Our outlook for real estate investing
A cycle of broad-based growth.
For the last two years, the real estate industry has been jumping through hoops to create a new normal for the way we live, work, and play. While “normal” is still being defined, from our vantage point we see the dust starting to settle on some of the real estate trends that were hazy in 2020 and 2021 including demand for travel and hospitality, the future of office, population migration, and the true resilience of various asset classes. While we recognize that many trends in this economic environment are still uncertain, our latest thesis combines industry knowledge, in-depth research, and the expertise of our Investments team to build our outlook and opportunity across ten real estate asset classes–hospitality, industrial, multifamily, retail, office, medical office, student housing, senior housing, and self-storage. We have also added life sciences to our thesis, as the sector continues to see tremendous growth and potential.
2021 was a year of record-breaking transaction volume of $809 billion according to data from Real Capital Analytics*, which is an 88% increase over 2020 volume and a huge comeback year for the commercial real estate industry. The multifamily and industrial sectors both set record transaction volumes of $335 billion and $166 billion, respectively, accounting for nearly 62%* of total volume. With a forecast of 3.5% GDP growth, the U.S. economy appears poised to drive growth again in 2022 across a spectrum of asset classes.
On the pricing side, commercial real estate prices increased by 24% in 2021 with significant price appreciation in most asset classes, according to Green Street’s Commercial Property Price Index (CPPI). As for locations, Dallas was the number one market for transaction activity, followed by Atlanta, Los Angeles, Phoenix, and Houston to round out the top five*. More details on our team’s favorite markets can be found in our Best Places to Invest in 2022 report.
But commercial real estate, although typically less correlated to the highs and lows of the public stock market, does not operate in a vacuum. Any outlook must also contemplate and adjust to the ramifications of above-average inflation, rising interest rates, and the current–and potential–geopolitical landscape. Black swan events, like once-in-a-lifetime pandemics, military conflicts, climate change, civil unrest, and cyber-attacks all affect the real world, of which real estate is a cornerstone. Our thesis isn’t static, and as the next phase of “normal” shakes out, we will adjust accordingly.
*Real Capital Analytics - Capital Trends. US Big Picture, 2021
How we’re evaluating each asset class
As we enter the next phase of the real estate cycle, we believe that nearly every asset class has an outlook for growth. However, it’s the variety of opportunities that makes this year relatively unique compared to recent history. Certain assets are far from “on-sale” but continue to be driven by robust underlying fundamentals, while others show signs of pivoting off of their lows and potentially offering acquisition opportunities at relative values. Overall, with less polarization in 2022, we view the market as more balanced and better positioned for broader, albeit moderated, growth across the board.
The hospitality industry appears to be moving into its next phase of recovery. Thanks largely in part to the 2021 summertime surge in travel, the initial recovery was stronger than expected. This put wind in the sails of the hospitality sector and provided the optimism that a full recovery would come earlier than 2024, as most analysts had believed entering 2021. According to STR, a leading data source for the hotel industry, the revenue per available room (RevPAR) for the U.S. hospitality sector hit an all-time high of $99.62 in July of 2019. It bottomed out in April 2020 at $17.93. Yet only 15 months later, U.S. RevPAR set a new all-time monthly high of $99.71 in July 2021, which was more than double July 2020’s RevPAR of $47.84.
Our experience through the pandemic has taught us that pent-up demand for hospitality does exist, especially for leisure-oriented hotels. We wouldn’t be surprised to see a similar phenomenon for corporate business-driven hotels once the country’s convention industry is once again operating at full capacity. The American Hotel and Lodging Association reported that business travelers made up 52.5% of room revenue in 2019, and that percentage is expected to recover at around 43.6% in 2022.
Overall, 2022 appears to be the year to lean into a broad hotel sector recovery. While in 2020, our team saw asset pricing discounted as much as 20%* relative to 2019 trades, this spread mostly evaporated throughout 2021. While discounted pricing for hospitality assets in comparison to 2019 values is still possible, it’s much more likely to be unique situations at the individual property level.
With the prospect of full recovery next year, we suspect 2022 will likely be the final year to acquire hospitality assets at attractive pricing before the market enters an expansionary phase. Due to the lack of uniformity of stress imposed on various asset types and geographies, specific markets and property types are bouncing back brilliantly–particularly drivable beach markets or winter sports playgrounds–while others have lagged in their recoveries. See which hospitality markets we are the most excited about in our 2022 Best Places to Invest report.
While continued uncertainty around business travel may lengthen the recovery time for urban-located hotels, we still see opportunity provided the going-in basis is attractive, and the deal is adequately capitalized to see it through to 2023. Remote work has given many people the flexibility to extend vacations and work from their destination. As business travel is recovering, the blending of remote work into leisure travel or, as STR calls it, “work-cation,” will provide opportunity in upcoming years.
*Based on CrowdStreet data as of March 3, 2022
On the heels of a massive yearly price appreciation of 41% for industrial in 2021, according to Real Capital Analytics*, we continue with a positive outlook for this sector in 2022. CBRE reported that Q4 2021 was the highest quarter in the sector’s history for net absorption, coming in at 121.9 million square feet. The availability rate was a historic low of 5.2%, and asking rents increased 11.0% from a year ago—the highest annual increase in 20 years.
With the consumer’s growing preference for fast delivery options (plus current supply chain issues), there is a shift from “just-in-time” to “just-in-case,” driving some retailers to order in excess of immediate demand. In 2022, “just-in-case” online retailers will likely need more space to store their goods and will likely handle a more expansive inventory. The imminent low inventory-to-sales ratios should drive logistics inventories up by more than 5-10% over the next five years.
According to Green Street Advisors**, although new warehouses are under construction, development timelines could be delayed due to a lag in the immediate availability of raw materials like steel. Due to limited supply and excessive demand, rents for existing properties are expected to grow by 13% in 2022 for the top 50 markets defined by Green Street Advisors*.
*Real Capital Analytics - Capital Trends. US Big Picture, 2021
**Green Street Advisors - U.S. Industrial Outlook, 2022
The capital markets are especially interested in investing in and lending on industrial assets in 2022. Industrial has long been a popular asset class among institutional investors due to continuously compressing cap rates and the potential for adding new supply. Lenders are especially eager to hold “safe” assets in their portfolio loans, which is why logistics real estate is taking up a larger amount of debt capital.
We suspect that much of our industrial deal flow this year will be focused on development, due in part to the competitive transaction market and institutional capital that is chasing lower-yield projects. Record completions in the top markets reached the highest quarterly volume since Prologis Research began tracking this metric, with record pre-leasing activity of more than 60% of the pipeline.
We suspect that a lack of well-located, industrial-zoned land and population expansion outward from popular urban centers will continue to push new industrial supply further from the existing supply. With rising land prices and lengthy timelines for permitting and entitlement, projects that break ground this year stand to benefit from the user’s willingness to pay a premium rent for buildings, especially those in well-located areas with modern features like high-speed data, floor quality, and increased clear height.
We see tremendous opportunity for this asset class going into 2022. The healthcare industry is poised to benefit from strong demand and drive subsequent growth for the medical office sector over the course of the next decade. According to the 2020 Profile of Older Americans, the average U.S. population is aging. U.S. Census data estimates that one in five Americans will be 65 or older by 2030, which increases to one in four by 2060. Furthermore, population projections from the census show that by 2034, older adults will outnumber children for the first time in U.S. history. Americans in this age cohort visit their physicians more frequently than younger people do, which means increased demand for medical office facilities.
The COVID-19 pandemic was turbulent for the economics of the healthcare system. Hospitals canceled elective procedures and postponed non-urgent treatments during the pandemic, while urgent care facilities operated at maximum capacity. There is pent-up demand for postponed procedures from the last two years, which will likely increase in-patient visits in 2022.
A consistent and ever-growing need for healthcare bodes well for the medical office sector. We see strong opportunity, especially in areas where population projection for older Americans is expected to rise. According to the Population Reference Bureau, most of the older population is concentrated in markets like California, Florida, and Texas.
We also expect increased demand for medical offices located further out and away from Central Business District locations as hybrid workers are less tied to medical offices near their office. We continue to like small-to-mid-sized medical offices which are located near hospital campuses rather than inside large hospitals. These facilities offer patients easier access, and they offer practices lower operating costs. As a result, health professionals have been migrating from hospital campus locations to purpose-built outpatient facilities, a trend we previously pursued for the Marketplace and see continuing in the years ahead.
Medical offices near well-performing retail locations like power centers and strip centers also tend to do well as people often schedule their appointments around running other errands due to convenience. Overall, we expect continued recovery for the medical office sector in 2022 as healthcare employment recovers and patients return for in-patient visits.
We have a favorable outlook for multifamily in 2022, supported by various macro trends, including rising inflationary pressures, a low-interest-rate environment, and further tightening of the housing market. 2021 was a record year for multifamily, the dominant sector in commercial real estate, accounting for 42% ($335 billion) of deal activity according to Real Capital Analytics*. Demand for multifamily soared in the aftermath of the COVID-19 pandemic, and we see continued growth for the sector in 2022. CBRE reported that the overall vacancy rate for multifamily fell by 2.2% yearly to a record-low of 2.5%, while the average net effective rent increased by 13.4% year-over-year. Occupancy in this sector has remained strong, with a new absorption record of 617,500 units in 2021, up 238% from 2020 and up 97% from 2019.
Due to high demand, the multifamily asset class is substantially more expensive than just a year ago. In their 2022 U.S. Real Estate Market Outlook, CBRE stated that the overall health of the multifamily sector will make 2022 a record year in terms of pricing. With occupancy levels forecasted to remain above 95% in the foreseeable future, constricted supply amid increasing demand will create an environment poised for continuous rent growth. CoStar* estimates a well-above-average annual rent growth in the first half of 2022, which is forecasted to stabilize at a 6.2% annual increase by year-end 2022, assuming supply can catch up with increasing demand for multifamily. Green Street Advisors*** is projecting a record 13.5% net-operating-income (NOI) growth for apartments in 2022. According to Forbes, rental demand will also be bolstered by a rise in home prices, an additional 2.9% on top of 2021 highs, as well as a gradual uptick in mortgage rates. Other demand drivers include overall job growth, wage growth, and consumer confidence, particularly in some of the nation’s fastest-growing markets.
*Real Capital Analytics - Capital Trends. US Big Picture, 2021
**CoStar - US Multifamily Annual Rent Forecast, 2022
***Green Street Advisors - U.S. Commercial Property Outlook, 2022
For multifamily, we see two strategies as most viable right now. First, we will continue to favor ground-up multifamily developments in 2022. Tremendous yearly rent growth in 2021 led to the massive appreciation of this asset class, outpacing the increase in construction costs which are up 17.5% year-over-year, the highest in the last 50 years. We will focus on assets we believe can stabilize by the third year (after being built and leased up). Historically, we have looked for projects that deliver a stabilized yield-on-cost that is 150 bps higher than its exit cap. Currently, a stabilized multifamily project typically offers a spread as high as 250 bps.
The second strategy is value-added multifamily acquisitions. These well-located properties have “good bones” but need substantial renovations to achieve potentially significantly higher rents. We will look for projects where investing, for example, $10,000 into a unit upgrade can yield more than $150 or more in increased rent. We expect rent growth to moderate over the next few years, which suggests to us that value-add plays in multifamily present a window of opportunity that may subside in the next few years. See which multifamily markets we are the most excited about in our 2022 Best Places to Invest report.
Of all property types, we believe office is the most polarizing this year. Depending on whom you ask, opinions range from office being the biggest opportunity in all of commercial real estate to the entire sector going the way of the indoor malls.
Although the future of offices is still uncertain, the hybrid-work model continues to gain traction. According to LinkedIn, roughly one out of six job postings are remote as compared to one out of 67 in March 2020. Furthermore, roughly 20% of high-paying jobs are now remote. For companies that take the route of the hybrid-work model, it means that their office space needs will evolve as employers reduce their total square footage demands. Reduced demand for square footage means that employers will likely be able to afford the higher rents associated with higher-quality, Class A and A+ properties, a trend we are already seeing. For instance, Class A trophy office effective rents are 54% higher than the rest of the office market*. This gap stood at 43% two years prior to the pandemic.
We may have witnessed the bottom of the office market in 2021. As the only property type that has experienced cap rate expansion since the beginning of the pandemic, office cap rates stand at 100-150 basis points higher than student housing, manufactured housing, and self-storage. While uncertainty remains going into 2022, an environment where office trades in the same range of retail cap rates suggests that a considerable amount of risk has been priced in.
*Rothstein, Matthew. “Rent Gap between Trophy Offices and All Others Reaches Record High.” Bisnow, 2 Nov. 2021, https://www.bisnow.com/national/news/office/trophy-office-rents-record-gap-all-other-office-110748.
Trends are shifting towards a hybrid model of working, yet there is still uncertainty when it comes to office demand. In 2022 the trend for in-office demand is “quality over quantity,” with employees demanding amenities, modern safety measures like high-filtration heating and ventilation systems, and touchless elevators. There is a “flight to quality” as tenants are increasingly disqualifying older projects and relocating or moving into new construction projects. Newer or redeveloped properties are simply better equipped to meet the demands of employees, which is attractive for office occupiers.
While we like stabilized, cash-flowing office deals, we also believe 2022 is the time to begin seeking value-added deals, particularly those with an attractive going-in basis, high asset quality, a resilient submarket, and an experienced sponsor behind it.
We also see the management model of coworking gaining momentum in an evolving office market. In the coming years, we expect to see more companies opt into flexible coworking spaces. As a result, we view the blending of coworking and traditional office spaces within the same building as part of the post-COVID-19 office.
Lastly, office utilization rates vary depending on location which suggests that certain markets will eventually feel more like how they were pre-pandemic while other markets continue the reshaping of their office spaces. According to Kastle Systems, Houston, Austin, and Dallas are among the top metros in terms of bringing people back to the office. These Texas markets currently stand in the low to mid 40% range in terms of their pre-pandemic occupancy levels. On average, looking across the top 10 metros tracked by Kastle Systems, office re-utilization rates are currently hovering around 31% (as of 2/9); this discrepancy is part of what makes us more bullish on Sunbelt office locations in 2022.
Retail was one of the hardest-hit sectors in 2020 but is now a path to recovery. From the bleak scenario of March 2020 retail sales were up 27.4%* by December 2021. The pandemic served as a forcing function to exit weaker retailers from centers around the U.S., resulting in some consolidation in rent rolls. Going into 2022, we can feel more confident about the current retailers in a center as being viable in the years ahead.
JLL’s Retail Recovery report** points to a healthier retail market recovery and higher rent growth for the Sunbelt markets than in the Northeast and California markets, observing that “retailers are going where the people are.” All retail asset classes, except “Lifestyle & Mall,” experienced positive absorption according to CBRE, reducing overall retail availability to a 10-year low of 5.6%. Average asking rents were up by 1.6% year-over-year.
New construction deliveries were mute, with 23.5 million square feet delivered in 2021, which was a 36% decrease from 2020 and down 49% since 2019. In addition, beginning in August, Green Street Advisors**** has tracked foot traffic at retail strip centers at levels 3-5% above pre-pandemic highs. With a further rebound in consumer spending likely in 2022 and supply that will remain muted, we see opportunity for further increases in both retail rents and occupancy rates in 2022.
*U.S. Census Bureau - Retail Trade: U.S. Total, 2022
**JLL - Retail Recovery, 2021
***Green Street Advisors - Strip Center Sector Update, 2021
In 2022, we see opportunities for retail-driven by stable and improving market fundamentals. We will observe market conditions and look to bring retail segments to our Marketplace that have fared well relative to others, such as grocery-anchored centers and neighborhood shopping centers. It remains true that future investment into retail will require careful consideration for the rapidly growing e-commerce sector driven by online shopping and accelerated by the COVID-19 pandemic. However, the segments impacted the most are isolated to traditional shopping malls and second-tier big-box stores.
For many other types of retail, e-commerce is becoming symbiotic with brick-and-mortar retail. According to a recent report published by IHL*, national retailers expect to open more stores than they close for the first time since 2017. This phenomenon tracks well with what we have experienced through the Marketplace. We have recently pursued retail investment opportunities such as an Amazon Fresh-anchored shopping center in suburban Chicago. Amazon Fresh combines in-person consumer grocery shopping, a distribution center for local grocery deliveries, and an online purchase return center all in one store. We look at Amazon Fresh as a trend leader for retail, and we expect to see increased cohabitation of e-commerce and traditional brick and mortar retail uses in shopping centers in the years ahead.*Rothstein, Matthew. “Rent Gap between Trophy Offices and All Others Reaches Record High.” Bisnow, 2 Nov. 2021, https://www.bisnow.com/national/news/office/trophy-office-rents-record-gap-all-other-office-110748.
The self-storage sector boomed in the last two decades, but with decelerating market fundamentals three years prior to the COVID-19 pandemic. Fast-forward to 2020, demand for self-storage space spiked again, bolstered by COVID-19-related migration as people moved across states, as well as intrastate, from urban to more suburban locations.
The sector is institutionalizing as the major storage REITs including Extra Space, Cube Smart, Public Storage, and Life Storage acquire properties and consolidate this fragmented asset class.
These factors have combined to drive pricing skyward, up 66% in 2021, according to Green Street Advisors*. The rampant appreciation is driven by a few factors. First, double-digit rent growth and record-high 95% occupancy rates nationwide translated into a 16.5% increase in NOI in 2021. At the same time, cap rates have compressed 110 basis points since the beginning of the pandemic, down to 4.0% nationally. All told self-storage ranks right at the top, alongside industrial, as one of the best performing of all property types over the past two years.
*Green Street Advisors - U.S. Self-Storage Outlook, 2022
There is an increasing need for self-storage due to work-from-home and relocation trends, which will likely create more opportunities in non-coastal markets due to pandemic-induced migratory patterns. We also expect major university towns to see strong demand for storage space. The older competitive set for self-storage often lacks climate-controlled and newer products, which continues to create opportunities for development. For development opportunities, we seek growing metros with a relative dearth of supply, namely five square feet or less of self-storage space per capita within the primary market area.
We are also bullish on adaptive reuse projects as oftentimes they are situated in great in-fill locations such as a retail center on a busy thoroughfare. In our experience, both development and adaptive reuse projects benefit from an unusually large spread between a typical stabilized yield on cost at stabilization (typically ranging from 7.5–8%), versus the typical exit cap of a fully stabilized self-storage property (roughly 3.5–4.5%). This outsized spread means a sponsor can often sell a stabilized self-storage property for 40–45% more than the cost to build it.
According to Green Street Advisors*, there will be a downtick in new deliveries in 2022 until 2024 due to labor shortages and supply chain issues. However, construction deliveries are expected to climb in 2025 and beyond due to increasing demand for self-storage. To us, this suggests that the next two years may provide an extended window of opportunity to invest in the sector and re-evaluate our strategy as we approach 2024.
*Green Street Advisors - U.S. Self-Storage Outlook, 2022
Senior housing was hit particularly hard by the pandemic in terms of both occupancy levels and labor shortages, as well as concerns about the health and safety of so many medically fragile senior adults in close quarters. Going into 2022, we are cautiously optimistic about the senior housing sector in spite of any lingering uncertainty.
The occupancy rate for senior housing properties has recovered from the pandemic-related low of 78% in the first half of 2020 to 81% in Q4 2021, according to Senior Housing News. These occupancy levels are still historically low as the senior living sector faces challenges from labor shortages, higher death rates from COVID-19, and alternative living arrangements.
With the first set of Baby Boomers turning 80 years old in 2025, we expect an influx of demand for senior housing amid an aging population. According to the U.S. Centers for Medicare and Medicaid Services, the number of individuals needing long-term care will double by 2050. Thanks to medical advancements, the U.S. population is living longer, increasing the average age of residents in these facilities to 84 years old.
We are taking a “wait and see” approach for senior housing in 2022. This asset class is “needs-based” and the need for senior care is growing, but we may not see a meaningful spike in demand until closer to 2025. Advancements in medical technology have increased opportunities for alternative living arrangements, affording many seniors the opportunity to live in their own homes longer, which can potentially reduce demand for traditional senior living arrangements.In the meantime, there may be opportunities to seek discounted properties as compared to pre-pandemic levels. According to CBRE’s Q2 2021 Senior Housing Market Insight report, the transaction volume and development is down significantly. However, demand for senior housing is forecasted to grow by 177% from 2021 to 2050, which will eventually push construction activity to keep up with demand for senior care. The PWC Emerging Trends in Commercial Real Estate report ranked senior housing as one of the top asset classes for investment prospects in 2022. While we may not be quite as bullish as ULI on this sector for 2022, we will continue to keep our eyes open for compelling deals going forward, especially as the dust starts to settle from the impacts of new COVID-19 variants.
In an effort to stop the spread of the virus, COVID-19 vaccinations were mandated for close to 1,000 colleges and universities, according to The Chronicle of Higher Education. As a result of these precautionary measures, students were allowed to return to campuses for the 2021 fall semester, and pre-leasing was up 5.2% from the year prior.
Fannie Mae reported uninterrupted new supply by bed deliveries for 2020 and 2021, which translated into level supply year-over-year. However, due to supply chain issues that are impacting most asset classes, new student housing project completions are expected to be sluggish, with a relatively low new supply of bed deliveries forecasted for 2022 according to RealPage Inc.
Although the student housing sector is normalizing faster than was previously anticipated, we do not view the current state of the sector as a rising tide that will lift all boats, because overall reduced enrollment in colleges and universities and declining birth rates may pose future challenges to a number of schools. According to the National Student Clearinghouse Research Center, enrollment in colleges and universities has not yet caught up to pre-pandemic levels. This is with exception of graduate enrollment which is continuing its upward trend, up 4.9% since 2019. Undergraduate enrollment had the steepest declines at 7.8% fewer students as compared to 2019.
This asset class continues to show resilience in the strongest locations. The opportunity in this sector is dichotomous, and location plays a key role in choosing the right investment. The most desirable and best-capitalized flagship universities will exploit their competitive advantage to attract students in record numbers, which will propel the student housing markets in areas with large universities at the expense of markets with smaller institutions and community colleges. This leads us to be generally bullish on Tier I universities (schools that are expected to bring in at least $100 million per year in research grants, plus have selective admissions and high-quality faculty), particularly those with large student populations and affiliated with major conferences.
According to the Yardi Matrix Student Housing report, the outlook for student housing is positive, especially for off-campus properties and in highly selective universities. The report also mentions that rents are at above pre-pandemic levels. Low vacancies in the student housing sector are pushing rents up in areas where student enrollment is anticipated to be high, and supply is strict.
Going into 2022, we fully expect more educational institutions to adopt a blended learning approach with both in-person and online courses. However, there is little evidence as of now to support that blending virtual classrooms into the traditional university settings will negatively affect the student populations that are local to campuses, considering that the in-person college experience is still important to students.
Overall, we see an opportunity for the sector and will focus on areas surrounding top-tier universities with a prudent supply of new housing relative to forecasted demand.
Life sciences is one of the fastest-growing industry sectors with a record $70 billion of private and public capital poured into life sciences-related companies in the U.S. in 2020; this was a whopping 93% increase from the previous record of $36 billion received in 2018.
According to PWC, the life sciences sector is projected to continue investing in oncology, gene therapy, neurology, and cardiology for the foreseeable future. A report by Green Street Advisors* showed NOI growth for the past decade for this sector at well-above the average for other property sectors which “looks repeatable the next five years given the tailwinds in the sector.”
Keeping the numerous data points in mind regarding the ever-growing potential of this sector, we are bullish on life sciences going into 2022 and beyond.
*Green Street Advisors - Life Science Insights, 2021
A unique aspect of life sciences occupiers is that they tend to cluster around specific areas. We see opportunities near bustling urban environments, especially in areas with top talent, high intellectual capital, and the presence of top research universities. In a report by CBRE, the top markets for life sciences real estate include Boston, the San Francisco Bay Area, and San Diego, where demand grew by more than 34% since mid-2020, with significant rent growth, tightening vacancies, and pre-leasing in new projects. See which life sciences markets we’re the most excited about in our 2022 Best Places to Invest report.
Life sciences tenants require highly specialized real estate, which is tough to come by–appropriate ceiling heights, robust power, high floor load capacity, venting, excess plumbing, and freight elevators. In addition, life sciences tenants need to consider the overall feasibility of the building for their specialized operations. Currently, there is a limited supply for lab space and R&D facilities nationwide, which has translated into tremendous excess demand in this sector, leading to rising rents and record development. The Boston-Cambridge life sciences market, for instance, has the tightest vacancy in the nation at one percent. In clusters where we see demand outstripping current supply, we will seek to fund ground-up developments.
In addition to ground-up development, we see creative opportunities to reposition existing properties when they are suitable for conversion. Converting existing office properties to life sciences uses is complex, so we’re placing heightened sensitivity on the experience of the sponsor.
Outlook By Geography
We remain focused on the metros we view as best positioned to benefit from a surging real estate market. Above-average rent growth, strong absorption rates, recovering job growth, and strong median household income growth are consistent themes across the markets that stand out to us this year. We also see an opportunity for urban recovery, which is why certain markets, such as Seattle-Tacoma and Miami, moved up significantly in our rankings this year, relative to their 2021 rankings.
A theme that carries over from 2021 into 2022 is continued momentum for our 18-hour city thesis. Many of our perennial favorite secondary markets–Dallas, Austin, Atlanta, and Nashville–experienced outsized rent growth and asset appreciation in 2021. We see the underlying fundamentals that are currently driving this growth continuing in 2022. Also, while most of our top markets demonstrated enough consistency to merit inclusion again in 2022, we welcomed four new markets–San Antonio, Charleston, San Diego, and Fort Lauderdale–to our top metros nationwide.
Environmental, Social and Governance (ESG)
The three pillars of ESG consider the impact of a business on environmental sustainability, social issues, and fair corporate governance practices to more holistically evaluate long-term risk and opportunities. This means we must rethink how commercial real estate exists within the built environment, how and by whom it is operated, and the long-term impact of our business operations.
CrowdStreet recognizes that the time has come for the commercial real estate industry to cease being a part of the problem regarding ESG issues and strive to become a part of the solution.
In 2021, we set a goal of having 15% of all approved Marketplace deals satisfying one or more CrowdStreet ESG components. We are happy to say we exceeded our goal, with 16.7%* of our total approved deals meeting these criteria.
We’re reaffirming our commitment and responsibility and have raised the bar in 2022 to a goal of 20%. That is just the beginning of our ESG evolution.
*Based on internal CrowdStreet data as of Febuary 25th, 2022
The massive momentum we saw in 2021 is transitioning into a broad expansion mode for 2022. While economic growth looks to be moderating from its torrid pace of 2021, Goldman Sachs still expects the US economy to grow by 3.2%, which equates to above-average growth by normal standards.
Any outlook right now must contemplate the possibilities of above-average inflation, as well as the rising interest rates. On the inflation front, while we acknowledge that it may continue at relatively high rates for another year or more, we believe our current inflationary environment will be relatively transitory and should abate as supply chains catch up to demand, hopefully within the next two years. In the meantime, our research suggests that owning commercial real estate during above-average inflationary periods can be a good strategy for investors as it can serve as a good hedge. Rents tend to match inflation over time, so to the extent that above-average inflation occurs, rents typically increase to keep pace.
As for rising interest rates, we see a moderately rising interest rate environment on the horizon, and we consider that generally good for the CRE industry. In our opinion, a ten-year treasury note that hovered around 1.5% last year, combined with massive injections of liquidity from the Fed, drove price appreciation to a degree that, were it to continue unabated for another two years, could result in an overheated market that would run a risk of crashing by 2024. We are pricing in the assumption of a roughly 2.5% 10-year Treasury by early 2023, and we would welcome a corresponding return to more normalized rates of growth in the years ahead. Such an outcome would give us greater confidence in a longer, more sustainable cycle.
While we are also forecasting modest cap rate expansion, it's worth noting that, ultimately, cap rates tend to be more supply/demand driven than interest rate driven. For example, from 2016 to 2019, the yield on the 10-year Treasury note increased from roughly 1.5% to over 3%, yet cap rates compressed over that same period.
While we see continued momentum behind the multifamily and industrial sectors that grew abundantly in 2021, we see an increased opportunity coming to other sectors as well. From the demographic drivers of an aging population leading to increased demand for healthcare-related real estate to our urban reshuffle that has spiked demand for self-storage to the ushering in of a new office culture centered around flexibility, 2022 looks to us as a year in which all asset classes present the prospect of opportunity, just in varying shapes and forms.
As is always the case, the possibility of unknown shocks around the corner, good and bad, are always present. As such, we will continue to monitor markets and update our thesis accordingly. To the extent we shift our outlook, we’ll keep you apprised of our latest perspective.
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