“Low yields in other asset classes in combination with the ability to increase rents acting as a partial inflation hedge should continue to drive demand for investments but not enough to dampen CRE investment.”
The CMBS market enjoyed a strong 2021, buoyed by a high number of single-asset/single-borrower and CRE collateralized loan obligation transactions—and the pace is expected to continue well into this year.
A new analysts from DBRS Morningstar predicts that despite the emergence of omicron, “continuing economic resilience in 2022 will buoy US real estate fundamentals,” with the industrial and multifamily sectors poised to outperform office, retail, and hotel thanks to gaining e-commerce tailwinds and the sky-high costs of homeownership, which have eluded many would-be buyers.
“As more workers return to the office, demand for office space will improve and hotels will see higher occupancy from an increase in business travel,” Morningstar’s Steven Jellinek and Erin Stafford write. “More efficient use of retail space, particularly in grocery- and discount-anchored centers, as well as a modest construction pipeline, will aid the recovery.”
While rising inflation could threaten growth, Jellinek and Stafford opine that the fundamentals behind recent hikes suggest the inflationary environment could moderate over the next year, relieving pressure on the Fed to increase rates and risk contraction in 2022. The analysts also predict that as consumer spending notches closer to pre-pandemic levels, the supply chain pressures that led to price increases should also moderate.
DBRS Morningstar predicts that near-term heightened inflation as the Fed tapers asset purchases will likely push both long- and short-term interest rates higher; “however, the outlook for rates remains low compared with historical levels,” according to Jellinek and Stafford.
“Low yields in other asset classes in combination with the ability to increase rents acting as a partial inflation hedge should continue to drive demand for investments but not enough to dampen CRE investment,” they write. “With strong investor demand and abundant capital flow into the real estate sectors, deal volumes are likely to increase further.”
Morningstar projects a 10% to 15% rise in CMBS originations in 2022.
“We expect origination volumes to remain elevated through 2022 (building on the 2021 increase) as borrowers lock in low rates ahead of the Fed’s tightening, which we don’t think will be prolonged enough to dampen investor demand for floating-rate SASB or CLO transactions,” Stafford and Jellinek write.
