Economy & Policy
U.S. Real Estate Market Outlook 2022
Growing economy to fuel commercial real estate’s recovery
In terms of GDP, the U.S. has fully recovered from the pandemic-induced recession of 2020. Real estate’s recovery is generally in full swing, with some sectors progressing faster than others. The pace of GDP growth will slow in 2022 from 2021’s exceptionally high level but will remain above the long-term trend for the U.S. Alongside low interest rates, strong economic growth will provide highly supportive conditions for commercial real estate.
COVID-19 outlook still uncertain but more optimistic
As the delta and omicron variants showed, the pandemic’s course is difficult to predict. COVID will likely endure in some form for the foreseeable future, However, society is learning to adapt to life with the virus and the ability to manage its effects has improved considerably. This is largely due to broader vaccine availability and the emergence of antiviral and antibody therapeutics. So, while COVID-19 will remain present in 2022, its impact on people, health-care systems and the economy should be more subdued than in 2020 and 2021.
Continued economic growth ahead
We expect U.S. GDP to expand by a historically strong 4.6% in 2022. All four quarters will see more than double the long-term trend of around 2%. The recently enacted Infrastructure Investment and Jobs Act—as well as the social spending proposals under consideration as of this writing—may add some upside potential to our 2022 growth forecasts, with greater impact in 2023 and beyond.
Figure 1: U.S. GDP Growth, CBRE House View
Source: CBRE Research. October 2021.
Inflation and interest rates in focus
Inflation reached multi-decade highs in the U.S. during 2021, largely due to strong economic growth, labor shortages and hobbled supply chains. All of this conspired to increase costs for products and services. We expect that price increases (as measured by Core PCE, the Federal Reserve’s preferred measure) will remain elevated during the first half of 2022, but will increase just 2.5% for the full year amid cooling economic growth and fewer supply chain constraints. Headwinds to growth in China—the world's second largest economy—are a risk to growth in the U.S. and could impact the timing of monetary policy adjustments.
Given the strong economic recovery and inflationary pressure, we expect the Fed will end its emergency quantitative easing—a key policy response to increase liquidity and improve market functioning during the pandemic—by mid-2022. This will set the stage for an increase in the federal funds rate, with the potential for more than one rate hike before year's end. However, we do not foresee interest rates rising sharply enough to disrupt property markets, with the 10-year Treasury yield expected to reach 2.3% (from 1.4% in early December) by the end of 2022.
Figure 2: Inflation vs. Fed Target, CBRE House View
Source: CBRE Research, October 2021.
Figure 3: U.S. 10-Year Treasury Yield, CBRE House View
Source: CBRE Research, October 2021.
We do not foresee interest rates rising sharply enough to disrupt property markets, with the 10-year Treasury yield expected to reach 2.3% (from 1.4% in early December) by the end of 2022.
Policy changes and commercial real estate
The recently enacted Infrastructure Investment and Jobs Act includes $550 billion in new spending on physical infrastructure over the next 10 years that could boost commercial real estate in 2022 and beyond. One positive effect is higher short- and long-term economic growth, which translates into more demand for commercial real estate, as new projects get underway and long-run productivity improves. In local markets, new areas could be opened for development, and better infrastructure supports the growth of local businesses.
As of this writing, Washington, D.C., policymakers are considering a large social spending bill that is estimated to cost about $1.75 trillion over 10 years. Several provisions could benefit property markets. Enhanced tax credits and health-care subsidies would support spending among lower- and middle-income workers. Large investments in “green” initiatives and affordable housing could increase demand in certain property sectors and regions, while universal pre-K and expanded Pell grants could expand workforce participation over time.
This bill also carries major implications for the tax code, which pose some degree of risk for commercial real estate. The most notable changes are a 3.8% net investment income tax expansion (which will cover rent and capital gains), surtaxes on taxpayers with adjusted gross incomes over $10 million and new tax incentives for clean energy infrastructure and building retrofits. Importantly, many of the proposed tax changes that would have been most detrimental to property markets are now off the table—including those affecting the 1031 exchange and carried interest treatment as well as an increase in the tax rate on capital gains.
A growing focus on ESG
Environment, social and governance (ESG) initiatives will play a larger role in real estate in 2022. According to CBRE's 2021 Americas Investor Intention Survey, more than 75% of investors have adopted or are considering ESG criteria, a trend that will continue.
Impacts will not only come in the form of legislation, including elements of President Biden’s spending proposals, but also from federal regulation. The Securities and Exchange Commission (SEC) is expected to issue rules to improve ESG reporting consistency across various disclosures and reports to investors. These rules will touch on each of the ESG principles, including climate change, human capital management and board diversity. This will likely heighten investor and occupier focus on how their real estate decisions may hasten ESG compliance. Beyond the federal level, it is important to note that policymakers on the state and local levels are also focused on ESG—many have already enacted notable policies in this regard—and this too is worth watching in 2022.
In real estate terms, ESG will lead to more demand for efficient buildings and retrofits. Given the fact that commercial buildings account for 16% of U.S. CO2 emissions, according to the U.S. Department of Energy, property portfolios will play an important role in meeting ESG targets in the coming years.
Trends to watch
- Slowing growth abroad and the normalization of monetary policy
Economic headwinds in China and supply chain issues will factor into inflationary pressures in 2022 and influence monetary policy. Should economic growth in China outperform and supply chain issues persist, the resulting inflationary pressures could hasten the Fed’s first rate hike since 2018. Alternatively, slowing growth in Asia and a resolution of supply chain issues could slow the U.S. central bank’s reduction in monetary stimulus. These are the main factors—along with COVID-19—that could shape the overall economic environment in 2022.