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July 14, 2022
By Roopa shree Venkatesh Maistrypalya
High inflation, skyrocketing interest rates, and a volatile U.S. market make us wonder where the real estate industry is headed. The economic outlook doesn’t seem to be great for 2022, and it seems as though we’re headed for a bumpy ride.
David Bitner, Global Head of Capital Markets Insights from Cushman & Wakefield, recently shared his outlook on the current U.S. market and the trends in the real estate industry at EisnerAmper’s Real Estate Principals Luncheon.
Current Observations
Trends in Different Sectors of Real Estate Industry
has exploded in the U.S. while the net change in housing stock has failed to keep up over the last decade. In short, the U.S. has underbuilt homes. 1.3-1.5 million new households are expected in 2022 and 2023. Pent-up demand from the pandemic and demographic factors will fuel the surge. U.S. vacancy will hold steady, generating healthy rent growth; it would be cheaper to rent in most markets. The multifamily sector has several years of strong fundamentals ahead of it. Indeed, NOI growth should remain positive even through a recession.
We have started off 2022 with strong liquidity. Apartment and industrial remain favorites, but the capital is beginning to rotate back to office and retail.
What Do Rising Rates Mean for CRE Values?
The relationship between the interest rate and values is not determinative; there has not been any clear relationship between the interest rates and cap rates. Cap rates are influenced by a range of factors such as NOI growth, supply of capital, interest rates, and risk aversion. Market believes the government will contain inflation but with substantial rate hikes. Core CRE lending tends will fall between the BBB and BB corporate bond segments. The increase in both yields and spreads suggests that economic growth prospects and willingness to take risk are not offsetting increases in rates. The result is enormous upward pressure on cap rates. These risks have already materialized in the REIT market and are increasingly being felt in the private markets. A major pricing adjustment is underway, especially for multifamily and industrial properties but so too for office and retail. It is unclear how long the private market adjustment will take, but we expect data to show significant increases in cap rates between now and 2024. The data will lag the reality, since for some period of time, the pricing adjustment will be shrouded by reduced liquidity.
Roopa shree Maistrypalya is a Tax Senior Manager in the Real Estate Services Group, with over 10 years in public account.
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