CARLSBAD, CALIF. — Commercial real estate investors are navigating a delicate balancing act as strong demand across many sectors is hitting some headwinds from inflation, construction costs and labor issues.
A first-quarter report by LightBox RCM highlights inflation’s double-edged sword as a driving force behind capital migration into the industry and increased costs across investment and construction sectors.
The 2022 Q1 LightBox RCM Investor Sentiment Report found that 52.3 percent of industry professionals expect that investment activity will be somewhat or significantly higher than in 2021, despite a marketplace that faces increasing headwinds from price increases on materials and consumer goods, among other factors. An additional 20 percent expected slightly higher levels. At the same time, 35.4 percent of industry professionals believe investment sales pricing will be somewhat or significantly higher in 2022 than in 2021 and 36.9 percent say it will be slightly higher.
“Today’s capital markets climate may be one of the most dynamic and intricate we’ve seen in many years,” says Tina Lichens, senior vice president of broker operations at LightBox, a Carlsbad-based analytics firm. “Investors are navigating a complex environment with significant opportunities as well as economic headwinds that are dictating a more nuanced approach. We expect to see subtle shifts in investment approaches and strategies as a result.”
The recent Russian invasion of Ukraine is adding another layer of potential volatility, as industry practitioners debate the potential impact on oil prices, commodity pricing and other factors.
“A lot depends on the length of the geopolitical turbulence. Some players may adopt a wait-and-see policy or pull out of the market completely, which reduces demand-side competition and could lead to somewhat softer pricing,” says Geoffrey Kasselman, partner and senior vice president of workplace strategy at CRG. “On the other hand, alternative institutional investments are likely to underperform as a result of such turbulence, which could end up boding well for an influx of new real estate capital seeking better returns.”
Highlights of the report include:
- Rising interest rates and increasing construction costs — largely a product of escalating rates of inflation — are the biggest threats and are causing investors to revise profit expectations.
- Multifamily and industrial assets ranked as the top two sectors for investors.
- 72 percent of respondents expect commercial property investment sales volume to exceed 2021 levels; a similar percentage of respondents expect pricing levels will increase, too.
- Population growth and household formation are top drivers of investment hot spots.
“One of the reasons 2021 investment activity was so strong is there was money coming in from outside investment categories as investors focused on commercial real estate as a safe haven as the economy moved into an inflationary period,” says John Chang, national director of research for Marcus and Millichap.
To view the full report, click here.