Archives for January 2022

Experts predict outsized growth in 2022 and 2023, but these three events are risks to the recovery.

Economic experts agree that the recovery will continue through 2022 and 2023, producing outsized growth of 4.7% next year. While there are a lot of positive trends supporting growth, there are three risks that could derail the economic recovery. During a 2022 outlook webinar, Richard Barkham, global chief economist, head of global research and head of Americas research for CBRE outlined his top concerns for 2022.

The first threat should be no surprise to anyone: the COVID variants. First, Delta variant came, and now a new variant, Omicron, could bring another wave of infections that could result in stalled reopening plans. “We don’t know yet what that holds,” said Barkham. “The early evidence suggests that while it is more infectious, it is less deadly, and the evidence is beginning to emerge that the vaccine still provides mitigation effects on the severity of the virus.”

That’s good news. If the variant is less likely to cause serious illness and the vaccines provide some level of protection, the new variant won’t interfere with economic gains. Our current view is that the Omicron won’t be any more serious than the Delta variant, meaning that it is not going to derail the economy,” says Barkham.

Barkham is also concerned about the slow down in China. In the third quarter, the country’s massive economy reported only 1% GDP growth. Comparatively, it has had 7.8% quarterly growth from 2010 through 2019. This is largely due to supply chain disruption as well as new energy regulations. “China GDP growth drives 40% of global demand, so a slowdown in China affects everyone,” says Barkham. “We don’t think this will derail the US economy, but it is one thing we are keeping an eye on.”

And, while government fiscal and monetary expansion is supporting economic growth, inflation—which will likely lead to higher interest rates—are having the opposite effect. Barkham believes that the current inflation trend is transitory because of the intense demand for goods, but he expects the inflation rate to hit 2.2% by the end of the year. That means The Fed will tighten in response. “We do see monetary tightening coming by reducing quantitative easing and possibly increasing The Fed funds rate,” said Barkham, adding that the response will have and impact on the commercial real estate market but not the economy. “Although the tightening will be there, The Fed won’t take risks with growth. So, it won’t derail the economy, but the 10-Year Treasury will rise.”

Source: “Three Threats That Could Derail Recovery in 2022“

A CRE consultant whose firm touches thousands of projects each year shares his outlook for 2022, along with resources to help you make the most of the new year.

Economists prognosticate; the big brokerage firms make their rosy forecasts; and your uncle shares his doomsday predictions at holiday dinners. Everyone has their ideas about what 2022 will bring. As consultants to the commercial real estate industry, we handle thousands of diverse CRE projects each year for lenders, investors, corporate occupiers, and developers—we see a lot. Based on that perspective, here’s our outlook for 2022, along with some resources to help you prepare for a successful year.

ESG Promises: Private equity firms have enjoyed robust fund raising, and many are making significant ESG commitments along the way. ESG ratings such as GRESB are now an integral part of private equity’s pitch to capital managers, and of course competitive real estate managers want to win!  So ESG is now very important not only for moral imperatives or political reasons, but for competitive reasons as well.

As a result, we are seeing ESG treated as a serious matter during due diligence and decarbonization projects in asset management. Our energy practice is seeing ESG-driven enthusiasm around solar and energy efficiency projects for the sake of fulfilling ESG commitments. The good news is that the vast majority of these project also have a reasonable return on investment and help real estate assets achieve a greener image. Judge for yourself—click here to review a few case studies.

Construction Headwinds Continue: Project volume remains strong, but supply chain issues, market volatility, and cost overruns will continue to be challenging. Lenders with plenty of appetite for construction lending are looking to mitigate risk in this environment; however, in search of rates, many fund lenders are willing to entertain riskier opportunities if they can quantify and understand the risk. Construction risk management consulting offers expert perspective and dedicated resources towards this end, and in the case of on-risk products such as completion commitments or project completion insurance, can even distribute some of the risk away from the lender.

Also, for lenders interested in the state-of-the-art risk management techniques, join your peers in an ongoing discussion of construction challenges and solutions at the CLRM Roundtable.

Changes in Environmental Due Diligence: For the first time in more than a decade, there have been big changes to the standard scope of work for Phase I Environmental Site Assessments. The ASTM E1527-21 standard goes live on 1/1/2022. The new standard includes changes to historic research and title search requirements as well as revised definitions and more. You can read up on the changes here or watch a webinar for more discussion. The new standard does not include PFAS as a recognized environmental condition but acknowledges the growing concern about PFAS by adding it to the list of “non-scope issues” that a user may want to evaluate as a business risk, as is commonly done with asbestos and mold.

New Focus for Agency Lending: FHFA set the 2022 caps at $156 Billion for Fannie Mae and Freddie Mac combined, with 50% of that required to be mission-driven affordable housing. But there’s a twist this year: loans that finance energy or water efficiency improvements—Fannie Mae’s Green Rewards and Freddie Mac’s Green Up/Green Up Plus programs—qualify as mission-driven if the improvements are for units affordable at or below 60 percent of AMI, and borrowers will achieve a minimum 30% reduction in energy and water consumption.

Data-Driven Asset Management: The CRE industry is behind on technology, but we see a lot of clients interested in improving.   Reactive asset management, with its related overspending and delays, is so 2021.  As tighter margins create pressure on asset managers to meet income projections, savvy portfolio managers use data to build proactive management programs for building systems such as roofs, HVAC, and plumbing. This data-driven, proactive approach results in lower maintenance costs and capital expenses, as well as fewer disruptions to operations and/or tenants. For a discussion of how proactive management can save money on roofing expenses, for example, view this webinar.

High Volume and Supply Constraints: High volume tested the CRE due diligence supply chain this fall.   The high volume of institutional transactions puts extra pressure on the high-end of the supply chain as institutional clients demand more experienced and credentialed professionals, and these professionals are hard to develop quickly.  Ever increasing institutional ownership will continue to pressure this segment of the market.

Source: “Six CRE Trends to Watch in 2022“

Utilizing a composite model, the U.S. Census Bureau has released a new experimental Monthly State Retail Sales (MSRS) data product that combines monthly retail trade survey data, administrative data, and third-party data that features modeled state-level retail sales.

The MSRS represents year-over-year percent changes for each state and the District of Columbia for total retail sales with the exclusion of nonstore retailers as well as 11 North American Industry Classification System (NAICS) retail subsectors back to January 2019 and provides data by state and NAICS code. State-level data is not adjusted for seasonal variation, trading-day differences, moving holidays or price changes.

Source: “Monthly State Retail Sales: January 2019 to September 2021“

C&W, VTS and CBRE all tell somewhat different stories about office demand.

Cushman & Wakefield has waded into the debate about office tour activity and what it foretells for this asset class in a recent brief. There are a number of different data points on this metric, with each provider interpreting the meaning differently.

Let’s start with C&W. It found that tour activity was on the rise this spring, nearly tripling in the first quarter and continuing through August. But in September, tours declined, which Cushman experts say is in line with historical seasonal trends from 2018 and 2019 in particular.

VTS reported similar findings with its index earlier this month but its conclusion was more dire. It found that new demand for office space fell for the second consecutive month in October to its lowest rate since the first quarter of 2021 suggesting that the initial post-vaccine surge of demand for office space has run its course.

Down 30% nationally since peaking August 2021, all seven markets analyzed by the VTS Office Demand Index saw declining demand for office space over the two-month period.

“As we pass the 18-month mark since the start of the pandemic, employers and employees alike have largely adapted to a new way of working and in many cases, that means permanent remote or semi-remote work,” said Nick Romito, CEO of VTS, in prepared remarks. “The longer we stay in limbo⁠—the place where, even with vaccines and better COVID-19 treatments, there is still trepidation about returning to work⁠—the greater the likelihood we have a permanent loss of demand for office space and eventually, a new normal. Time is not on the side of office leasing.”

Then, there is CBRE. At the end of November, it reported that many top US office markets showed improved demand for new office leasing in the month of October even as leasing activity and sublease availability indices weakened slightly for the month, pausing their positive momentum from previous months.

“The growth of tenants actively looking for space is a precursor of increased leasing to come,” said Nicole LaRusso, CBRE Senior Director of Research & Analysis, in prepared remarks.  “Recent strong job growth should add further momentum to the office market, particularly as consumer and business confidence increases. Barring another Covid resurgence, the office market appears to be on firm footing heading into 2022.”

Cushman, for its part, points out that tour activity—which is typically a leading indicator for leasing activity—is still more than twice the amount of fall 2020.

Total leasing in the last two quarters is 50% higher than the last three quarters of last year, a metric Cushman says “bodes well for lease executions, and eventually net absorption, over the next several quarters.”

Indeed, net absorption last quarter was nearly 50% better than the precious four (-18.3 million square feet in Q3 versus an average of -35.7 msf of absorption).  Gains were led by Atlanta, Puget Sound – Eastside (Seattle), Suburban Maryland and San Diego.

Net absorption also improved quarter-over-quarter across 60 of the 90 markets tracked by Cushman & Wakefield, including gateway markets like San Francisco (+1.8 msf), Midtown Manhattan (+1.8 msf), Los Angeles (+1.3 msf) and Boston (+1.0 msf).  The four-quarter rolling total US leasing activity has also increased by 14% over the past two quarters.

All signs appear to point to the office sector evolving, not collapsing, according to Petra Durnin of brokerage, workplace strategy and project management firm Raise.  That’s especially true as companies eye flex space as an alternative to traditional office models.

“Companies are accessing better solutions to attract and retain high-quality talent,” she told GlobeSt in an earlier interview. “The shift from highly centralized offices near talent pools to a distributed workplace strategy means many companies are adopting not only a hybrid model but a hub/spoke/remote model and evaluating multiple locations across the U.S. with a heavy focus on sublease space or coworking. The whole shift in how and where people work is a rebalancing effort to meet talent where talent is.”

Source: “Parsing the Conflicting Data on Office Tours“