Can real estate investors sustain growth in the current market and looking ahead?

This Q&A was published as part of PitchBook's H1 2022 Global Real Estate Report sponsored by Baker Tilly.

The biggest question at the moment is where the market and economy are going. While we anticipate where we are headed, there is a different outlook for every area of real estate. Our real estate professionals analyze the current state of the market and forecast each service need now and moving forward.

What are your thoughts on the current real estate market, and where do you see things heading in 2022?

While the cost of capital is increasing, a large supply of capital is also chasing opportunities, looking for yield. Where this capital gets deployed depends on where interest rates go, whether we enter a recession, and, if so, whether it will be a V or U-shaped recession. The outlook is different for every type of real estate.

The office market, for example, has not been resolved. People are largely working from home versus going back to an office. Many investors are pursuing necessity-based retail opportunities, but if we fall into a recession, how will that impact an industry that depends on disposable income?

Clients investing in lodging are seeing some softening in the market but not a sharp downturn.

With industrial real estate, downside predictions include stagnating market rent growth or plateauing—or at least slowing—value growth.

Even though the immediate multifamily outlook is favorable, if there is a deep and drawn out recession, household formation will likely decrease as will the number of households. Historical trends say people will double up on housing or move back with their parents. Rising interest rates, however, may help multifamily because rising rates make home ownership prohibitive for many people, forcing them to rent instead of buy in the near term.

Another change related to multifamily is location. Pre-pandemic, the suburbs were not as desirable, except for those with easy access to downtown via mass transit. Now, things have shifted. The suburbs are in demand as people are hesitant to go downtown. In some cities, we will likely see the office space repositioned as residential units or other alternate uses as a result of companies not needing the same space they did three years ago.

What questions or concerns are your clients raising at the moment? How are you advising them?

Deal flow is top of mind as well as opportunities to deploy committed capital. Many clients who were focused in a particular geography or property type are refocusing, for example, from urban office space to industrial or exploring new geographies. Everyone is trying to anticipate where the market and the economy are going.