CRE Values, Yields Forecasted to Increase Next Year

Experts are doing more than wishing the commercial real estate industry a prosperous New Year—they are promising it. In a recent 2022 outlook webinar from Green Street, Michael Knott estimated that commercial real estate values and yields would increase next year. Values are expected to increase 11%, while yields will average 6%, according to his research.

On the value side, self-storage, industrial, retail and apartment values are going to be up the most. The reason for the boost in values is simple: real estate is cheap compared to the corporate bond market, and it is attracting a lot of attention and capital. The competition is driving asset pricing. According to Knott, the analysis compares real estate returns to corporate bonds, which are 22% higher that commercial real estate assets. “That is a very bullish signal for commercial real estate in our analysis,” Knott, managing director and head of US REIT research at Green Street, said in the webinar, adding that the analysis also considers REIT pricing. “The REIT signal, which we think is typically predicative of changes in private market values. So, the REIT signal is much more sanguine. When we blend those two indicators, we come up with a roughly 10% higher real estate value.”

This isn’t a new trends. Real estate values have appreciated rapidly in 2021, and that momentum is carrying into 2022. “We have all experienced a lot of real estate value appreciation in 2021. It is a buoyant time for commercial real estate values, and we expect that to continue,” said Knott.

In terms of the fast appreciating sectors, they are the usual suspects: single-family rentals, industrial and manufactured housing, which Knott said has been a favorite for a long time and the outlook is still positive. Self-storage is also at the top of the list. “Self-storage has had an unbelievable run in terms of move-in rents, market rent and NOI growth,” he added. At the bottom of the list is also the typical line-up, including office, malls and lodging.

The increase in asset pricing will deliver a 6% unlevered return to investors, on average. “The important thing about this analysis is that the expected returns for commercial real estate are forward looking over the last 35 years. That gives some really valuable insight into what the spread is between expected returns at any given time and bond yields prevailing at the time,” explains Knott.

At the end of his forecast, he noted that commercial real estate generally acts as a solid hedge against inflation. “If inflation picks up, commercial real estate should do okay,” he said. “If it doesn’t real estate is still cheap compared to prevailing bond yields, so it feels like a favorable spot for commercial real estate.”