2022 Will Be the Year the Urban Core Recovers

A move back to the urban core, motivated by a gradual return to physical office space by real estate occupiers, will drive commercial real estate investment in 2022, with significant variation across US markets. 

John Chang, Senior Vice President and Director of Research Services, foresees increasing momentum in the recovery of the urban core—“not a bounce back, but more of a slow march toward recovery.” He says that recovery will also look different across US metros, as local COVID polices like vaccine mandates, mask mandates, and rules on public gatherings still vary significantly.  That means that cities like New York and San Francisco will likely recover more slowly than cities with less stringent codes. 

Chang also says the broader urban recovery will be influenced by a movement back toward working in the office.

“I know a lot of people are saying that working from the office is an outdated concept, but I see two powerful forces pushing toward a return to the office,” Chang says. “First, companies have been seeing a slow degradation of productivity….and second, more and more workers are indicating they want to go back to the office, at least part time.”

As a result, “we should see a slow but steady strengthening of urban housing, downtown amenities and services and office space demand,” Chang says.

The housing shortage will also persist, Chang predicts, putting pressure on single family home prices and keeping apartment vacancies low and rents high. Vacation destinations will generate “outsize momentum,” and Chang expects that migration will continue to secondary and tertiary markets, particularly in the South.  And while housing construction will pick up, it will still likely fall short of demand.  What’s more, rising construction costs will continue to focus development on upper price tier housing units, with a focus on suburban areas. Traditional workforce housing “won’t see a substantive inventory increase,” Chang says. This will keep Class B and C apartments tight.

His final prediction? Wage pressure will result from a return to the office, while housing shortages will drive up home prices and rents. Taken together with materials shortages that have plagued the US since the onslaught of COVID, those factors will continue to drive inflation, keeping it at near-historic highs.

As the Fed picks up the taper of qualitative easing, “we should expect at least three interest rate hikes in 2022,” Chang says. Strong market liquidity will keep cap rates down, and the yield spread between CRE returns and the cost of capital will tighten. That will translate into an “interesting investment climate” in 2022.