By the Numbers
CMBS Outlook 2022: Neutral on multifamily, overweight lodging and office
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The transition to a post-pandemic world should broadly help commercial real estate although performance should diverge somewhat in 2022. Hot sectors such as multifamily should moderate as a decade of price appreciation that accelerated during the pandemic begins to plateau. Sectors that underperformed or remained stagnant during the pandemic such as lodging and office should stabilize and beat expectations. But performance within lodging and office could end up highly segmented due to persistent new preferences for work and travel.
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CRE price performance varies by sector
The foundation for commercial real estate (CRE) performance, like that of most asset classes, is the value of the underlying collateral. CRE prices have been rising fairly steadily for over a decade, though there has been quite a bit of divergence across sectors (Exhibit 1). Multifamily has experienced the greatest price appreciation by far, followed closely by land prices. Prices for office and lodging properties have risen slowly, with lodging dropping sharply during the pandemic as hotel loans experienced the highest rate of delinquencies and forbearance.
Exhibit 1: US commercial real estate property price indices
Note: CoStar commercial repeat sales indices; data is quarterly through September 2021. Indices are equal weighted, meaning that every repeat sales transaction has the same weight regardless of the value of the property. Equal-weighted indices are heavily influenced by low-value deals where transaction frequency is highest and are therefore considered more relevant for measuring performance of average properties.
Source: CoStar, Amherst Pierpont Securities
A coming plateau in multifamily
Price appreciation of multifamily properties, which was already handily outstripping other sectors in part due to decades of underbuilding, accelerated during the pandemic (Exhibit 2). This acceleration was similar to the rapid price appreciation in single-family residential homes. Single-family home prices appreciated 19.8% year-over-year as of August 2021, a new record going back to 1987. The recent low for home price appreciation was 3.18% in September of 2019; it was 4.4% in June of 2020, just as the pandemic driven spike in home prices began to emerge.
Exhibit 2: Single-family and multifamily price appreciation
Note: Indices show year-over-year changes in single-family and multifamily home price indices. Multifamily index is from CoStar, value-weighted. Value-weighted indices weight the price changes by the value of each transaction. A value-weighted index is most sensitive to price variations of high-value properties and is often used for analyzing capital flows. Data is monthly thru September 2021.
Source: Bloomberg, CoStar, Amherst Pierpont Securities.
Multifamily property prices rose on average by 7.75% during 2019, and began to show signs of acceleration in August of 2020, when they increased by 9.3% year-over-year. Multifamily properties hit a recent peak of 18.3% increase year-over-year in July of 2021, and price appreciation has since slowed modestly to 16.2% as of September.
Both single-family and multifamily price appreciation show some very early signs of beginning to plateau. Another year of 15% to 20% price appreciation seems exceedingly unlikely. The housing shortage for both single-family and multifamily properties has been decades in the making. The sharp price increases were due to a tidal wave of pandemic-related demand for larger spaces in less dense areas, fueled by exceptionally low interest rates colliding with low supply.
Some aspects of that demand for single-family homes will likely be persist into the post-pandemic normal: the desire for home office space, and larger yards and outdoor amenities in more suburban areas. This demand is a result of people spending less time in the office and commuting, as many jobs migrate to a hybrid model of home and in-office work.
Exhibit 3: Survey of apartment conditions
Note: Tight markets are defined as those with low vacancies and high rent increases. The reported index numbers are from data compiled from quarterly surveys of National Multifamily Housing Council members. Survey responses reflect the change, if any, from the previous quarter. The indexes are standard diffusion indexes and are convenient summary measures showing the prevailing direction and scope of changes.
Source: National Multifamily Housing Council, Amherst Pierpont Securities
On the multifamily side, surveys indicate that market conditions for apartments are tight and sales volume is high (Exhibit 3). Vacancy rates for multifamily buildings and single-family rentals are low, and rent increases on average are approaching double digits (Exhibit 4) due to the pandemic surge. Median asking rents rose 18.9% from June 2020 ($1,033) to June 2021 ($1,228) but fell by 2.0% to $1,203 in September 2021.
Exhibit 4: Low vacancy rates and rising rents
Note: Data is quarterly, through September, 2021.
Source: US Census Bureau, Bloomberg, Amherst Pierpont Securities
Long-term fundamentals remain strong for multifamily housing and single-family rentals since the housing shortage will take years to correct. However, a further surge in multifamily property price appreciation seems unlikely given the recent softening of rent increases and slight moderation in property price appreciation in an already very tight market.
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Overweight lodging and office sectors
Investor outlook for multifamily and single-family rentals for 2022 is neutral to slightly positive. CRE sectors more likely to outperform in 2022 are office and lodging. Loans that are delinquent, in forbearance or in workout remain relatively high in the lodging sector, but the outlook is positive as leisure and business travel returns. Sub-sectors matter, as leisure travel has bounced back much faster than business travel. Mid-range hotels outside of urban cores have performed much better than their luxury counterparts, while convention centers and hotels catering to business travelers continue to struggle. Hotel analysts expect business travel will not fully recover until 2023. Investors should selectively overweight the sector while its still bruised and has the prospect to out-perform over the next couple of years.
Office properties tend to benefit from long-term leases, so even hard-hit urban cores have not seen a deluge of office delinquencies or distressed sales. However, subleases are on the rise and many corporations continue to evaluate the need for large urban office footprints as the trend towards more hybrid and remote work seems to be sticky. Office property prices are broadly stagnant but offices in suburban areas and co-working spaces are more likely to benefit from lingering changes in work habits and preferences for less concentration, shorter commutes and broader corporate footprints.
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