2021 Review and 2022 Outlook
The commercial real estate market will surprisingly close with a bang in 2021 given the historic strong demand for multifamily and industrial space and the resiliency of brick-and-mortars in serving consumer demand off-premises. The strong growth in these sectors made up for the weak and tenuous recovery in the office market. The year 2021 is also poised to be the strongest year in terms of investment acquisitions, surpassing the peak sales volume of 2006 and the pre-pandemic level.
In 2022, sustained household formation, strong consumer spending amid slower inflation and sustained wage growth, continuing re-entry to the office even if mostly on a hybrid schedule, and the expansion of construction and investments in secondary/tertiary markets will drive leasing, construction, and sales. Interest rates are on a course to increase with the Federal Reserve winding down its $120 billion monthly asset purchase and eyeing three federal funds rate hikes. However, interest rates will still be low compared to the pre-pandemic level and even if the T-note hits 2.5% by end of 2022, this will still be lower than the average rate of nearly 3% in 2018. Strong economic property market fundamentals will drive the growth in net operating income, especially in the multifamily and industrial market, and will continue to attract equity capital and sustain price appreciation.
With improving market fundamentals, investor acquisitions of multifamily, office, retail, and industrial properties of at least $2.5 million totaled $523 billion in the first ten months of the year. NAR expects the full-year level of acquisitions to hit nearly $645 billion, surpassing the prior peak level of acquisitions in 2006 of $581 billion.
The multifamily market had a historic year, with 1.07 million units absorbed since the pandemic. The vacancy rate hit a record-low of 4.5% as of December 18 while the median asking rent growth hit a record high of 11% year-over-year. Rental demand soared amid the recovery in household formation and with home prices rising at a double-digit pace. Rental demand has increased across primary and secondary markets, with renters returning to the major metro areas of New York, Washington DC, Boston, Chicago, San Francisco, and Los Angeles. However, metro areas in the Sunbelt markets had the largest increase in net demand, led by Dallas, Houston, Charleston, Wilmington, Savannah, and several Florida metro areas.
With sustained demand for online shopping, the industrial property market also had a record year, with nearly 700 million square feet of space absorbed since the pandemic and with rents soaring to a historic high of 8.4% as vacancy fell to an all-time low of 4.1%.
The retail brick-and-mortars managed to survive broadly unscathed, except malls. Since 2020 Q2, 47.9 million square feet of space was absorbed, compared to just 29 million square feet of retail space absorbed in the 12 months before the pandemic hit. Malls saw a decline in occupancy, but that was offset by the positive net absorption from neighborhood centers, strip centers, and free-standing/single-tenant stores.
Hotel occupancy and revenues also recovered with increased personal and business
travel. As of December, occupancy was at 57% compared to 42% one year ago.