Perspectivas
2022 Global Real Estate Outlook Late-Cycle Investing Philosophy Comes Early
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2022 Outlook
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enero 14, 2022
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enero 14, 2022
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2022 Global Real Estate Outlook Late-Cycle Investing Philosophy Comes Early |
2021 marked the most rapid economic recovery witnessed in the U.S. over the past four decades. As a result, inflation has reached its highest point since the 1970s and markets are polarized between the need to raise rates to curb price growth versus continuing to stimulate the economy to achieve and sustain full employment. In the meantime, real estate fundamentals have accelerated beyond expectation, with 20% rent growth common in many U.S. apartment and industrial markets and cap rates at record low levels. Consequently, returns in 2021 are likely to be at the highest point since 2010. While Europe’s recovery has lagged and Asia’s has been more stop-start, real estate fundamentals have exhibited strength, and the weight of capital looking for durable income has kept yields low.
Within 18 months, the global economy has already reached the mid-phase of a typical economic cycle. From here, MS Research forecasts a moderation in economic growth and tighter monetary policy, with significant variation around the world, linked to COVID variants and vaccination progress, government policy, divergent growth drivers and geopolitical risks. Real estate fundamentals will follow suit, with moderating but above-trend near-term rent growth and the likelihood of flat to marginally higher cap rates in some markets and sectors as growth expectations moderate.
The structural impacts from COVID-19 will also continue to influence the amount and type of real estate sought by occupiers. While uncertainty and occupancy challenges were dominant themes in 2021, it is likely that more permanent impacts may emerge in terms of space usage, desired asset specifications and preferred locational attributes within each sector in 2022 and 2023.
GDP Growth Expected to Remain Strong, but Decelerating as Economy Shifts to Mid-Cycle Phase
Following a robust global growth rate of 6.1% in 2021, Morgan Stanley (MS) Research expects growth to step down to 4.7% in 2022. U.S. growth is expected to stay strong, at 4.6% in 2022, slightly down from 5.5% in 2021, supported by deferred consumption, inventory rebuilding and lack of fiscal drag. Growth in Europe and the U.K. is expected to remain robust and balanced and match the U.S. at 4.6% in 2022, supported by a solid labor market and accomodative policy. From 2023, U.S. growth is expected to outpace other developed markets, in-line with pre-COVID trends. In China, MS Research expects policy to reverse the recent sharp slowing, but still forecasts medium-term growth below pre-COVID rates. Japan is expected to continue its path toward economic normalization, generating above-trend growth of 2.9% in 2022. This growth is expected to be supported by an increase in Japan’s exports of capital goods, IT-related items and autos as well as a gradual return of personal spending from higher vaccination rates.
Source: MS Research, Strategy, data as of November 16, 2021
Labor Supply Constraints: Mostly a U.S. Concern
Labor market frictions are a key theme, with reported shortages most acute in the U.S. Despite strong labor demand and rising wages, labor force participation remains 170bps below its pre-COVID level. However, prime-age labor force participation rates are expected to increase by 40bps in 2022 and another 30bps in 2023, helped by improving child care, falling health risks and rising wages. In contrast, in the euro area the labor market has weathered the pandemic reasonably well, with the labor force participation at the end of 2Q just 0.7pp below its pre-COVID level due to successful furlough schemes. In the UK, the participation rate stands at 100bps below its 1Q20 highs, worse than in the euro area but better than the U.S.
Inflation is forecasted to stay high through 2022
Inflation prints have reached record levels in the U.S. and Europe prompting a shift in Fed policy. While inflation is forecast to stay high through most of 2022, it is expected to moderate thereafter. This forecasted moderation is due to a shift in consumer spending from goods to less inflationary services, easing supply chain bottlenecks and a retreat in energy prices.
In the U.S., the price effects of supply chain disruptions are expected to subside over the coming quarters, with continued higher rents and wages countering these deflationary factors, which is expected to keep overall inflation at higher levels than pre-COVID through 2023. Overall MS research forecasts 2022 inflation prints of 3% in the U.S., 2.3% in the U.K., 1.4% in Europe and 1.2% in Japan (4Q ‘22 over 4Q ‘21).
Source: Morgan Stanley Research, data as of November 2021
Source: Real Capital Analytics, MSREI Strategy, data as of September 2021
Tightening Central Bank Policy
In line with the midcycle economic environment and due to more persistent inflationary pressures, monetary policy is expected to normalize and tighten. The Federal Reserve has accelerated its tapering of asset purchases with the program expected to end by March 2022. Additionally, the Fed has projected three 25bps rate hikes in 2022, another three in 2023 and two more in 2024. The Bank of England and Bank of Canada are also poised to raise interest rates in the near term. The U.S. yield curve has begun to steepen, with long-term rates hitting 1.74% (as at January 6, 2022), and MS Research expects them to continue to rise and reach 2.1% in 4Q22, resulting in a flatter curve going into 2023, given higher policy rates.
The most prominent risk to Morgan Stanley’s overall constructive forecast (+40bps above consensus) are continued supply chain pressures (including both goods and labor) and the rise in number and severity of cases from the new omicron COVID variant.
The supply constraints that have held back growth and pushed up inflation in 2021 could easily persist or worsen. In such a scenario, growth would be notably weaker, inflation higher and policy rates aggressively tighter. Given relatively high and accelerating vaccination rates and a “live with COVID” stance adopted by most countries, the risk of new broad-based lockdowns and consequent significant loss of economic activity is expected to be relatively low.
Source: Board of Governors of the Federal Reserve System, Morgan Stanley Research, data as of December 2021
Shrinking Real Estate Investable Universe Will Increase Competition for Core Assets
Given the low interest rate environment, the weight of capital targeting real estate will likely continue to increase as investors search for yield. While the industrial, residential and healthcare sectors are taking the lion’s share of allocated capital, core offices and niche sectors like student/senior living are beginning to garner more investor interest despite facing occupancy challenges in 2021. At the same time, there continues to be less investor appetite for retail, noncore office and business-related hotels.
Price Acceleration
Industrial and residential prices have accelerated rapidly, in part due to cap rate compression driven by outsized investor interest, but also due to significant rent growth, most notably in the U.S. Outside of London, Europe’s industrial price acceleration has been largely driven by cap rate compression. While rent growth has not kept pace, it is expected to catch up over the coming years. In Asia, prices and rents have grown more modestly, suggesting some potential upside to values.
On the other end of the spectrum is office, which has seen considerably less price growth and even more divergence across regions. For example office markets in Germany have still seen cap rate compression while gateway cities in the U.S. have seen yields expand, particularly for non-stabilized assets due to greater uncertainty over future demand given likely higher adoption of work-from-home models.
Source: Green Street Advisors, PMA, MSREI Strategy, data as of October 2021
Fundamentals may converge across sectors but remain bifurcated across markets
Across all regions, property market fundamentals have been impacted by the pandemic to differing degrees. The industrial sector continues to exhibit the strongest performance globally, spurred by tenant demand driven by an acceleration in e-commerce and supply chain reconfiguration. Residential sector fundamentals have surged, given supply shortages, higher incomes and for-sale affordability challenges. While fundamentals in these two sectors have been propelled by structural changes from COVID-19, it is expected that fundamentals will moderate due to higher supply and a pullback in space demand from industrial tenants and lower multifamily demand, given rent affordability challenges.
While uncertainty and occupancy challenges plagued the office sector in 2021, higher utilization rates are expected in 2022. However, as employees’ work preferences shift from being health-driven to lifestyle-driven, it is expected that hybrid work models could become the norm, leading to a reduction in overall office demand of 10%-15% with significant variation across region, and asset location and specifications. Fundamentals have also begun to improve for sub types of retail and hotel assets, most notably Class A malls and leisure-oriented hotels.
Industrial
SIGNIFICANT ACCELERATION IN PRICING, DEVELOPMENT STRATEGY MOST ATTRACTIVE
Operating Fundamentals
Source: JLL, MSREI Strategy, as of October 2021
Source: CBRE, BNP Paribas, JLL, MSREI Strategy, data as of October 2021.
Investment Strategies
Residential
SURGE IN FUNDAMENTALS IS EXPECTED TO MODERATE AS DEMAND/SUPPLY REBALANCE
Operating Fundamentals
Source: Census Bureau, Moody’s Analytics, MSREI Strategy, data as of October 2021
Source: U.S. Census Bureau, Moody’s Analytics, MSREI Strategy, as of November 2021
Investment Strategies
Office
SIGNIFICANT BIFURCATION IN PERFORMANCE
Operating Fundamentals
Source: Kastle Return-to-Work Office Barometer, Google Mobility Trends, PCA, MSREI Strategy, as of October 2021
Source: PMA, MSREI Strategy, as of August 2021
Investment Strategies
Hotels
FROM REPRICED ALPHA BET TO GROWTH-ORIENTED BETA PLAY
Operating Fundamentals
Investment Strategies
Niche Sectors Garnering More Interest
Operating Fundamentals
Source: Costar; Bidwells, MSREI Strategy, as of May 2021
Investment Strategies
Retail
RETAIL SECTOR BEGINNING TO RECOVER
Operating Fundamentals
Source: RCA, MSREI Strategy, data as of October 2021
Source: Greenstreet, PMA, MSREI Strategy
Investment Strategies
ESG considerations remain top-of-mind
Investment managers need to remain focused on managing the environmental footprint of real estate assets they acquire and manage to reduce negative environmental impacts while maximizing efficiency and value to investors, tenants and the broader community. Initiatives focused on building safety, existing contamination, energy supply and efficiency, flooding, GHG emissions, indoor environmental air quality, natural hazards, water supply and water efficiency need to be continually monitored and addressed. These ESG considerations are now being fully integrated into investment decisions, underwriting, asset management and hold/sell decisions. Additionally, MSREI believes that there will be opportunities to reposition existing assets to better align to higher ESG standards.
Conclusion
Morgan Stanley Real Estate Investing (MSREI) believes that the global real estate environment will support attractive real estate returns for value-add/ opportunistic investments over the next several years, driven by outsized rental growth in some sectors (e.g., industrial, residential), cap rate compression (supported by low interest rates) and some moderate levels of re-pricing (e.g., in sectors more negatively impacted by COVID). In this investing environment, MSREI believes local market perspective, knowledge, presence and relationships, combined with the ability to actively manage assets to drive NOI growth will be critical to deliver attractive risk-adjusted returns.