What’s the outlook for the economy and commercial real estate in 2022?

 Let’s start with some information about the economy. The cost of everything seems to be rising quickly. The U.S. Bureau of Labor Statistics confirmed that in its latest numbers for the Consumer Price Index. The index has increased 6.8 percent compared to a year ago. That increase doesn’t include housing and other non-consumables that have climbed substantially as well.

The CPI serves as a means for adjusting income payments. According to the BLS, more than 2 million workers are covered by collective bargaining agreements tying wages to the CPI. The index also affects the income of almost 80 million people as a result of statutory action, including 47.8 million Social Security beneficiaries,
4.1 million military and federal civil services retirees and survivors and 22.4 million food stamp recipients. 

Some private firms and individuals use the CPI to keep rents, royalties, alimony payments and child support payments in line with changing prices. With few exceptions, it looks like everyone is getting a raise, although I suspect they aren’t getting enough to keep up with the real cost of inflation. Real average earnings for all employees decreased four-tenths of a percent in November. 

The Federal Reserve has announced plans to start tapering bond buying and could increase interest rates three times over the next year to try to tame inflation. To me, it feels like too little too late. Expect prices to continue increasing early next year. Maybe we should all just start wearing those whip inflation now buttons that came out during the Gerald Ford presidency.

How does this affect the outlook for commercial real estate next year? Landlords with leases including CPI increases are well positioned, and investor demand for quality real estate will continue. Overall, most properties will increase in value in 2022, albeit at a slower rate than 2021, with investment in multi-family leading the way. Industrial will fare well, and retail properties should continue to rebound with a pickup in new construction. Office properties will struggle, and hotels might not fully recover until 2023. 

Depending on the effects of the COVID pandemic, it looks like we’ll be moving in a positive direction in 2022.