Synopsis of US Real Estate 2022 Outlook

Feb 10 2022 | 2 min

“To many, the property sector may look remarkably the same as it was before the pandemic. It isn’t. Some markets and sectors may have changed forever. Some buildings and other assets are obsolete, and property managers now have to imagine how they can be repurposed.”
—PricewaterhouseCoopers (PwC)

US Real Estate - Implied Cap Rate

Source: Bloomberg

Like the broader economy, the US real estate sector has held up with surprising resilience since the pandemic struck in March 2020.

Following a relatively brief downturn where occupancy and rents fell, the real estate sector rebounded quickly across sectors, including retail and hospitality. Transformational changes are underway.

However, the US real estate sector is trading at historically expensive levels. Capitalization rates (net operating income to market value) are at their lowest since 2003 at 4.8%.

The S&P Case Shiller Home Price Index (which tracks the prices of single-family homes in the US) has risen 44.7% from its last high in February 2007, as shown below.

U.S National Home Price Index YoY Percentage Change

Source: Bloomberg. Post GFC represents the period after December 2009.

Against such elevated valuations, it is difficult to generate outperformance in the sector.

Issues in US real estate

The chart below shows the main issues facing the sector in 2022, according to the Emerging Trends in Real Estate 2022 survey by PwC of 1,200 individuals from the industry.[1]

Importance of Issues for Real Estate in 2022

Supply-side issues are the primary concerns. Prices of key commodities, such as lumber,[2] have skyrocketed, while labor costs increased in the tight labor market.[3]

The real estate sector has yet to recover fully despite the quick rebound. The following chart shows an overall drop in demand for commercial real estate. Only select sectors have benefitted these last two years.

Change in Share of All CRE Transactions, 1H 2021 versus 1H 2019

Property Type Outlook Synopsis

The chart below shows respondents’ assessment of the investment prospects of each property type.

Investment prospects

Industrial/ logistics

The industrials sector has been the biggest winner of the pandemic, as Covid-19 accelerated the already growing e-commerce penetration. This fueled deep and diverse demand for modern logistics facilities in prime locations while supply was limited, driving valuations to historical highs.

Residential

Covid-19 has benefitted housing, particularly in the secondary and tertiary cities. Besides the work-from-home trend, the pandemic has accelerated the trend of moving out of gateway cities due to high living costs. Further, the demand-supply gap is massive. According to the National Multifamily Housing Council,[4] 328,000 apartment homes must be built each year to meet projected demand by 2030. Valuations are also at historical highs.

Hotel

Although the rapid vaccine rollout globally has helped the hospitality sector recover somewhat, business travel is expected to remain depressed for several years.

Office

Some have dubbed the office sector as "the new retail," as considerable uncertainty remains until workers and employers find an optimum hybrid work model.

Retail

The sector is ranked last, as challenges remain despite the survival of retail with remarkable resolve and adaptability. The main issue remains the acceleration of digital commerce. Repurposing the excess space needs considerable investment and time.

Real Estate Investing at The Family Office

At such high valuations, especially in sectors that have benefitted from the pandemic, such as industrials and residential, it is difficult to achieve attractive returns in real estate.

The Family Office uses its extensive network to source highly selective investments that produce above-average yields by investing in:

  • Value-add strategies that enhance rental income post-acquisition through capital improvements,
  • Real estate debt that provides higher protection relative to real estate equity with similar income, and
  • Structurally dislocated markets.

Since 2004, we have helped over 200 clients preserve and grow over US$2 billion in assets. Whether you wish to invest in the best ideas in real estate or across asset classes, reach out to us today, and our world-class financial advisors are ready to help you construct a bespoke portfolio for your needs.

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[1] https://www.pwc.com/us/en/industries/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html
[2] https://fred.stlouisfed.org/series/WPU081
[3] https://fred.stlouisfed.org/series/UNRATE
[4] https://www.nmhc.org/globalassets/advocacy/testimonies/nmhc-naa-statement-for-hwmosc-record-7-14-21-hearing-.pdf

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