Expect more volatility in 2022 for these asset classes

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

“Hotel performance metrics were impacted by the Delta and Omicron variants throughout the second half of 2021, and the future of property types like office and retail remains decidedly uncertain,” analysts said. Moody’s Victor Calanog, Jun Chen and Todd Metcalfe. “Rising home prices will likely ease, but overall there is still a housing shortage in the United States, which should prevent major declines in home prices.”

Overall, Moody’s expects US GDP to grow 4.1% this year – a slowdown from last year, but still “the strongest growth rate on record” in more than 20 years. As economic growth hit a nearly three-decade high last year, higher aggregate demand mixed with supply chain issues to drive price pressure. And that, according to Calanog, equates to a tighter outlook for monetary policy: Moody’s is forecasting three rate hikes this year as uncertainty around infrastructure, ongoing pandemic effects and geopolitical tensions linger.

“In the realm of ‘accepted knowledge,’ there is a cliché that ‘real estate is a hedge against inflation’,” the trio write in their analysis. could be a hedge against inflation”. Not all owners are likely to be close to achieving the net income growth needed to keep values ​​from falling in a rising interest rate environment.

While some multi-family and industrial landlords may be able to pass on inflated prices to tenants, the same is unlikely to be true for commercial property owners most affected by the growth of e-commerce. Moody’s predicts that the future will also be uncertain for Class B offices in cities where demand for physical office space has declined: “the longer we delay a full return to the office, the more likely it is that parts of our workforce will be permanently decentralized,” company analysts warn. Moody’s expects the office vacancy rate to remain above 18% for the next few years, but they backtracked on earlier forecasts of steep rent declines.

Another consideration? Assets at tight prices, especially in the multifamily, where Moody’s predicts a stabilization of rents. Moody’s predicts a “slight uptick” in multifamily deliveries this year, but notes that supply chain and labor issues will continue to derail the projects. The company’s current forecast is for vacancies to remain unchanged.

“At this point in the cycle, demand exceeds supply in most markets, and short lease terms and unsophisticated tenants argue for the asset class as an inflation hedge,” the report notes. . “But, if our economic forecast materializes on an increase in Treasuries of about 100 basis points over the next two years, and that translates into exit cap rates, the need for growth in the NOI on tightly priced assets is amplified.”

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

“The world has had two years to learn how to deal with the pandemic, and while the immediate future may remain unsettled for hotel properties, it at least seems highly unlikely that the hospitality industry will again have to deal with large-scale international blockages. comparable to early 2020,” predicts Moody’s.

And perhaps unsurprisingly, the the industrial sector will continue to shine: Sub-sectors such as flex/R&D and warehouse/distribution show the highest expected rent increases of the five main asset classes analyzed by Moody’s.

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