The economy will enter 2022 on a firm footing and should be able to withstand a variety of challenges that have emerged in recent months, providing a backdrop for continued solid REIT performance, says Nareit Senior Economist Calvin Schnure.
Schnure noted that the economic mood has shifted over the last couple of months, reflecting the new Omicron COVID-19 variant, supply chain issues, price spikes, and labor shortages, among other issues.
“Overall, though, the economy is quite sound. It has a lot of strength and should be able to handle these challenges pretty easily in the year ahead,” Schnure said, particularly since many of the current challenges are related to the pandemic and should ease as COVID cases come down.
As for the hot topics of inflation and interest rates, Schnure pointed out that inflation is still very connected to short-term bottlenecks. “We’re going to see continued concern about inflation, which the Fed is going to be watching closely,” he said, with gradual increases in interest rates likely to begin around the middle of next year.
Meanwhile, Schnure noted that REITs have had a very strong stock market performance in 2021, which is in part a catch-up from weakness seen earlier in the pandemic. At this stage, though, REIT total earnings are above pre-pandemic levels, he said. That trend is expected to continue in 2022 due to rising occupancy and increased rents. “It could be a very solid year for REITs in the year ahead,” he added.
Turning to office and retail real estate, two sectors that faced particular uncertainty this year, Schnure noted that both areas have undergone longer term structural changes. On the retail side, while the share of e-commerce has grown, consumers are still interested in a physical shopping experience, he pointed out. That is encouraging news for the sector and is resulting in new retail leases being signed.
In the office sector, Schnure said it will be important to see what type of space is needed when everyone is in the office for collaborative work, as these peak space needs will drive overall demand for office space. Generally, the office sector should have continued gains in the year ahead, he noted.
Schnure added that through the pandemic, REITs have had strong financial positions, putting them in a position to expand operations. Indeed, the second and third quarters saw the highest amount of property purchases since 2015, he said.
“Look for REITs to have continued earnings growth as occupancy levels recover and a strong balance sheet to give them a good platform for planning for the future,” Schnure said.
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