The US economy, including much of commercial real estate, bounced back in record fashion from the pandemic in 2021, but faces major question marks this year including inflationary pressures and new geopolitical uncertainty in Europe. reached out to Victor Calanog, head of Commercial Real Estate Economics at Moody’s Analytics, to discuss this year’s multifamily, housing and CRE outlook, including major findings from the first quarter report by the financial intelligence and analytics firm.

With a 5.7% increase in real GDP, the strongest rate of growth for the U.S. economy since 1984, 2021 was a big, busy year that translated into a whole lot of activity and frankly record-breaking numbers for many multifamily and CRE sectors,” Calanog said. “By and large, this year will see some uncertainty, but still, fingers crossed, pretty strong economic activity that should translate to continued high demand for commercial real estate.” 

The Moody’s GDP forecast for 2022 was around 4.1% growth, but that prognostication came before the Russian invasion of Ukraine and the higher oil prices and other economic uncertainties it triggered. Inflation of around 7.5%, the highest number in at least 30 to 35 years, would have tapered off by the second half of this year, but the timetable for that relief will get pushed back into 2023 partly because of the unexpected economic shock of war. 

“So watch out for persistently higher inflation which will prompt the Federal Reserve to continue with its policy of monetary tightening, but likely not at the speed and magnitude of what we expected just three to four weeks ago,” Calanog said. “The Fed will tread lightly on raising interest rates and dampening demand when there’s all this uncertainty about the conflict in Eastern Europe.”

Conventional wisdom holds that raising interest rates to combat inflation will lead to higher cap rates, which mean lower valuation rates for CRE assets. Calanog maintains that the market will be more nuanced than that and depend on whether there’s continued strong demand for certain types of assets in certain geographies. 

“You may be able to pass along inflation through higher rents in super-active sectors like multifamily and industrial in certain places,” he said. “But that’s not necessarily true for an asset class like office and retail whose futures are still decidedly murky because of the various macroeconomic and demographic factors that have been operative since before COVID and which the pandemic kicked into high gear. I think for the office sector, especially Class B office space, and even for the retails and hotels of this world a lot of investors will want to price in possible volatility when it comes to higher interest rates.”