Real estate professionals across the country aren’t only dealing with historically high inflation, rising interest rates and the increasing permanence of remote work. They are also grappling with trying to plan for how the remainder of 2022 will unfold.
That economic landscape has led to what Brad Case, chief economist at Middleburg Communities, a Virginia-based multifamily property management company, called “an uncertainty imbalance,” in which broader economic factors seem to be heading south while demand for multifamily looks to continue its historic rise.
Much the same is seen in the retail real estate market. That’s where investors have been pouring money into centers anchored by “necessity” retailers such as grocery stores and pharmacies, businesses Stephen Lebovitz, CEO of Chattanooga, Tennessee-based real estate investment trust CBL Properties, said can persevere. He said low unemployment, growth in wages and high savings leave his firm “cautiously optimistic” about keeping customers coming into stores.
Tenant demand in the industrial sector is expected to keep outpacing supply, according to Conner Thomas, vice president of investments for the Northern California region at Bridge Industrial, who said “market fundamentals are strong, and we project them to remain so.”
The biggest question mark looms over the country’s office market. Remote and hybrid work models have become prominent in tenant decisions about where, how and whether to use physical space. It’s a trend that’s only expected to gain momentum in the months ahead as employers adapt to the nation’s tight labor market and demands from workers for more flexibility.
“Every major company that we represent that uses office space for their executive, administrative and sales functions are all looking at workplace redesign,” Bob Shibuya, CEO of Dallas-based real estate brokerage Mohr Partners, told CoStar News. “They’re anticipating that the hybrid workplace is not a temporary but a long-term trend. We are working on a couple of headquarters transactions where the space in the new headquarters might be reduced by as much as 50%.”
Real estate professionals say the one certainty for the rest of the year across the nation’s office, multifamily, industrial, biotech and retail sectors is that it feels as if anything and everything is still up in the air. Here’s what some across the industry are expecting for the balance of the year.
Brad Case, chief economist and director of research for Middleburg Communities, a Virginia-based multifamily property management company:
“We’re seeing an uncertainty imbalance. There’s substantial uncertainty about things like inflation, commodity prices and corporate earnings, which is causing investors to hunker down. At the same time, we see very little uncertainty about fundamentals in multifamily housing. We are very confident about continued growth in demand for rental homes, heightened constraints on supply, continued resident retention and continued rent growth.”
Eddy O’Brien, co-founder and managing partner at Blaze Capital Partners, a Charleston, South Carolina-based rental housing investment and development firm:
“We expect rental housing demand to continue to overwhelm supply through the balance of the year, resulting in strong multifamily performance that should continue to witness elevated occupancies and healthy lease-over-lease gains, even if that means a bit of softening from current historically outsized levels. We tend to think about investing on a longer-term time horizon with a focus on delivering housing solutions, hence our increasing activity in ground-up development and more recently, multifamily conversions aimed at delivering attractive, cost-conscious housing options. Hopefully this longer-term focus mitigates some of that big-picture risk.”
Paul Mullaney, managing director of CarVal Investors, a Minneapolis-based alternative investment manager:
“We expect fewer acquisitions and more refinancing loan requests. The yield curve and spreads for financing had been compressing during the pandemic recovery. Now, both spreads and the underlying yield curve are higher and expected to be high through the remainder of 2022. The speed in which those changes happened caught a number of property owners by surprise. The impact has reduced the availability of cheap debt and put downward pressure on asset values so that property owners may now feel that a sale today is no longer maximizing value. In this unsure environment, owners are being more proactive and taking steps towards refinancing well before the loan matures so they are not faced with an even more difficult debt market in the future.”
Evan Stone, managing partner of Dallas-based Goodwin Advisors, a capital markets firm focused on office and hotel investment sales:
“We are starting to see people nationally put new construction on hold and we’ve seen some sales where people have backed out. We may start to see some stress on buildings where people might have to refinance at much higher interest rates, but I think we’ll see the better buildings continue to lease at higher rents.”
Kevin Shannon, Los Angeles-based co-head of brokerage Newmark’s U.S. Capital Markets division:
“This summer will be characterized by continued capital market ‘choppiness’ with many market participants watching from the sidelines for new data points. The headline news hasn’t helped with underwriting optimism with the increased chatter of a possible recession. I do think we will see some settling of market conditions after Labor Day with less volatility relative to rates, spreads and the equity market, which should happen if it’s clear inflation growth has peaked. My biggest concern is that inflation doesn’t peak in the third quarter, and the Fed further increases its anticipated rate increase pace to aggressively combat inflation.”
Stephen Lebovitz, CEO of Chattanooga, Tennessee-based real estate investment trust CBL Properties:
“We are cautiously optimistic about the remainder of the year with low unemployment, real wage growth and record-high savings rates bolstering in-person shopping. Inflation and the threat of a recession are certainly concerning, but with healthy traffic and sales and strong demand from tenants to open stores in our properties, our portfolio continues to strengthen. Additionally, most retailers are in a much healthier financial position and have the flexibility to weather a downturn in the broader economy. The pandemic certainly had a lasting impact on the retail industry, much of which ended up being a positive. We were cautious going into 2022 given the record inflation levels and anticipated a slowdown as consumer spending normalized, but consumers continue to demonstrate their preference for in-person experiences.”
Doug Healey, senior executive vice president of leasing for Santa Monica, California-based national mall landlord Macerich:
“We haven’t seen any of the bigger economic issues slowing down retailers’ leasing decisions, which has a lot to do with our portfolio. We’ve been through these cycles before, but the retailers we deal with are public companies that are strategic and opportunistic. They’re signing five, seven, even 10-year leases and see this moment as an opportunity to take advantage of available space. There is an absolute flight to quality right now. We can get past the economic hiccup that’s going on in the current environment, and while that doesn’t happen 100% of the time, we haven’t seen retailers slow down because of what’s going on in the macro economy right now. I don’t see that letting up.”
Matthew Harding, CEO of North Plainfield, New Jersey-based Levin Management Corp., a retail property management company:
“Retail and retail real estate have seen strong recovery through 2021 and this year to date. This is reflected in stepped-up leasing and new store openings, particularly within open-air shopping centers. Tenant interest and transactions for brick-and-mortar retail space continue at the brisk pace set through the first half of the year. Of course, we are all watching the economy, and though we haven’t seen changing conditions impact activity — yet — we may experience a slight slowdown in the coming months.”
Conner Thomas, vice president of investments for the Northern California region at developer and investor Bridge Industrial:
“Tenant demand continues to outpace available supply, and there are limited new developments under construction or in the pipeline in the market. Additional Fed interest rate increases would continue to disrupt the capital markets, specifically as it relates to the availability of new construction financing. To maximize the changing investment climate, Bridge has refined its underwriting to account for the interest rates climbing along with capitalization rates. Land values will be the most impacted and show decline from prior peaks, but Bridge believes buying opportunities are still there. The market fundamentals are strong, and we project them to remain so.”
Fred Knapp, Houston-based managing director of Transwestern Ventures:
“Obviously there’s a lot of uncertainty. There will be some consolidation in the market just because the funding won’t be there and the valuations won’t be as high as they’ve been. Thereafter, we’ll return to growth. So much of the valuations are based on rising interest rates and fears of inflation or a recession, so you’ll see a pullback and some knee-jerk reactions over the next six months. But there will be a lot of companies that need space for commercial production. After that, we’ll start to see valuations rise again and more capital come to the space to push tremendous growth in the sector. That growth has already been set in motion.”
Bill Cawley, chairman and CEO of Dallas-based real estate services company Cawley Partners:
“Development is going to slow down. In an inflationary market, development will cost more tomorrow than it does today, and at the same time, prices are dropping and cap rates are going up. I think office is going to struggle a bit. Not everyone wants to come back to work. If we go into a recession, I think that might change where employers can require people to come back to the office. A lot of companies today are acquiescing to their employees. We are lucky to be in Dallas, where there’s a lot of incoming relocations. Our leasing activity in our multi-tenant office buildings is very brisk with people making decisions. New product is where everyone is headed. The best quality office assets will do well. The marginal ones will get smoked. I would not want to be in commodity office right now.”
Tanya Ragan, president of Dallas-based real estate investment, development and management company Wildcat Management:
“With the momentum and where we are today, we are in the best place we’ve been in the last two to three years. In the last few months, it’s the first point in time when things are clicking again. It’s a combination of activity, whether it’s leasing conversations or the ongoing migration from some of these other areas in the country, to hiring and new jobs. We’ve done more tours in the last 90 days than we’ve done since the beginning of the pandemic. Things are also getting back to a lot more structure. People are going to networking events, and guys are even showing back up in suits. I’m extremely positive, but we’ll know more in the next few months. It’s felt like we’ve been sitting on pause for a year or two.”
Michael Cohen, Colliers International president in the New York Tri-State region:
“2022 has been a very busy year, and I don’t see any reason that it would grind to a halt in the rest of the year. There may be an oversupply of office space, but that doesn’t mean there’s not a lot of movement. For a broker, whether the market is tight or soft, we’re busy and happy as long as there’s activity. That’s how I’d sum it up right now: busy and happy. Office tenant representative brokers are having a field day. The irony is that in a softening economy and a softening real estate market, tenant rep brokers can add infinitely more value than they can in a tight market. For office landlord brokers, brand-new buildings are renting very nicely, but there’s a lot of other space that is going begging. Owners and their brokers will need to know that certain spaces are worth a lot less than the owner thinks they’re worth and that those spaces will sit vacant a lot longer than they expect it to.”
Bob Shibuya, CEO of Dallas-based real estate brokerage Mohr Partners:
“If you were to ask me three or four months ago what Q3 and Q4 look like, I would have said that I was generally optimistic for 2022, and that we were on track to have an even better year than 2021, which was a record year for our company. I’m optimistic, but I’m much more cautious. The way that we will achieve growth is different than we anticipated earlier this year. We’re probably doing more lease restructures and property dispositions than we anticipated before, when we were expecting clients to take more space and make more acquisitions. The rising cost of capital due to rising interest rates is having a dampening impact on both leasing and investment sale transactions. There’s definitely a pullback in leasing. A lot of our clients that were planning acquisitions or going through some combination of organic and acquisitive growth have pulled back as the corporate cost of capital has gone up. A lot of them have hit the pause button on acquisitions and put growth on hold or scaled back plans because of the uncertainty about whether we’re entering a recession or are already in recession.”
Includes contributions from Candace Carlisle, Linda Moss, Richard Lawson, Randy Drummer and Mark Heschmeyer.