Highlights:
- Affordability is our theme
- A bottom-up analytical approach is needed to uncover the best opportunities for 2022 CRE investment
- Hidden gem opportunities exist in multiple sectors
A multitude of factors will drive commercial real estate (CRE) portfolios in 2022 including travel, work and behavior patterns. These have all been rewired by the Covid-19 pandemic (and further cemented by the Omicron variant).
Inflationary forces also have the potential to impact the decisions of commercial real estate investments and lending. So, as we take in the new landscape, the other thing that we’re rewiring is our outlook. If you think like we think, your first question is probably: “Where’s the strategy?”
In this sea of moving parts, the one constant in our positioning is affordability and finding the right products and property mixes to satisfy our thesis.
Here at Ready Capital, we have performed extremely well since the onset of the pandemic and are confident that we can continue to navigate this dynamic landscape.
To that end, we are firmly in the consensus camp that inflation is less transitory with rate hikes expected in Q3, Q4 which should drive increases in rentals, thus highlighting our core viewpoint and heightened focus around where to look for affordability.
Are some commercial real estate sectors positioned better than others?
With regards to a rebound in the office sector, we still see a lot of uncertainty and the central business districts (CBDs) of major urban areas remain in the danger zone. However, there are opportunities within certain segments and idiosyncrasies of the market. The devil is often in the details.
Despite top-category assumptions:
- “Hospitality” is not a recovery loser for commercial real estate investment
- “Office” is not a recovery loser for commercial real estate investment
Let me explain: With a more thematic, macro view, and with thorough bottom-up research and analysis, we are finding hidden gems.
Hidden gems in Hospitality
In Hospitality, we’ve seen increased demand for luxury accommodation even as economic conditions have remained under strain:
- Weekend occupancy has shown strong numbers in 2021, indicating a recovery surge in Leisure & Hospitality (L&H)
- According to the U.S. Travel Association’s latest Monthly Travel Data Report, travel spending in October 2021 totaled $88 billion, only 12% lower October 2019 (pre-pandemic) levels. That same month, L&H added 164,000 jobs, beating out all other industries.
Investing in luxury real estate – even for a long weekend
But people aren’t hopping to luxury because they’ve been pent up during the pandemic; prices for some luxury destinations have declined to attract more cost-conscious guests. When confronted with the chance to visit a prized luxury destination at only a small premium over a more conservative destination, many guests are choosing luxury in this environment.
Smart investors followed the trend. According to Real Capital Analytics (via WealthManagement.com reporting) investors increased their spend on full-service hotel purchases by 442% from 2020 to 2021.
And many advisors are looking to REITS as a safe and sure way for investors to add passive income in 2022. What is a REIT?
But Hospitality isn’t the only sector with glimmers of gold among the rubble. The Office category is one that’s rapidly evolving to meet the demands of modern work and modern medicine.
Hidden gems in Office sector
The numbers continue to roll in via LinkedIn recruiter polls: Who wants to go back to the office? Work from home? Hybrid model? On the surface it would seem that the concept of the Office with a capital “O” is a dying one.
While we’re keeping an eye on trends in traditional office, we’re racking focus to a recovery winner with staying power into 2022 and beyond: The medical office.
Occupancy has remained buoyant throughout the pandemic, and this has proven true through multiple recessions, making this asset a dependable one for investors.
According to GlobeSt.com, medical office closings accounted for almost 30 percent of all U.S. office sales between March 2019 and March 2020. And despite the dramatic decline in non-emergency medical visits in 2020, demand for space dipped only 12.7%.
Commercial real estate risks we’re monitoring
We are intently eyeing the risk of GDP growth without commensurate labor participation, and as both lenders and investors ourselves, we have to constantly calculate where we sit in that cycle.
We’re following a couple of market factors in particular:
- The ramifications of a persistent remote work environment
- A generational shift of many opting out of ‘traditional’ employment opportunities
Even within this challenging investment landscape, we remain well positioned to execute on our real estate investment strategies and will continue to benefit greatly from the highly diverse offerings we can tap into, across all elements of the financing lifecycle, for the benefit of borrowers and investors alike.
Tom Buttacavoli is Chief Investment Officer (CIO) of both Ready Capital and Ready Capital’s external manager, Waterfall Asset Management, LLC. Buttacavoli is also Portfolio Manager of the firm’s SBC loan portfolio.
What is a REIT?
REIT stands for Real Estate Investment Trust. Similar to mutual funds, a REIT pools capital from multiple investors. With the distributed model of investment (and risk), each REIT investor can earn passive income on properties without having to go the daunting processes of acquiring, operating, and improving a property alone.
According to the latest ULI Americas report, total annual returns for equity REITs were forecast to spike to 27.8% in 2021, carrying 10% annually into 2022.