Expect More Volatility Into 2022 For These Asset Classes

Some volatility is expected to persist across the multifamily, hotel, and office asset classes well into 2022, according to new research from Moody’s Analytics. 

“Hotel performance metrics took a hit from the Delta and Omicron variants throughout the latter half of 2021, and the future of property types like office and retail remains decidedly uncertain,” Moody’s analysts Victor Calanog, Jun Chen, and Todd Metcalfe.  “Home price gains will likely moderate, but overall there is still a housing shortage in the US, which should forestall major downturns in residential prices.”

Overall, Moody’s predicts that US GDP will grow at 4.1% this year – a slowdown relative to last year, but still “the most robust growth rate on record” in more than 20 years. While economic growth hit a nearly three-decade record last year, higher overall demand mixed with supply chain issues to result in price pressure.  And that, according to Calanog, equates to a tighter outlook for monetary policy: Moody’s predicts three rate hikes this year as uncertainty around infrastructure, the ongoing effects on the pandemic, and geopolitical tensions linger. 

“In the realm of ‘accepted knowledge,’ there is a cliché that ‘real estate is an inflation hedge,” the trio write in their analysis. “That likely needs to be qualified by restating it as ‘some real estate could be an inflation hedge. Not all landlords are likely to be about to achieve the net revenue growth required to keep values from declining in a rising interest rate environment.”

While some multifamily and industrial landlords may be able to pass inflated prices through to tenants, the same is not likely to be true for owners of retail properties most impacted by e-commerce growth. Moody’s predicts the future will also be uncertain for Class B offices in cities where demand for physical office space has waned: “the longer we delay a full return to the office, the higher the chances that parts of our workforce will become permanently decentralized,” the firm’s analysts caution. Moody’s predicts office vacancy will remain above 18% for the next few years, but they have walked back prior forecasts predicting serious rent declines.

Another consideration/? Tightly-priced assets, particularly in multifamily, where Moody’s predicts rents will stabilize. Moody’s predicts a “mild uptick” in multifamily deliveries this year, but notes that supply chain and labor issues will continue to derail projects. The firm’s current forecast calls for vacancies to remain flat. 

“At this point in the cycle, demand outstrips supply in most markets, and short lease terms and non-sophisticated tenants make a strong case for the asset class being an inflation hedge,” the report notes. “But, if our economic forecasts come to pass about Treasuries going up by approximately 100 basis points over the next two years, and that translates to exit cap rates, the need for NOI growth on tightly priced assets gets amplified.” 

The hospitality sector, which was hit particularly hard last year as Omicron and Delta variants derailed consumer travel plans, will see a slight improvement this year.

“The world has had two years to learn how to cope with the pandemic, and though the immediate future may remain volatile for hotel properties, it at least seems highly unlikely that the hospitality industry will once again need to deal with wide-scale international lockdowns comparable to early 2020,” Moody’s predicts.

And perhaps unsurprisingly, the industrial sector will continue to shine: subsectors like flex/R&D and warehouse/distribution have the strongest projected rent growth increases of the five core asset classes Moody’s analyzes.