02/23/2022 | by Sarah Borchersen-Keto

Anticipated interest rate increases of about one and a half percentage points by year-end will still create a “very favorable” environment for commercial real estate, says Nareit Senior Economist Calvin Schnure.

Speaking on the Nareit REIT Report, Schnure noted that it is “appropriate” for the Federal Reserve to be raising interest rates at this point and removing the stimulus that was put in place early in the pandemic.

Schnure noted that goods inflation has been at about 12% over the past year, while service price inflation has slowed somewhat. “This suggests that we're not having a long- term problem from wage pressures with inflation. I do expect inflation to slow down, mostly in the second half of this year,” he said.

REITs, Schnure said, perform better than most other sectors during periods of moderate to high inflation because they represent a real asset that own properties whose values rise with prices and with leases that can respond to changing market conditions.

“REIT assets and incomes do tend to rise when inflation moves up and if you look at the stock return data you do see that REITs actually outperform the S&P 500 during periods of higher inflation and rising interest rates, Schnure said.

Schnure also noted that commercial real estate markets improved across the board in the fourth quarter. The recovery has shown momentum through the second year of the pandemic, which should lead to good performance in 2022.

Schnure also pointed out that office markets have stabilized, industrial real estate is still enjoying high demand, high occupancy, and rent growth, while there has been “surprising demand “for retail space, with the third and fourth quarters showing the strongest half-year demand growth since 2016. Multifamily markets remain very tight with rapid rent growth, he added.

Meanwhile, construction of industrial facilities has surged during the pandemic, Schnure said, with over 500 million square feet of new facilities under construction. This is equal to 2.9% of the existing stock; for comparison, construction activity was less than 1% of existing stock at a comparable point in the recovery from the 2008-2009 financial crisis, he noted.