Investing in commercial real estate has always been a great way to build wealth and that remains true today. With that in mind, we know that commercial real estate has been through a lot since the start of Covid-19 shutdowns starting with office workers sent home to work remotely and online sales surging as retail stores suffered. As we settle into the new normal – with many offices implementing hybrid work schedules and surging e-commerce sales – this is a good time to take a look at current commercial real estate trends in our first blog post in the commercial real estate investing 101 series.
Commercial Real Estate Investing 101: Commercial Real Estate Trends 2022
There is no doubt that commercial real estate has suffered during the Covid-19 pandemic but that doesn’t mean it’s all doom and gloom. While the official end to the pandemic hasn’t been declared, commercial real estate is expected to continue on a trend of economic recovery and stabilization this year. Many commercial real estate investors are optimistic because of the ways the industry has been able to adapt to change, evidence of a post-Covid rebound, strong levels of infrastructure spending, and unexpected demand for industrial properties.
Let’s take a look at 2022 commercial real estate investing trends for different types of commercial real estate properties:
Industrial properties
Demand for industrial properties for warehousing, manufacturing, assembly, production, storage, and distribution has grown significantly this year due to high e-commerce sales, a strong economy, supply-chain issues, surging transportation costs, and population migration. Specifically:
- Many developers are looking to invest in commercial real estate inland because there isn’t much additional space near seaports.
- Large companies whose inventory has been affected by supply chain issues over the last 18 months are investing in warehouses to ensure they have onshore “safety stock.”
- Large retailers and manufacturers are investing heavily in distribution facilities.
- In addition, manufacturers are investing in distribution facilities closer to their manufacturing facilities in order to offset rising transportation costs and also investing in warehouse space as they increase the amount of inventory they keep onsite.
Office space
Demand for office space may be permanently reduced after changes to worker expectations mean more companies are being forced to offer work from home options to their office workers. This reality means that office building supply may continue increasing in 2022. On the other hand, more companies have asked their workforce to return to the office in 2022 and many companies have moved to a “hybrid” model that allows employees to work from home part of the time and work from the office the other days, ensuring that office space is still relevant. These developments will likely stabilize demand for office spaces this year.
Retail stores
E-commerce sales exploded during the pandemic as malls closed down and shoppers wanted to avoid crowds, putting a strain on once thriving retail and department stores. In fact, several retail and department went bankrupt in 2020 and 2021. Experts predict that there may be 25% fewer retail stores by 2025, replaced by healthcare, grocery, and other alternative stores in some larger markets.
Hotels
Hotels have been competing with Airbnb rentals for some time and it’s no secret that the pandemic put a huge damper on travel and hotel stays in its early days. Now, despite an uptick in travel demand, hotels are not expected to experience a full recovery until 2023. Hotels in densely populated areas may continue to see lower guest rates as Covid-cautious people choose to take vacations in quieter spots while the drive-to-leisure segment may recover more quickly. There are a couple bright spots for hotels:
- Luxury hotels are expected to pick up renovation projects that may have stalled during the pandemic.
- Some consumers are turning away from Airbnb rentals as they see the devastating impact they have had on local communities.
Other trends and opportunities:
- There may be additional development opportunities for commercial investors with experience in new build development projects in the coming year. Neighborhood retail in well-populated areas that offer in-person services, is one potential opportunity.
- Commercial real estate investors should also keep an eye on ongoing supply chain issues, geopolitical events, interest rate hikes, and opportunities for public and private entities to build affordable housing.
- Real estate will welcome more quants (quantitative firms) into the mix with the intent to deploy AI and machine learning in their investments.
- Three-quarters of commercial real estate executives in a recent survey said their companies would likely expand partnerships with or invest in proptechs this year.
The future of commercial real estate is strong
While no one can predict the future of any industry with 100% certainty, we feel confident in saying that the economy behind commercial real estate is on solid ground and that the positive trends and predictions we discussed in this article are likely to come true. There are many reasons that commercial real estate is still a good investment in 2022, including:
- Opportunities in smaller cities / secondary markets as white collar workers continue to move away from large city centers.
- High rates of commercial capital and available debt will contribute to a year of growth.
- Old retail spaces are converting into new market opportunities such as distribution centers, pick-up locations, or showrooms.
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