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The Outlook for Commercial Real Estate: Geopolitical uncertainty, inflation, and predictions for 2022 and beyond

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LightBox Insights
May 23, 2022 4 mins

A recent LightBox webinar (April 27th, 2022) convened experts to discuss how market conditions are changing amid the war in Ukraine and what lies ahead for the rest of the year. Moderated by Dianne Crocker, principal analyst at LightBox, the webinar featured Ryan Severino, chief economist at JLL; Tina Lichens, chief operating officer at LightBox Real Capital Markets®; David Scherer, co-founder and co-chief executive officer at Origin Investments; and Fred McDonald, vice president and property appraisal analyst at Popular Bank. Highlights are below.

How is the Ukraine war affecting the commercial real estate market?

Ryan Severino: The situation in Ukraine is exacerbating inflation and causing the Fed to move more aggressively than it might otherwise have. When there is disruption somewhere else in the world, the U.S. is still a safe harbor. The outlook for investment in Europe raises the probability that capital flows into the U.S. will increase, a positive for real estate.

David Scherer: We’ve seen a flight of safety to the dollar, which is strong relative to other currencies. There is more foreign capital coming through the U.S. real estate market, but it’s very selective. We’ve seen a tremendous amount of consolidation in real estate, especially into multi-family and industrial, but the buyer pool is thin. I don’t think multi-family will see appreciation this year.

Are investors revising 2022 expectations?

Tina Lichens: Yes, though it depends on the sector. One of our large clients is telling us the number of buyers they have is half the number they used to have, and the offers they’re getting are 20 percent less than previously. The office sector is affected more than multi-family, but we’re seeing this across the board. Since the beginning of the year, the number of individuals executing agreements and starting due diligence is down about 30 percent from the beginning of January.

Fred McDonald: Our bank is up maybe 20 percent between New York and Florida. I’ve had several calls from account officers saying we’ve got to get the appraisal in right away because we’re under rate lock. I haven’t heard those words for a while. Borrowers are also looking at the expense side. I’m predicting that we will try to close everything by October or mid-November.

What impact will the midterm elections have on the market?

Ryan Severino: For various trends that manifest in multiple ways domestically and globally, the geopolitical risks are slanted to the downside. I don’t want to overstate it; I don’t want to be alarmist, but it’s something we have to consider. And the probability that something disruptive will occur during the midterms, or even with the next presidential election, is high.

Office is the one area of CRE where the future is nebulous. Where are opportunities surfacing and where is the sector headed?

Ryan Severino: The pandemic has accelerated various trends. There is clearly a preference for quality in the office sector, for buildings built in the last five years. I don’t think the pandemic is the death knell for office completely, but I do think the world is going to be different on the other side of it. The rift between shiny new spaces with interior light and better sightlines and everything else is going to widen over time. That has consequences for new construction and for older inventory, which have taken a hit.

David Scherer: I think office needs to reprice. There’s a demand segment that’s permanently gone because of Zoom and Microsoft Teams. You’ve lost five or 10 percent of your demand. There’s enormous operating leverage in office. If you take five percent away, you’ve crushed valuations.

The latest Real Capital Analytics report noted a slowdown in the annualized rate of price increases in the first quarter of this year. How does the rest of the year play out?

Fred McDonald: I think it will keep going strong throughout at least this year in Florida. The state is seeing an influx of people from all over the U.S. and they’re doing deals like crazy. We’re up 20 percent overall. I’m cautiously optimistic. The impact on higher interest rates will affect multi-family units under rent regulation because expenses are going up. You’ve got to watch expenses. If you don’t, you’re going to be in for an unpleasant surprise.

Tina Lichens: There’s no slowdown of activity in terms of product coming on the market. We had a record number of listings come to market on the RCM® LightBox platform last week, more than we’ve had in the 21-year history of the business. We’re not seeing any signs of slowdown. But by late in the third quarter I would expect us to see some changes, though maybe things hold up for the rest of the year. Certainly things look different next year at this time.

Ryan Severino: I think the situation is better than most people think. A lot of the narrative is being disproportionately colored by inflation. If you ignored inflation and looked at almost every other metric in the economy, it looks great—GDP growth, the labor market, cost of capital. Inflation is having an inordinate impact. I don’t think it’s going to stay at these uncomfortable levels permanently.

David Scherer: I think by the third and fourth quarters this year you’ll see a correction in all real estate, even with in-demand properties, including multi-family and industrial. I don’t think industrial rent can go up 10 percent every year. Even if inflation ebbs, I think we’ll have a correction, though not a severe one. Real estate is an amazing asset class—it appreciates over time; you can own it ten years from now and it will be higher. I’m not saying the sky is falling, but a correction is coming—and that’s a healthy thing.

Watch the full webinar replay here

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