What Lies Ahead for CRE Investment

Ben Reinberg

As we head into a new year, many commercial real estate investors do so with a fair amount of anxiety, uncertain of where they may encounter headwinds. But while the lingering COVID-19 pandemic, federal fiscal policy and other macroeconomic factors may be jamming their navigational instruments, there will certainly be safe landing spots in 2022. Here’s a look at challenges and opportunities for the year to come:

The Challenges Ahead

For most investors, the chief concern at the moment is inflation. As the consumer price index rose in November by 6.8 percent year-over year, we are witnessing the strongest inflationary period since June 1982—and flirting with an environment similar to the stagflation of the 1970s.

To put things in perspective, the last time inflation was at this level, the Falklands War was underway and “E.T.: The Extraterrestrial” had just opened in theaters. Many investing professionals simply haven’t seen an environment such as this during their careers.

Another matter on the horizon is the Biden Administration’s proposal to increase capital gains taxes to help fund the Build Back Better Bill. With more money on each transaction going to Uncle Sam, there could be a flurry of sales before the close of the year as investors look to liquidate in hopes of avoiding a larger tax bill.

And, of course, we are still grappling with COVID-19. The virus continues to wreak havoc on individuals’ health, as well as our collective economic health. The emergence of new, more transmissible variants means that the already prolonged pandemic could be here longer than even the most bearish forecasts have predicted.

Real Estate Opportunities

Many experts predict the stock market will likely ride up and down a series of parabolas for a few more quarters—reflective of consumer uncertainty and what’s occurring in global markets—before settling down hopefully by midyear. But as commercial real estate always lags behind other indices, stability will be slower to arrive for many real estate investors’ liking. That said, there are some clear winners in the short term, and some sectors to watch in the long term.

Industrial has been hot for quite a while now, and there’s no reason to expect that to change. The pandemic has given e-commerce a boost and, therefore, demand for warehouse space remains high with vacancies at all-time lows. The supply chain issues we saw in 2021 are not indicative of turbulence ahead, but rather a side effect of how dynamic this sector has been.

It’s a little harder to read the tea leaves with multifamily, however. While rents took a hit at the very onset of the pandemic, they’ve been on the rise in just about every market across the country ever since mid-2020. It will be interesting to see if this trend is sustainable into 2022. With inflation on the rise and incomes not keeping pace, households will have to keep closer tabs on their monthly spending, which means apartment rents could plateau next year.

The one near certainty is that the health care sector will continue to be as attractive during and after the pandemic as it was prior to COVID-19. Because it is such a necessity, medical real estate is relatively insulated from wider market disruptions.

Net-leased health-care spaces are particularly appealing to investors as providers are clamoring for the single-tenant spaces that have had trouble retaining retail tenants. Because medical space is expensive to build new, competition is tight for suitable, existing locations.

Amid the fear of rising interest rates and increases in capital gains taxes, a lot of properties are about to go up for sale, creating a buyer’s market in many sectors. If assets remain available for too long, however, owners will be forced into a price reduction. For well-capitalized investors who have charted out a long-term strategy, this could mean building up their portfolios at value prices.

Ben Reinberg is chief executive officer of Alliance Consolidated Group of Cos.