Heading into a new year, the U.S. commercial real estate industry finds itself in choppy waters amid fears of a recession, rising inflation, and interest rate hikes as market participants await a course correction. Challenges during 2022 including continued supply chain constraints, increasing labor costs and struggles in attracting talent are anticipated to endure through 2023. Combined with international and domestic geopolitical issues and market volatility, many believe during the near term, the U.S will experience a mild to moderate economic recession. Although inflation appears to have recently stabilized, it remains above seven percent, and the Federal Reserve has made clear its intent to continue raising rates until it sees a marked reduction in inflation nearer to its two percent target. Weakening fundamentals and higher cost of capital are anticipated to generally lower asset values. The good news is that for the most part, corporate finances are in good shape and having learned a lesson during the pandemic, employers will avoid extreme layoffs to avoid losing employees in a tight labor market. While consumer confidence is highly subdued, average household debt is low compared with the onset of prior recessions. Many anticipate that inflation will be significantly lower by the second half of 2023, setting the stage for falling interest rates and the beginning of a new cycle.

Recently the U.S. commercial property sector was spooked as two of the nation's largest nontraded real estate investment trusts, namely the $69 billion Blackstone Real Estate Income Trust (BREIT) and the nearly $15 billion Starwood Real Estate Income Trust (SREIT), separately announced a limitation on withdrawals due to a surge in investor redemption requests that breached each REITs quarterly repurchase limit.  Although hospitality investments represent a small portion of each vehicle's portfolio, many perceive the rush of investors seeking to liquefy assets as an ominous sign of developing economic headwinds.

New lodging construction is relatively muted due to a continued reduced inflow of new projects as compared to pre-COVID levels. Above average inflation, rising interest rates, labor, and material shortages, as well as price increases will continue to be key factors in decision-making for developers during the near term. Combined with limited new supply, rebounding corporate and group travel, and new demand for lodging being induced by the hybrid work model, the sector is experiencing strong tailwinds while rising interest rates coupled with the dislocation in the credit markets have created headwinds. Although overall hotel demand remains below pre-pandemic levels, largely due to strong room rate growth, key U.S. hotel industry performance indicators have consistently exceeded 2019 levels since March 2022. Leisure travel and, more recently, group and inbound international travel have led the recovery, while transient business travel continues to lag. A slowing economy is anticipated to reduce the rate of RevPAR growth which when combined with rapidly increasing operating costs, in particular labor, will place negative pressure on profit margins. The good news is that the airline industry anticipates the post pandemic travel rebound to continue to maintain momentum during 2023.

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