Strong fundamentals in property segments of the multifamily, office, industrial, and retail markets are likely to keep the commercial market recovery going although at a moderate pace amid rising interest rates and elevated inflation of over 2% during the next two years. The hotel market is expected to slow amid rising air fare, transportation costs, and belt-tightening by consumers as inflation outpaces wage gains.
In the apartment market, rising mortgage rates will tend to increase the demand for rental units. Given the pace of home price appreciation (+23% from March 2021 through May 2022 based on NAR median existing-home sales price) and the rise in 30-year fixed mortgage rates (+2.1 percentage points), the monthly mortgage payment has increased by about $750 dollars, pricing out about 4 million 25-44 year old renter households. As of April, multifamily rents are up 9.4% year-over-year, ahead of the inflation rate of 8.5%, making multifamily rental acquisitions a good investment hedge against inflation. Moreover, 27% of metro areas are experiencing double-digit rent growth, mostly in the South region, specifically, Florida (see p.8). Rents are rising faster in Class B/C buildings than in Class A buildings, an indication of the desire for more affordable units.
Another good hedge against inflation is the industrial property market. with rents up 11% year-over-year, with 37% of 390 markets posting double-digit rent growth. Again, the fastest rent growth is in the South region, the only region to experience net domestic migration from 2019 through 2020, according to US Census Bureau data. To be clear, this sector is also facing headwinds: demand is expected to ease somewhat as consumer spending slows because inflation is rising higher than wage growth. However, the rising cost of oil could increase the demand for fulfillment centers as businesses seek to cut back on rising transportation costs should oil prices remain elevated. The demand for warehousing is also likely to increase as logistics operators and businesses engage in ‘just- in-case’ inventory management from “just-in-time” management to minimize raw material supply disruptions (see p.10).
In the office market, asking rents continue to increase although rents are still below the inflation rate, which reduces its attractiveness as an inflation hedge. Still, asking rents continue to recover, with an average growth of 1.3% year-over-year as of April. Only the Washington, DC metro area is suffering from a 0.2% year-over-year rent decline. Given the ongoing construction of about 150 MSF, vacancy rate will likely remain above 10%, but rents will continue to increase modestly (see p.9).
Retail stores such as strip centers, neighborhood centers, and power centers are likely to be less impacted than malls which the ongoing recovery in malls could likely slow, as evidenced by the faster rent growth of these stores types (over 4%) compared to malls (below 4%). However, with little construction underway, rent growth is not likely to decline, rising at the mid-3%. With rents rising at below the inflation rate, retail properties are not as good as an inflation hedge as against multifamily and industrial properties (see p.11). The hotel industry faces renewed headwinds in 2022, with rising airfares and gas prices that could slow personal travel and therefore demand for lodging. A slowing economy could also lead businesses to cut back on business meetings and conferences.