The US Regional Real Estate 2022 guide covers 13 jurisdictions. The guide provides the latest legal information on the impact of COVID-19 and US tax law changes, real estate finance, planning and zoning, investment vehicles, commercial leases, construction, and income tax withholding for foreign investors.
Last Updated: May 12, 2022
As the USA emerged from the initial phases of the COVID-19 pandemic, the economy as a whole confronted a number of unique challenges, and real estate has not been immune to any of them. The pandemic accelerated social trends that were already taking hold, including regional population shifts, universal acceptance of e-commerce, and work-from-home. As the pandemic evolved, the economy was presented with a number of new macro-economic challenges, including housing shortages, supply chain bottlenecks, inflation, under-supply in labor markets, and aggressive inflation. Intersecting social trends and macro-economic challenges look likely to have a long-lasting impact on real estate in the USA.
Given the sudden shock of the pandemic in 2020, the US real estate rebound in 2021 was as surprising as it was encouraging. Some market segments recovered stronger than others, but most segments improved. CBRE estimated that US real estate investment volume in 2021 was on track to roughly equal pre-pandemic levels from 2019 – the then highest annual total – and that investment volume can be expected to increase another 5%–10% in 2022. Reporting a similar trend, JLL noted that global real estate investment activity rose 54% in 2021, totaling a record USD1.3 trillion, led by the Americas and Asia Pacific markets.
Assuming that the continuing effectiveness of vaccines and consistent improvement in therapeutics keep pushing COVID-19 toward endemic status, demand is expected to pick up in the sectors hit hardest by travel restrictions, quarantines and social distancing requirements, including hospitality, urban buildings, and entertainment. Uncertainty remains a key theme in 2022 as concerns persist around new variants, Russia’s war on Ukraine, and inflation.
The Industrial Sector
In 2021, demand for commercial warehouse and industrial space was exceptionally strong, fueled by growth in online shopping, an expanding economy, and population migration to warm-weather climates. Continuing a trend that accelerated in 2020, demand for warehouse and industrial space outpaced supply, resulting in low vacancies, higher rents, and robust investor interest. CBRE reported a record 448.9 million square feet of industrial space was under construction in the third quarter of 2021 as developers rushed to catch up to demand. Until new facilities are built, however, the tight availability of appropriate facilities, particularly in big cities, will limit new leasing activity – one of few headwinds to growth in the booming industrial sector.
E-commerce sales increased at the onset of the pandemic, accounting for 21.6% of all retail sales in Q2 2020, up from 16.2% in the previous quarter. Despite a slight deceleration in growth since 2020, e-commerce sales are well above pre-pandemic levels, at around 20% of total retail sales as of the third quarter of 2021, according to CBRE. As consumers continue to buy more products online, retailers, wholesalers, and third-party logistics companies (3PLs) may need more space for order fulfillment and storage, further driving up demand for regional and last-mile distribution facilities. This demand is likely to be heavily concentrated in Southeastern and Southwestern markets with strong population growth and superior logistics hub connectivity, including Austin, Central Florida, Las Vegas, Nashville, and San Antonio.
Rising transportation costs are a top concern for warehouse and industrial tenants, which will also drive industrial leasing demand. Industry data shows that the cost to transport goods by ocean more than tripled in 2021 and that the cost for domestic freight rose by more than 40%. Given the large share of total costs directly related to transportation – between 40% and 70%, vs 3%–6% for fixed facility costs – logistics companies will continue opening warehouses closer to consumers to contain transportation costs and speed delivery times.
In the wake of recent disruptions to the global supply chain, which itself is partially attributable to shipping costs, manufacturers will look to bring operations back onshore to the USA. Among the industries at the forefront of onshoring manufacturing technology, defense, automobile, and medical-device companies. While production ramps up in traditional US manufacturing strongholds, Arizona, Texas, and Florida are likely to see the largest increases in demand for manufacturing space, largely because of workforce supply, the low cost of available land, and low-tax environments.
Other contributing factors to the sector’s growth include the expansion of automated technology and robotics, which require modern building design and amenities, and regulatory and ESG-driven investor pressure to improve the energy efficiency and sustainability of warehouses and logistics centers. Retailers, wholesalers, and 3PLs may also seek to warehouse larger amounts of inventory to soften the impact of future supply-chain disruptions. The conditions are present for the industrial sector to keep growing at a rapid pace in 2022 and beyond.
The Office Sector
The US office market began to rebound in 2021 as more workers returned to the office and tenants took advantage of lower rents to upgrade to newer, high-amenity buildings. Amid strong job growth, leasing volume rose by 9.2% in the fourth quarter, resulting in a full-year increase of 14.6% over 2020, and net absorption turned positive for the first time since the onset of the pandemic. Meanwhile, sublease space leveled off and vacancy plateaued, according to JLL.
Across geographic markets, Sun Belt cities such as Atlanta, Austin, Charlotte, Dallas, Miami, Nashville, Phoenix, and Raleigh led the way, with leasing activity approaching pre-pandemic levels. Secondary markets also led the turn to positive net absorption. Seattle, Boston, and New York also rebounded and while other gateway cities remained negative, they experienced lower negative net absorption than in recent quarters. The volume of leases over 100,000 square feet rose by 46.6% between the third and fourth quarters of 2021, outperforming the market as a whole.
Office fundamentals are expected to continue to improve this year, bolstered by the creation of an estimated 1 million new office-using jobs nationally, according to CBRE. As employers get more comfortable managing COVID-19 spikes, they may become emboldened to make long-term leasing decisions, but serious questions remain about hybrid work and how to get workers back to in-office work after nearly two years of remote work.
The need for workplace flexibility will drive many leasing decisions in the coming quarters. CBRE’s 2021 Occupier Sentiment Survey found that 87% of large companies plan to maintain a hybrid work approach. With the service economy posting record results in 2021 it is hard, however, to use efficiency and productivity as the prime justifications for getting white-collar employees back in their seats. The business case for the office should rather focus on the benefits of collaboration, connection, and culture. This changing role of the office should accelerate a flight to quality, putting modern, sustainable buildings that offer flexible workspace and shared meeting space in highest demand.
Despite the positive momentum, vacancy rates will remain above pre-pandemic levels for the foreseeable future, and tenants will enjoy lower-than-usual rents in major markets such as Los Angeles, Manhattan, and Washington, DC. The expected delivery of more than 53 million square feet of new office construction in 2022, according to CBRE, will have a lasting impact on the national office market and accelerate the need of owners and municipalities to address the repositioning and re-use of millions of square feet of obsolete office properties.
The Hospitality Sector
The US hospitality sector came to a near-complete stop early in the pandemic as many hotels reduced operations or shuttered completely amid lockdowns and quarantines, but the sector has proven resilient, thanks to the vaccine rollout, government economic stimulus, and lockdown fatigue.
By mid-2021, overall revenue per available room (RevPar) was more than 90% of what it was in 2019, and popular leisure markets such as Miami were already above pre-pandemic levels. That said, domestic business travel and international inbound travel languished due to tight corporate travel budgets and cross-border travel restrictions. Industry data shows that as of mid-2021, core urban areas that catered to business and international travelers were still down as much as 67% in RevPar compared to mid-2019.
Many experts are optimistic that a rollback of travel bans globally will bring a recovery in inbound travel this year, even as domestic business travel remains constrained by new working patterns, including the widespread adoption of videoconferencing technology. CBRE research predicts that inbound travel, led by Asian and European tourists, will account for one-sixth of a forecast increase of 23% in total revenue for the hotel sector in 2022.
The benefits will vary across locations and properties. Resorts and all-inclusive destinations are expected to outperform, aided by a trend toward more travelers seeking simplicity and price certainty. Hard-hit global gateways such as New York and San Francisco have real upturn potential and should capture a disproportionate share of future growth.
Hospitality experienced the largest drop in investment transaction volume at the onset of the pandemic. Since then, investor activity has mirrored consumer behavior, with many leisure-oriented hotels trading hands at high, pre-pandemic type premiums. As business and convention travel slowly rebounds, pricing for corporate-oriented hotels also will increase, although a full recovery might not happen for at least another year or two.
Labor shortages continue to be a pressing issue in the hospitality industry, with recruiting and retaining staff being among the top concerns facing hotel property owners and operators. The industry also has the difficult task of forecasting and managing consumer demand amid inflationary pressures.
Other Sectors to Pay Attention to in 2022
Suburban properties, and multifamily in secondary and tertiary markets showed resiliency and strong growth during the pandemic downturn, with both secular and cyclical factors – including a desire to spend more time outdoors and millennial family formations – fueling demand for apartments in lower-density and less-expensive submarkets. CBRE predicts that US multifamily investment activity will reach USD234 billion in 2022, well above 2019’s level of USD193 billion. Investors in non-urban multifamily are seeing very strong pricing and cap-rate compression in 2022, which are expected to temper activity in this product type.
Student housing is becoming a very attractive alternative for traditional multifamily investors as they appreciate the sector’s recession protected consumer base and a strong base of middle class or better lease guarantors.
As workers started returning to the office in 2021, investors and developers showed an increased appetite for urban core multifamily. As of the third quarter of 2021, vacancy rates for urban multifamily properties were approaching pre-pandemic levels, at 5% on average, and were projected to fall to 4% by the end of 2022, according to CBRE.
Having overcome the challenges of the pandemic, the US senior housing sector is now in full recovery mode, according to JLL. Demand for senior housing in the second half of 2021 approached record highs, with more than 21,000 units absorbed across primary markets, according to the National Investment Center for Seniors Housing & Care. Over the next decade, the “silver tsunami” of retired baby boomers and fewer adult children choosing to be caregivers to their elderly family members will drive demand for senior housing nationwide. Investors and municipalities are starting to consider senior housing as a viable use for obsolete office and hotel properties in major cities.
A full recovery of the real estate industry from the initial impact of the COVID-19 pandemic will depend on more than the direction of the virus and therapeutics. Economists are confident that trends such as the growth of e-commerce, hybrid work and regional shifts are here to stay. Whether these trends continue at their current velocity or stabilize will dictate the extent to which sectors such as industrial, suburban multifamily, and leisure-oriented hospitality will stay more attractive than office, urban multifamily, and business-oriented hospitality. Current levels of activity are expected to sustain or improve across all sectors, even those that bore the initial brunt of the effects of COVID-19 as investors continue to view real estate as more resilient against inflation than equities.
The headwinds that might buffet investment decisions in 2022 are those unrelated to COVID-19, including the risk of an escalation of Russia’s war on Ukraine and the risk of recession triggered by interest rate increases.