As we gradually come out of the pandemic, let's to take a look at the best places to invest in commercial real estate in 2022 and beyond. We'll also look at the best types of commercial real estate to buy. I'm officially bullish on real estate in 2022. I expect prices to rise by another 8%-10%.
Commercial real estate is a lagging asset class that has some of the best upside opportunity in my opinion. With the S&P 500 at record highs, more capital will naturally flow to commercial real estate.
Inflation has become one of the top issues for investors this year. If inflation does begin to accelerate, I believe owning real assets is one of the best ways to profit. Inflation not only whittles down the cost of debt, it also boosts the principal value of you real estate holdings.
Stocks have already had a great run. Single family homes and the residential housing market is really strong. A recovery in commercial real estate seems like a high probability, especially as travel picks up and people go back to work. As a result, I think it's worth focusing on hospital and office commercial real estate investments.
I've invited CrowdStreet, my favorite real estate crowdfunding platform for accredited investors to share their thoughts on what's going with commercial real estate today. CrowdStreet will also reveal the best places to invest in commercial real estate for the future.
A New Cycle Of Recovery In Commercial Real Estate
The U.S. commercial real estate (CRE) market is poised to enter a new cycle of growth. Several investment banks are forecasting GDP to rebound by 5% – 6.8% YoY in 2021. Meanwhile, the mass distribution of COVID-19 vaccines increases the anticipation of transaction velocity – nearly 40% increase in total U.S. CRE transactions for next year, according to CBRE’s mid-year 2020 report.
We sit at a pivotal moment for the commercial real estate market. We at CrowdStreet see multiple data points lining up to suggest the next upcycle is emerging right now.
Reasons For Optimism
The first reason for optimism is our supply of money. Over 20% of all dollars now in existence were created in 2020. And the trend was similar in 2021 due to so much stimulus. This much liquidity pumped into the market this fast should put upward pressure on commercial real estate prices.
The second reason for optimism is a continued low interest rate environment. The Fed provided guidance this March saying they plan to keep the Fed Funds Rate unchanged for a couple more years.
As a result, we have already begun to see the positive effects of such low interest rates on commercial real estate pricing. Cap rate compression is happening and CrowdStreet expects to see more of it in 2021.
And finally, revised economic outlooks show a more rapid recovery. Green Street Advisors now projects a full return to 2019 output levels by 2022 Goldman Sachs forecasts a 6.8% YoY rebound in GDP growth after the passing of the latest $1.9 trillion stimulus package.
The Best Places To Invest In Commercial Real Estate
In this new cycle, different metros will recover at different rates. CrowdStreet’s Investments team heavily weighed quantifiable factors like regional population and job growth.
Here are our best places to invest in commercial real estate for 2022 and beyond according to CrowdStreet. CrowdStreet is a leading real estate crowdfunding platform that focuses on 18-hour cities. I've met them a couple times before and have spent hours on their investment webinars. They are an excellent platform.
- Salt Lake City
- Dallas-Fort Worth
- Tampa-St. Petersburg
- Washington D.C.
- San Fransisco-Oakland
- Northern New Jersey
- Inland Empire
Notes On Four Of Our Favorite Markets For 2022+
CrowdStreet's top 20 markets also possess a subjective vibe. The vibe blends multiple tangible and intangible attributes together to create attractive communities that people want to live and work in.
This mix is the magnet that pulls people to cities like Phoenix (#3), Tampa-St. Petersburg (#8), Boise (#10), and Indianapolis (#17). And where people go, investment opportunity follows. Here are some notes on each of the four cities.
|3||Phoenix||Phoenix is our top market in the West. A 2020 exodus from urban CA locations has bolstered already strong underlying fundamentals. Arizona also ranked #5 for inbound moves in the Annual 2020 United Van Lines Moving Study.|
|8||Tampa-St. Petersburg||With strong population growth, no state income tax, a business friendly environment, affordability and a Sunbelt location, Tampa-St. Petersburg is an attractive market across nearly every asset class.|
|10||Boise||Boise is leading the nation in year-over-year housing appreciation, hitting a blistering 20.1% in 2020. The California-to-Idaho movement is on and Boise is poised for strong growth across every asset class. A hidden gem, Boise is not currently an institutional market but we believe it will be later this decade.|
|17||Indianapolis||A central location and the convergence of four major interstates make Indianapolis a key Midwest distribution hub. The presence of the state capital provides a stable base of employment and, unlike its Midwest competitor cities, it’s growing faster than the national average. Its cost of living is relatively low, which makes it attractive for residents seeking a more affordable lifestyle.|
Best Region To Invest In Commercial Real Estate: The Sunbelt
In CrowdStreet's Investor Sentiment Survey report, over 1,200 investors told CrowdStreet the Southeast was their preferred region when it came to investing opportunities.
In their 2021 Strategic Global Real Estate Outlook report, Nuveen validates this preference. It shows how COVID-19 has accelerated population migration to the Sunbelt.
Population growth was a huge factor when ranking our top 20 cities. Therefore, it’s no surprise Sunbelt cities such as Raleigh-Durham, Austin, Nashville, Atlanta, and Charlotte ranked well, particularly for multifamily investment opportunities.
The existing pipeline of new multifamily units remained strong in Q3 2020. Over 110,000 units were delivered and another 580,000 units under construction. That said, fewer than 300 new projects broke ground. This is the lowest velocity since 2012. Urban construction saw the largest pullback in 2020 at ~50% below the three year average. Meanwhile, the share of new construction for suburban multifamily development has only risen.
The New York Times reported that, “According to FlatRate Moving, the number of moves it has done has increased more than 46 percent between March 15 and August 15, compared with the same period last year. The number of those moving outside of New York City is up 50 percent.”
Jones Lang LaSalle Incorporated, a global commercial real estate services company, agrees with CrowdStreet on the Sunbelt. JLL predicts the real winners over the next 36 months will be Sunbelt and Mountain West submarkets. Much like CrowdStreet, JLL estimated those metros will outperform gateway cities.
Best Places To Invest In Commercial Real Estate By Asset Class
CrowdStreet also ranked their top markets by asset class. Their two favorite asset classes to invest in are Industrial and Hospitality.
1) Industrial Real Estate
New industrial completions are forecast to jump by 29% next year, according to CBRE Econometric Advisors. Demand is expected to keep pace with new supply, thanks in large part to the increase in e-commerce sales.
Many of CrowdStreet’s top industrial markets, including Northern New Jersey, Dallas-Fort Worth, the Inland Empire (California), and Washington D.C., are markets that are close to large populations with excellent access to highways, railway, and seaports.
CBRE agreed, pointing out that “…the Inland Empire will remain the dominant big-box industrial market. Phoenix, Las Vegas, Denver, Salt Lake City and Reno also are posting robust industrial fundamentals and development because of their proximity to burgeoning populations.” CrowdStreet also values smaller infill locations, located closer to the end user for last-mile distribution.
2) Hospitality Real Estate
The hotel sector was undeniably the hardest hit in 2020. Since rents and occupancy levels are marked to market daily, it was the first and fastest to plunge heading into the pandemic. The sector bottomed out at 22% occupancy with an 81.6% decline in RevPar (Revenue per Available Room) during the first week of April 2020. AHLA reported that annual occupancy fell to roughly 44% for the full year.
However, this also means hospitality is likely to be the distressed asset class with the strongest bounce coming out of the pandemic. It will be a long road to recovery. However, the opportunities are emerging for investors.
When ranking their top hotel markets, CrowdStreet looked for demand drivers within the leisure space such as cultural amenities, entertainment venues, tourist attractions. and one-of-a-kind destinations.
CrowdStreet believes that top leisure destinations like Orlando, FL, will bounce back faster than others. You can sign up with CrowdStreet to get e-mail notifications whenever a new deal launches.
Commercial Real Estate Is Making A Comeback
Starting in early March 2021, I've noticed traffic feels back to where it was in San Francisco pre-pandemic. The Transportation Security Administration said Friday, March 12 was its busiest screening day since March 15, 2020. Nearly 1.36 million people went through airport checkpoints in the United States on March 12, 2021. Over Easter weekend on April 4, travel is now much higher than the same date a year ago.
In 2022, traffic on the roads and at the airports are all back to pre-pandemic highs. I truly believe looking for hotel deals is what we should focus on right now. I'm looking for a hotel that is selling at a big discount in a good travel market right before the travel explosion.
To help me find these deals, I've signed up with CrowdStreet to send me e-mail notifications. Their investment team is looking for such opportunities as well.
Industrial is likely going to continue staying strong. However, it is Hospitality where there seems to be the most amount of opportunity if the capital structure is strong. I'm hopeful the economy continues to open up and strengthen.
I'd like to thank CrowdStreet again for sharing their insights. CrowdStreet has been a long-time sponsor of Financial Samurai since pre-pandemic. I expect more quality offerings focused on 18-hour cities on CrowdStreet's platform.
You can sign up here and explore all they have to offer.
Readers, what are the best places to invest in commercial real estate in 2022 and beyond? What are you favorite commercial real estate asset types? Personally, I like hospitality and single-family rental properties the most.