Welcome to 2022: Boom Times Ahead

It’s part of the human spirit to say goodbye to the year just past with a sense of relief, and look to the year ahead with optimism. But moving into 2022, we have good reason to do just that.

 

It’s always foolhardy to make projections, big or small, about a field as complex and critical as CRE in general, and multifamily in particular. This discipline involves home, business, money and the economy, each with the potential to be affected by external factors. But let’s do it anyway.

 

And let’s start big: The boom times around multifamily investments in 2021 will continue in 2022.

 

In some ways, it’ll be a continuation of what we saw in the past two years: growth in rents, growth in total transactions, and growth in overall transaction volumes (even through the depths of the pandemic). In fact, last year was the first time transaction volume eclipsed $200 billion. The torrid pace might slow down a bit, but there will still be considerable forward motion.

 

This isn’t just coming from the folks at Offerd. The most recent report from CBRE expects the overall economic rebound to keep getting stronger and shows GDP rising by 4.6%. The report also expects the Federal Reserve to start raising interest rates, which will drive investment in commercial real estate even higher. Bottom line: CBRE says investment in multifamily properties will rise from $213 billion in 2021 to $234 billion in 2022, a 10% spike.

 

Then there’s “Viewpoint 2022,” the latest look ahead from Integra Realty Resources, which offers an even rosier outlook. This one builds on data showing that transaction volume in the apartment sector surpassed all prior annual records (based on year-to-date October 2021 numbers tracked by Real Capital Analytics), and that multifamily investment year-over-year was up a staggering 96%.

 

But this isn’t what’s come to be known as irrational exuberance. The report notes that “multifamily capital flows were, by and large, rational and disciplined, even in such an overheated market environment.”

 

Consider the top markets categorized as ‘bulls,’ which showed the biggest gains in transaction volume: Tallahassee, Fort Myers and Miami/South Florida. Meanwhile, at the tail end of the ‘bears’ side, we have Seattle, Greensboro and SF metro. Moving into 2022, those and other names in the bears’ list might be perfectly positioned to see a surge in investments.

 

Taking a macro view, remember that even while infection rates register record highs, the worst of the pandemic might be behind us. As those pressures fade, the woes of the supply chain are (separately) being addressed, and this should have a positive effect on new construction. This will be particularly evident in the markets experiencing the greatest incoming migration over the past five years.

 

Digging deeper into that aspect, there’s been so much buzz about migration overall and urban flight in particular. Offices shut down, professional distancing took hold, bosses realized (finally!) that working from home was entirely viable, and pundits went wild. After all, if you don’t have to live in an expensive metro for job reasons, then why would you?  

 

Of course, it was never that simple—there are many reasons to live in New York, or San Francisco, or Chicago, and those didn’t go away with the pandemic. Some of these markets were hit hard in the short term, but that’s why they’ll see the biggest bounce in the months ahead. We predict some of the strongest growth in population, rents and valuations in the densest urban areas, particularly in the Sun Belt and on the coasts.

 

Interest rates have stayed low for a while now. Most pundits expect them to rise, but we don’t believe it will be big, at least relative to historical rates. Also, even with a slightly higher interest rate environment, cap rates will stay essentially where they are. Meanwhile, the persistent increase in demand—new research shows vacancies across multiple multifamily classes are at all-time lows, meaning that rents and valuations will stay high—will also help keep cap rates low. As for the much-talked-about 1031 regulation, it appears to be safe for now. Those hot-button regulations typically don’t change in an election year.

 

We’ll keep saying this: If you want to see multifamily activity, keep an eye on the Sun Belt and the Smile Belt, with a particular focus on the coastal markets and busy urban areas. The fundamentals will stay the same: Regions with technology hubs, STEM-related jobs and an overall educated population will outpace all other markets. Just off the top of the head, Austin, Nashville, Charlotte, Raleigh and Denver tick all the necessary boxes.

 

Finally, as multifamily investment booms, will we see new players getting into the market? We will indeed, and they’ll keep coming from every corner. Consider firms new to CRE investment, such as family offices or private equity groups, along with investors steeped in other CRE sectors like office and retail, now being attracted to the multifamily sector. Foreign capital is moving this way too (we often highlight some of these), as is small scale ‘retail’ investment (from both general and limited partners). All of this will drive record sales volumes. . .again.

 

In fact, going past what CBRE and others predict, we predict transaction volume in 2022 will surpass $250 billion. That would make for a very happy new year.

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