Commercial real estate (CRE) assets have long been a reliable performer when it comes to delivering stable, consistent, investment returns. But, in 2022 against the backdrop of the pandemic’s third year, rising interest rates, supply chain disruptions, and accelerating technological change, the commercial real estate market faces some degree of uncertainty.
In this article, we are going to discuss the commercial real estate trends that are likely taking shape in 2022. First, we will discuss the broader trends shaping commercial real estate markets. Second, we will discuss them as they relate specifically to the types of grocery store anchored retail centers that we invest in. By the end, readers will have a greater understanding of the macro trends driving capital allocation in 2022 and will be able to use this information to make their own investment decisions.
At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.
6 General Commercial Real Estate Trends
At the beginning of each year, major players in commercial real estate like CBRE, JP Morgan, and Deloitte, issue their forecasts for the trends that will shape investment decisions in the year ahead. We have described the most notable below.
1. Generally – The Outlook Is Positive
In their report, CBRE notes that “…We foresee a record year for commercial real estate investment, enabled by high levels of low-cost debt availability and new players drawn to real estate debt’s attractive risk-adjusted returns. Commercial real estate values will rise, particularly for sought-after industrial and multifamily assets…”
2. Is The Impact of E-Commerce Overblown?
Over recent years, many businesses have been impacted by the continued rise of ecommerce. These impacts have translated into increased credit risk for the traditional brick and mortar retailers who lease space in commercial assets. But, JPMorgan thinks that some of this concern may be overblown. Specifically, they state “…while e-commerce has impacted brick-and-mortar retail, its effects may have been overblown. People still want to eat at restaurants, get haircuts and purchase other in-person goods and services.”
3. Hybrid Work Isn’t Going Anywhere
At the outset of the pandemic, we were all forced to work from home and it turns out we kind of liked it. But, many companies want workers in the office, at least sometimes. As we move into 2022, a hybrid remote/in person work environment has emerged as a viable long term solution. JPMorgan notes “…the future of offices is still largely unknown. Across industries, however, employers are embracing hybrid work. Even tech giants, many of which were committed to 100% remote work, are leasing office properties in major U.S. cities (like New York, San Francisco, Phoenix, Tampa, Washington DC or Los Angeles). Current employment numbers have led other, more traditional businesses to use hybrid work as a recruitment and retention tool.”
4. Housing Affordability is An Issue, Is Multifamily The Answer?
In the most popular markets – Florida, Texas, Colorado – home prices continue to rise, putting them out of reach for median wage earners. This is an issue, but affordable multifamily assets and higher density can be a solution – if they are incentivized by local governments and municipalities. JPMorgan reports, “…Moving forward, however, municipalities need to offer incentives. The industry must also draw on public-private partnerships to build more workforce housing.”
5. ESG Concerns Come to the Forefront
ESG is an acronym that stands for “Environmental, Social, and Governance” and investors in the real estate sector are likely to demand more responsible ESG practices in the coming year. In their outlook report, Deloitte notes “most CRE companies are in the early stages of addressing climate risk; respondents indicated sustainability concerns, and the need to address them were priorities in this year’s survey. But in the wake of the pandemic and community demands for more equitable playing fields, CRE leaders should also prioritize social issues and diversity, equity, and inclusion (DE&I) initiatives. The CRE industry has a long way to go to achieve equitable representation.”
6. Demand for Technology Continues To Rise
With the rise of hybrid work environments, companies will continue to demand the technology infrastructure needed to enable it. This is particularly true for office space and the office market in general, but it also applies to asset classes like data centers and self-storage who may be able to leverage technology solutions to drive lower operating costs.
This is potentially a big opportunity as Deloitte reports, “many CRE firms are focusing on retrofitting properties and repurposing spaces for alternate uses to maximize value. However, only one-quarter of respondents say their companies are substantially increasing technology investments to bolster portfolio and asset management capabilities.”
For commercial real estate investors, it is important to recognize these trends and use them to guide their investment decisions. At First National Realty Partners, we feel it is important to stay on top of the broader trends described above and to pay close attention to the trends that impact the retail industry specifically. Let’s discuss those next.
5 Retail Trends
Of the four major commercial real estate industry property types, it could be argued that none has seen more change than the retail sector. While this change is traditionally discussed in a negative context, the retail sector has proven to be remarkably resilient and has been able to adapt to changing consumer shopping behavior. As we look towards 2022, there are five retail trends to watch.
1. Retail Productivity & Consumer Spending Is Rising
In their 2022 outlook, CBRE reports that “since 2010, sales per sq. ft. of U.S. retail space have been on the rise. From 2010 to 2020, retail sales grew 42%, while retail supply grew just 4%. The pandemic forced a temporary pause in this trend, but year-to-date activity in 2021 shows that retailers are using space more efficiently than ever.
Consumer spending is forecast to rise in 2022, as a build-up of personal savings during the pandemic is released. The revival of inbound international travel, responsible for more than $150 billion in expenditures annually according to a 2019 U.S. Travel Association report, will provide an additional boost to retail in coastal and other tourism-focused markets.”
2. Modest Levels of New Development Are a Tailwind For Existing Properties
New construction in the retail sector has been relatively modest for several years now. Lack of new product and a low interest rate environment means that demand for existing properties has been intense, which is beneficial for current property owners. To support this point, CBRE says “with developers focused on industrial and multifamily projects, the retail construction pipeline will remain modest heading into 2022. As supply chain issues impact building materials, including delayed deliveries and higher overall costs, retail development will remain constrained, allowing space productivity to improve even more.”
3. Foot Traffic Will Rise
Even with the Omicron variant of the coronavirus spreading quickly, there are signs that this wave is cresting and could see an equally sharp decline, especially in dense urban areas like New York City. As restrictions begin to lift, retail centers are expected to be the beneficiary of increased foot traffic (and sales).
In their 2022 outlook, CBRE notes that, “foot traffic at retail centers will rise in 2022 as more pandemic restrictions are lifted. Occupiers are signing longer leases and investors are placing capital into retail assets, setting the stage for a busy 2022. The restoration of inbound international travel will also boost retail sales in gateway markets.”
4. Digital/Retail Partnerships
In an effort to expand their physical offerings, traditional retailers will pursue partnerships with digital native /direct to consumer companies to offer in store selections of their products. This can be a win/win for both brands as it could increase foot traffic to physical retailers and allow emerging brands to gain a foothold in traditional retailers.
5. The “Last Mile Problem” Makes Physical Stores More Important Than Ever
The “last mile” on the journey of a retail product to a consumer’s hands is one of the most challenging and expensive parts of the shipment/logistics process. As e-commerce sales continue to rise, existing retailers continue to convert sales floor space to distribution/warehouse space to solve this issue.
CBRE reports that “For the final “50 feet,” which remains one of the most expensive legs of the logistics process, physical stores will take on a greater role in 2022. Stores will make it easier for consumers to return goods, offer refunds and expand return locations.” In other words, existing retail stores are slowly changing into critical distribution hubs as an effective way to transport goods over the last mile into consumer hands.
It is one thing to identify the retail trends, but it is another altogether to understand how they will impact the allocation of capital.
What Do Retail Trends Mean For Investors?
While it is difficult to speak for other investors, we can certainly speak to how the trends described above impact our own commercial real estate investment strategy in the new year. There are five points to consider:
Fundamentals Matter
It may seem obvious, but a rising interest rate environment with much uncertainty means that we are taking a back to the basics approach. We are making safe assumptions about future growth and financing our properties with conservative amounts of debt. When appropriate, we use fixed rate debt to limit our exposure to further interest rate increases.
We Care About Our Tenant’s Business Model
As part of our fundamentals approach, we are looking closer than ever at the business model of our tenants to ensure they are well positioned to thrive in a post-pandemic, e-commerce first world. In addition, we are paying close attention to our tenant’s finances to make sure they can withstand prolonged economic contractions.
Grocery Stores Are More In Demand Than Ever
Given their stability and the consistency of demand for their products, investors love grocery stores which has given us a great deal of validation for our business model. But, it has also increased competition for the best properties. This means we must remain disciplined and not “chase” properties to the point that we end up paying a higher than acceptable price for them.
Follow The People
Wider acceptance of remote work means that employees don’t need to live in the same city as their company. This is driving significant growth in the south and west – states like Florida, Texas, and Colorado are the major beneficiaries of this trend. Where the people go, businesses go. As a result, we are actively looking for deals in high growth markets to stay ahead of this trend.
Interest Rates Are Going Up
Many properties are financed with variable rate debt, which may leave them exposed to interest rate risk in a rising rate environment. We think that properties with fixed rate, long term debt, may fare better than those who may be forced to refinance in the short term.
So, for us, these emerging trends mean that our business model is validated in the sense that grocery store anchored retail centers are the “gold standard” of retail investment. But, it also means that we will have a renewed focus on tenants who showcase multi-channel distribution strategies and have an experiential component. With these tenants in place, we think our properties can offer a compelling mix of risk and return.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
