2022 Commercial Real Estate Outlook

EquityMultiple’s Investor Relations Team hosts monthly webinars for current and prospective investors. Most recently, we invited EquityMultiple’s CEO Charles Clinton to discuss milestones from 2021 and preview our roadmap for 2022.

For those of you who were not able to attend, we’ve included a summary of key insights below.

2021 Year in Review

By the numbers: core metrics

2021 was a transformational year for us. We saw an increase in both the number of offerings, and the diversity of real estate investments we were able to provide.

We also saw 50-100% growth across all our core metrics:

• More new investors joined the platform in 2021 than in 2019 and 2020 combined.
• We distributed more to investors in 2021 than in all prior years since founding. This growth was primarily powered by a wave of realizations that came through when the market strengthened this past year.

Cumulative Investor Distributions shown through the end of the last full quarter

For a more detailed overview, please refer to our Track Record and our latest Quarterly Growth Update.

By the numbers: CRE property types & markets

Over the last twelve months, we focused heavily on multifamily real estate investing. Historically, multifamily has always been our biggest sector of the market. In 2020 and 2021, multifamily showed great resilience–even more so than expected. Financing was also particularly attractive in multifamily. Historically low interest rates powered both current yield and long-term appreciation potential in a different way than the financing that was available even a few years prior.

In terms of the commercial real estate markets where we are currently operating, we mainly sourced offerings in the SMILE curve: up and down the coasts, and across the southern U.S, with our heaviest concentrations in Florida and Texas.

As for the capital stack, we pushed more heavily into equity this year. Our Investments Team found interesting opportunities for investors to provide equity for multifamily properties in some of the aforementioned SMILE regions. Note: this type of investment strategy generally makes sense for long-term investors looking for potential upside.

EquityMultiple’s 2022 Outlook

Macroeconomics for the year ahead

Global recovery on the horizon

2020 was a tumultuous year for the economy, to say the least. We experienced the largest drop in global GDP since 1945-1946 (-6.2%) in the first half of the year¹. This was more than twice the drop realized during the global financial crisis.

The recovery starting in the second half of the year was rapid, if uneven, for different sectors of the economy. In fact, 2021 nearly reversed the losses that we saw in 2020. Many leading economists now forecast near-term growth as above average over the next two to three years, predicting a return to pre-COVID conditions.

Anticipated growth despite inflation

High energy prices and persisting supply chain disruptions have contributed to rising inflation. That said, for the most part, economists agree that there will be improvements this year for the following reasons:

• Availability of goods should continue to improve.
• Supply chain shortages will likely be corrected throughout 2022.
• Federal Reserve monetary policy can be used as a counterweight.

Of course, we are currently seeing the impact of rising rates in the public markets, particularly in tech stocks that have long-dated earnings. Essentially, investors believe those future cash flows aren’t worth as much when interest rates start to climb.

The issue in the public market extends beyond near-term inflation, however. There has been a historic run-up in the market–the S&P 500 has averaged 14.7% in the last five years vs. a historical average of 6% over the past 100 years. As such, 87% of surveyed strategists believe the market will be at or below the historical average over the next five years.

Real estate as a hedge against inflation

Historically, the real estate industry has performed well in periods of strong inflation and strong growth. In fact, between Q3 2020 and Q3 2021, the NCREIF Property Index returned 12.1% in contrast to the 4.9% real GDP growth rate and 5.4% increase in inflation.² This is directly in line with NCREIF data from the past 43 years, which demonstrates how real estate can serve as a natural hedge against inflation (see below).

It’s worth noting some asset classes have inherent characteristics, which are conducive to strong performance during inflationary periods. Most notably, this is true in real estate sectors that have natural rent resets, like in multifamily, where you have annual leases, or in hospitality where you have nightly rentals. To sum up:

• Short-term leases provide recurring opportunities to increase rental rates.
• In turn, this can increase both cash flow and property values.
• Multifamily vacancy rates also fell to 4.7% in Q4 2021, a level last seen in Q4 2019.³

One caveat: interest rates put pressure on cap rates. So, as interest rates rise, you tend to see cap rates start to rise. We are currently looking at whether the spread between interest rates and cap rates will start to compress. Given the amount of money moving into real estate, both at the institutional level and from individual investors, there is reason to believe you may see those spreads narrow as more demand floods into this part of the market.

Market Performance & Current Real Estate Trends

Distressed Opportunities (or lack thereof)

Overall, distressed opportunities did not play out in the way that a lot of pundits initially predicted. Given the unique nature of the COVID crisis, banks and other parties were generally more willing to renegotiate terms to help borrowers extend through the hardest part of the economic crunch.

Hospitality Bounces Back

In hospitality, we saw a wide range of occupancy rates following the toughest part of 2020’s shutdowns due to COVID. In markets with more transient demand like Florida, where you also have fewer restrictions and vaccination requirements, the bounce back in demand was significant, signaling a much faster return to pre-pandemic levels than in Tier 1 cities like New York, Washington D.C., and Los Angeles that are more reliant on business travel.

That said, we remain optimistic about hotel investment, and believe leisure travel will likely increase in the months to come. We may even see excess demand for travel from groups that have been under more strict lock downs.

Opportunities in Office Real Estate

Remote work is here to stay, but how, exactly, that plays out in the office market is anyone’s guess. We suspect preferences will be highly regional, with many businesses opting for a hybrid work structure. Due to this uncertainty, office properties may now be undervalued, especially when compared to both historical data and a three-year forward outlook. In any event, our Investments Team will continue to monitor the office space for potential buying opportunities.

Growing Demand for Industrial Properties

E-commerce is by no means a new trend, although it certainly accelerated during the pandemic. As consumers continue to purchase more goods online, there will naturally be a need for more industrial space to support this growth. In particular, we are keeping our eyes out for potential “last-mile” facilities in busy markets like the Tri-state area, which could use a greater supply to match current demand.

Our Strategy: What to Expect in 2022 vs. 2021

We expect demand will continue to increase this year and would like to accommodate a greater number of investors in a higher volume of investments. With this in mind, our goal is to increase the average transaction size, while still maintaining the same level of thorough due diligence investors have come to expect from our Real Estate Team.

In 2022, we plan to present a variety of diverse opportunities across CRE markets with strong fundamentals. Specifically, we will continue to pursue opportunities that fall within these three categories:

1. Direct investments
2. Fund investments
3. Savings alternative (short term notes)

We also plan to invest in more debt and bridge lending. And while we have mostly focused on the SMILE markets to date, we are also looking to expand into select midwestern markets, which were not as impacted by COVID as some of the coastal markets.

The bottom line: we are excited about the year ahead and look forward to helping our investors diversify their real estate portfolios.

PS – Interested in joining next month’s webinar? Contact Investor Relations for more information or sign up for an EquityMultiple account to secure your invitation.

—

¹Source: https://blogs.worldbank.org/opendata/understanding-depth-2020-global-recession-5-charts

²Source: Franklin Templeton (as of December 13, 2021).  

³Source: Moody’s Analytics (as of January 5, 2022).

This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.

Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.

All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.