Heading into March, the economy continues to deal with headwinds presented by the pandemic, various supply chain issue, and labor shortages. However, even with these hurdles, economic activity within commercial real estate continues to ride the winds of economic recovery. As the overall market has seen an increase of investments, domestic and foreign, we look at some of the recent news in the CRE world, how different real estate sectors have handled their own challenges, as well as what to expect in the coming months of 2022.
CRE Investment Record Set in 2021
As 2021 has finished, more reports regarding economic conditions and past results filter into the public. Comparing the numbers for 2021 and 2020, the levels of investments in the commercial real estate world have far passed 2020 numbers. According to a GlobeSt.com article, CBRE announced US commercial real estate investment volume for 2021 reached “a record $746 billion, up by 86% from 2020”. While these numbers are not an indicator of what to expect in 2022, the overall sentiment from the commercial real estate world is that of a positive outlook. With so many economic disruptions stemming from the pandemic, commercial real estate has embraced these challenges and has instead viewed the situation as an opportunity.
The top sector for 2021 was Multifamily, coming in with $315 billion invested for the year or 42.2% of total investment volume according to CBRE’s article. Following this was industrial at 21.5%, offices at 18.3%, and retail at 9.9% of total investment volume for the year. In terms of the markets that were the hottest over this period, Los Angeles, New York, and Dallas topped the list with $58 billion, $49 billion, and $41 billion, respectively. However, the markets with the largest year-over-year growth include Las Vegas at 232%, Houston with 191%, and South Florida coming in at 179% over 2020 numbers. It is best to not use the past as an indicator for the future, however, the level of interest and positive investor sentiment are at all time highs; and the numbers prove it. Moving forward, commercial real estate is looking to ride the tailwinds of a record setting year.
Foreign Investments in the US for 2021
Foreign investment in US real estate assets took a major hit during the height of the pandemic, and understandably so. As we look at what has happened in 2021, we can see that foreign investments have exceed pre-pandemic numbers. According to Paul Bergeron’s article on GlobeSt.com, foreign investment totaled “an estimated $57.7 billion in U.S. commercial real estate in 2021, up 49% from 2020”; with total investment in US commercial real estate for 2019 coming in at $52.6 billion.
What is more interesting, is the foreign investments shift in markets, as 2021 showed heavy interest in assets in secondary markets. According to a GlobeSt.com article, foreign investors “shifted their acquisitions toward secondary markets, with Seattle, Atlanta, and Dallas outranking Manhattan”. While there has been heavy interest from foreign investors, many US investors are just as bullish on these same markets. Some of the largest driving forces behind this shift to secondary markets is the large migrations to these areas and “the relatively cheaper cost of acquiring real estate in those markets”.
What to Learn from Challenges Faced by Industrial Sector
For 2021, Industrial was one of the hottest sectors of the commercial real estate market, however with increasing demand came increasing challenges. As industrial continued to stay on fire throughout 2021, current supply was not able to keep up with demand, driving bids and valuations to record levels. Rents rose rapidly, and some top industrial markets are experiencing vacancy rates below 1%. Not only is there a shortage of properties, but those planning new developments have begun to start to look in the surrounding areas near industrial hubs to find suitable land. According to a GlobeSt.com article, “developers and users are pushing farther out of the city to secondary locations”. As new developments are forced to the outskirts of major industrial hubs, the current supply of suitable sites is ever shrinking; meaning these challenges will continue to persist.
Another factor that has contributed greatly to industrials activity is the increased rise of e-commerce due to the pandemic. This drove prices higher and created increased demand for e-commerce distribution centers that were strategically placed. While many of the challenges faced by industrial can be overcome, the path to do so is still unclear. Many of the issues faced are the same sector-to-sector, all with varying magnitude. How the industrial sector handles these challenges can provide the other sectors of real estate integral information on how to deal with some of these obstacles.
Material Costs Expected to Level Off?
One of the biggest issues that was faced by all in real estate was the rapid rise in material costs due to major supply chain disruptions; as prices for wood, steel, copper and more, skyrocketed and stayed at elevated levels for months. As supply chains catch up and more onshoring efforts are continuing, the overall costs for many raw materials are expected to level off for the years first quarter. Demand for materials will continue to be high, as the demand for new construction continues to be high; however items such as steel and copper are expected to drop as far as 2%. According to a GlobeSt.com article that utilizes Linesight’s Commodity Report, “Linesight sees prices declining by 2%” for copper, with lumber expected “to climb moderately by 0.7% in Q1”.
While this is good news for the price of raw materials, volatility is still to be expected in the short to mid-term. Wood has seen some of the largest price increases over the year, but it looks like metal and metal-derivative products will be harder hit moving forward. In a GlobeSt.com article, Barry Wurzel of Wurzel builders states that, “lighting, plumbing fissures, and electrical wiring are the most volatile”. As the year goes on, the burden on the supply chain is expected to lessen, but what is to be seen is where these prices will level off at.
The world’s economy is no doubt still reeling from the effects the pandemic had on it and should still be for some time. This next year is looking poised to be promising for many areas of the economy, but especially for real estate. When it comes to development, the build-out process can be time consuming and stressful; at SCGWest we look to take these off the client’s hands. Our goal is to minimize costs, timelines, and headaches involved with developing a space, if you would like to check out what we here at SCGWest do, click here!