investors the opportunity to outperform.

Download the complete outlook
January 19, 2022 | 22 minute read

In 2021, the commerical real estate (CRE) market experienced a rebound that surpassed even the most optimistic forecasts. National property values soared the most in more than two decades as secular growth sectors (apartment and industrial) combined with cyclical rebounds (retail and suburban office) to create a powerful price growth cocktail. Investors, enticed by rapidly improving fundamentals and relatively attractive yields, flocked to the space, driving sale volumes to an annual record. The 2021 experience was one of a supercharged early-cycle environment, supported by a strong recovery in rents, excess liquidity, and low interest rates.

As we look ahead to 2022, many of the same supports remain, but the starting point has changed. Property valuations experienced a sharp uptrend, leaving them potentially more vulnerable to rising rates. Both monetary and fiscal policy are set to tighten over the coming months, while inflation remains a crucial macro concern. In short, 2022 will welcome a new market expansion phase, typified by strong fundamentals and a more even balance of upside and risks. Opportunities for investors should remain across both debt and equity as dispersion across regions and sectors persists.

Key takeaways

  • 2021 was a record year for the U.S. CRE market, with price growth and transactions volumes setting new highs.
  • COVID beneficiaries such as apartments and industrials continue to grow rapidly, while signs of a rebound in the more cyclical sectors have become apparent.
  • 2022 will likely feature a more even balance of upside and risks.

As we head into 2022, the setting for the U.S. CRE market appears upbeat. The U.S. economy likely grew at a 5.6% pace during 2021, which would mark the most rapid growth since 1984.1 A strong economy generally benefits real estate, and this time was no different: Annual CRE sales volume crossed $600 billion for the first time ever through November, and 18.4% property price growth underscores the soaring demand for investment in the space.2 The pandemic has also driven changes in consumer and business behavior, such as e-commerce and remote work, that have disproportionately benefited some of the largest sectors in the real estate market. Despite robust fundamentals and sentiment, the CRE market remains disciplined from a financial standpoint, with leverage low and cash plentiful for borrowers to pay debt service. Finally, while the latest omicron-driven wave of COVID cases presents risks, vaccination has placed the world in a much more advantageous position compared to one year ago.

While the starting point for the market looks benign, macro risks are likely to become more prominent in 2022. The primary and most dangerous of these risks is inflation, both for its direct impacts on the economy and the reaction it elicits from monetary authorities. Headline CPI is running near 7%, a four-decade high, while core CPI of 4.8% is the highest since the early 1990s.3 Companies have largely been able to pass through rising costs and retain their margins, but inflation has delivered a blow to consumer confidence. While CRE has historically been a reliable hedge against inflation (see our CRE 5 for ’22), elevated inflation that persists throughout 2022 introduces the risk of an economic deceleration. Additionally, it could force the Federal Reserve to act more aggressively, pushing interest rates upward and challenging cap rates. On top of inflation, the global economy continues to deal with new variants of the virus, supply chain shortages, and a slowdown in China, all of which are driving uncertainty.

With this backdrop in mind, we will use this space to provide a broad overview of the CRE market heading into 2022. In particular, we will focus on a broad theme that has, in many ways, been the defining characteristic of the COVID-era CRE market.

  • U.S. BEA, as of September 30, 2021

  • Real Capital Analytics, as of November 30, 2021

  • U.S. BLS, as of November 30, 2021

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Andrew Korz

Director, Investment Research

Christopher Bole

Financial Writer, Fund Communications

Robert Hoffman, CFA

Managing Director, Investment Research

Search our site