Limon Net Lease Group

Research Brief

What is the CRE Investment Outlook for 2022?

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Investment climate in 2022 expected to be very active

Apartment investors, among others, report a large amount of capital looking for deployment

 

Lack of for-sale inventory driving strong competition for assets

As a result, property values are seeing aggressive upward pressure and cap rates at record low

Private investors who’ve seen tremendous performance over the last cycle, may consider rotating capital from lower-yielding asset classes into those with strong returns

2022 Investment Forecast Report series provides an excellent opportunity to engage investors on this very topic

Agents can use these tools to discuss diversification strategies, understand client investment objectives and position as a trusted real estate advisor

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Research Report | Retail Sales January 2022

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Retail Sales Have Tailwinds Heading into 2022 Despite Soft End to 2021

  • Consumers step back in December. Core retail sales dipped 2.5 percent last month as spending that usually occurs closer to the holidays was spread over a longer shopping season.
  • Shift in holiday plans impact retail sales. The rapid spread of COVID-19 last month altered travel schedules for a sizable portion of the population. Family visits and vacations were put on hold, which eroded spending.
  • Seasonal challenges account for soft spending performance. Fewer people are generally able to move during the holiday season, which contributed to a decrease in some sectors.

Outlook Raises Questions This Year

  • Key issues to watch in 2022. The largest threat to retail sales this year is inflation, which is nearly at a 40-year high.
  • Labor market also presents challenges. Although 2021 marked a historic year in job growth and saw the unemployment rate decline to 3.9 percent, several questions on the overall strength of the market remain.

*Through December; savings deposits and money market funds through November.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Federal Reserve; U.S. Census Bureau

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What is the 2022 Inflation Outlook and Impact for Real Estate Investors?

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Inflation rate (CPI) hit 7.1% in December, a 40-year high

Three primary factors are driving inflationary pressure, and will likely not be resolved in the short-term:

1. Supply Chain:

  • Disrupted supply chains is restraining the amount of goods and raw materials available to the market
  • At the same time, consumption is elevated with inflation-adjusted retail sales up 16% from pre-COVID
  • This is supply-demand mismatch is stoking prices and putting upward pressure on inflation

2. Labor Shortage:

  • Record 4.3M shortfall of job openings and people looking for work creating wage pressure
  • Rising wages is a “sticky” form of inflation and will likely stay with us even after the shortage is resolved

3. Housing Shortage:

  • Lack of affordable housing options is putting upward pressure on rents and home prices
  • Rapidly rising housing costs will keep inflation elevated over the short to mid term

Additionally, the Federal Reserve has signaled a more hawkish stance in an effort to relieve elevated inflation pressure. For CRE investors, this could mean rising interest rates over the short term, as the industry’s inflation-resistant reputation draws new capital.

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Employment Research Brief | January 2022

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Labor Market Tightens Further, Fostering Upward Pressure on Wages, Interest Rates

  • In rare feat, unemployment drops below 4 percent. Employers added 199,000 personnel to payrolls in December, below the 2021 monthly average of 537,000 jobs, while the unemployment rate fell 30 basis points to 3.9 percent.
  • Recent hiring indicative of strong industrial space needs. The transportation and warehousing sector grew by 19,000 personnel last month, raising the total headcount to 218,000 above the February 2020 level.
  • Office tenants continue to hire staff; in-person return delayed. Ongoing job growth in professional and business services has lifted the traditionally office-using sector close to its pre-pandemic headcount.

Additional Trends:

  • Labor participation subdued despite low unemployment. While the unemployment rate has contracted to just 40 basis points above the pre-pandemic rate, labor participation has not fully recovered.
  • Falling unemployment bolsters Fed’s policy change. Job openings in excess of job seekers and a sub-4 percent unemployment rate imply the economy is essentially at full employment for the current pandemic situation.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

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Housing Research Brief | Year-End 2021

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Multifamily Developers to Plug Some Holes in the Housing Shortage in 2022

  • Swell in homebuying inflames shortfall. In late 2021, the single-family housing landscape mirrored the conditions witnessed earlier in the year. For-sale inventory of both existing homes and finalized new homes trailed historical averages.
  • More rentals are needed to ease the imbalance. Builders of single-family homes are trying to ramp up the construction pace to meet strong demand but face barriers amid inflated material costs and labor shortages.
  • Multifamily pipeline aligns with pockets of robust demand. Nationally, the U.S. is expected to add roughly 400,000 new rentals in 2022, a monumental number that is a record spanning back multiple decades.

Developing Trends

  • New-home sale stock climbs for eighth straight month. The number of newly built homes available for purchase surpassed 400,000 in November, rising in every month going back to April. Nevertheless, only 39,000 of those dwellings were fully completed when listed for sale while more than 25 percent had not yet started construction.
  • Mortgage rates momentarily hold firm. After the 30-year mortgage rate jumped 20 basis points in October, it was unchanged at 3.1 percent in November. Mortgage rates will likely face upward pressure in the months ahead, however, as record inflation is poised to edge up the 10-year treasury yield.

Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; RealPage, Inc.; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Wells Fargo

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Retail Sales Research Report | December 2021

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Pace of Spending Eases; Retail Real Estate in Good Shape Moving into 2022

  • Retail sales continue to float well-above pre-pandemic levels. Consumers acted on holiday shopping plans earlier than normal, resulting in a more moderate improvement in retail spending last month than is typical for this time of year.
  • Traditional retailers benefit from the return of shoppers. Over the past year, spending at store-based retailers has climbed 13.5 percent as foot traffic climbed across nearly all major sectors.
  • Broader reopening highlighted in annual spending gains. As Americans leave their homes more often, some sectors have strong annual gains. Over the past year, retail sales at gasoline stations soared 52.3 percent, though some relief is materializing as the average price of a gallon of gas slipped by $0.07 to $3.31 from the beginning of November to mid-December.

Rising Prices Present Challenge

  • Inflationary pressure creates headwinds. The consumer price index increased 6.9 percent year-over-year in November, the largest change in nearly 40 years, eroding spending power for consumers.
  • Fed forced to act to contain rising prices. Among the Fed’s two mandates, maximum employment and price stability, the pace of inflation is a significant concern. As a result, the central bank will taper asset purchases faster than originally planned and start
    lifting interest rates.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Placer.ai; U.S. Census Bureau; U.S. Energy Information Administration

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