2021 was a record year for CRE, nearly doubling in total transactions from 2020. However, with looming Fed rate hikes on the horizon, there is slightly more uncertainty surrounding the outlook for 2022.
The Fed has announced a rate hike as early as March 2022, with a potential of two more hikes this year, at 25bps (or .25%) per increase. The increase comes at a time when inflation is on the rise, and the Fed is beginning to unwind their asset purchase program. Increasing rates allows them to ease inflation. So, what does this mean for CRE transactions?
Real estate, multifamily specifically, has always been an appealing asset class when it comes to inflation protection. Increases in rates, especially slow increases will likely have little impact on multifamily investing, barring any unforeseen higher than expected rate hikes. This bodes very well for those already in the space, as we’ve already seen business as usual thus far into 2022 (as of February 17, 2022). We should also see an increase in new investors into the space as they look for a better yield and inflation protection.
As more investors move into the space, demand will increase, particularly in the top markets around the country. This demand should move savvy operators to new markets, so look for tertiary and secondary market demand to increase, thus creating a better quality of living in markets like Bozeman, Idaho Falls, and places like Clarksville, Tennessee.
There are a few things to that could hinder this growth however–the issues with supply in building materials being the main factor. As supply chains continue to bottleneck, look for some projects to be deferred to 2023. Keep this is in mind if you are looking into ground up development in some of these secondary markets. The demand will be filled where it is needed most first.
Another variable to keep an eye on is the rental price increase. Some markets in 2021 saw increases as high as 20% and even higher in markets like Austin, Texas. Look for these increases to continue, but at a more stable rate. This is a key factor for underwriting, do your due diligence when vetting operators. Things like 10% increases year over year for 7-10 years are a huge red flag! Good operators know that this spike is not sustainable. If for some reason rental rates do continue this trajectory, then that is a huge bonus as an investor, but if the market corrects or a downturn comes, then you are protected.
All in all, 2022 is shaping up to be another great year in CRE. At CCG we are very excited to continue to grow our investor base and do our very first deal under the CCG name! As always, please do not hesitate to reach out if you have any questions, or if you are interested in joining our investor team!
Cheers,
Jonathan Cattani
Managing Principal
Cattani Capital Group