Five Reasons To Be 'Cautiously Optimistic' About Global CRE in 2022

Sentiment in the CRE community is clearly on the decline—and for good reason—but the Omicron variant’s gradual fade, as well as the rollback of government restrictions across Europe, should give CRE investors cause for optimism in 2022, according to Cushman & Wakefield’s chief economist. 

“Just weeks into 2022, we have reasons to be cautiously optimistic, which bodes well for the property markets,” Kevin Thorpe says in a new report. “In several global markets, Omicron has entered a seemingly sustained pattern of plateau and decline. In Europe, some of the first markets hit by the new strain, governments are starting to roll back restrictions and mandates, ushering in a new phase of a return to something closer to pre-pandemic life. With many calling for COVID-19 to be treated as endemic, we’re optimistic that the disruption we’ve seen in markets across the world will further abate in 2022.”  

The pandemic will continue to loom large, of course, but rising vaccination rates “may” allow the pandemic to shift toward a more endemic form this year, which would then in turn mitigate further disruption to the economy. Just over 60% of the world’s population is partially vaccinated, while 50.4% is fully vaccinated as of January 18. And while the global seven-day moving average of case rates is on the rise, new deaths are declining.

On the supply chain front, Thorpe predicts that pressures will ease as the pandemic subsides. About 60% of the world’s goods travel through Asia Pacific, a region that has been quicker to shutter factories and ports due to COVID. But Thorpe says ports will likely utilize slower post-holiday months to catch up; “if ports can’t reduce backlogs during this period,” he cautions, “port bottlenecks are likely to extend into 2022.”

And while CPI inflation remains high, “current high rates are not expected to persist into the medium-term, limiting pressure on long-term rates,” Thorpe says. “If inflation expectations remain low, then odds are good that long-term interest rates will also remain low throughout 2022.”  Commercial real estate returns tend to be viewed as a hedge against inflation, and a Cushman analysis of historical CRE returns show a strong positive trend, he says, rising more than 1:1 with increases in inflation in both the private and public markets. 

The commercial real estate market will also benefit from stronger GDP growth: every 10 basis points of real GDP growth generates property demand of 5 million square feet for the office sector globally, and 45 million square feet of industrial space.

“Much of the strong economic growth being projected assumes the consumer is ready to unleash pent-up demand that has been accumulating throughout the pandemic. As confidence grows, look for global real GDP to grow in the 4-5% range in 2022,” Thorpe predicts.

He also expects industrial supply will continue to play catch up to soaring demand, noting that in London, the availability of industrial space fell by 33% from March 2020 to September 2021, and in the US, vacancy rates are below 2% in Los Angeles, the Inland Empire, Savannah, and New Jersey.  He expects industrial demand will continue apace, and construction deliveries will surge in 2022, “bringing more balance to the marketplace.”