April 2022 Commercial Market Insight

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Strong fundamentals in property segments of the multifamily, office, industrial, and retail markets are likely to keep the commercial market recovery going, although at a moderate pace amid rising interest rates and elevated inflation of over 2% during the next two years. The hotel market is expected to slow amid rising air fare, transportation costs, and belt-tightening by consumers as inflation outpaces wage gains.

In the apartment market, rising mortgage rates will tend to increase the demand for rental units. Given the pace of home price appreciation (+23% from March 2021 through May 2022 based on NAR median existing-home sales price) and the rise in 30-year fixed mortgage rates (+2.1 percentage points), the monthly mortgage payment has increased by about $750 dollars, pricing out about 4 million 25-to-44-year-old renter households.

As of April, multifamily rents are up 9.4% year-over-year, ahead of the inflation rate of 8.5%, making multifamily rental acquisitions a good investment hedge against inflation. Moreover, 27% of metro areas are experiencing double-digit rent growth, mostly in the South region, specifically, Florida (see page 8 of the report). Rents are rising faster in Class B/C buildings than in Class A buildings, an indication of the desire for more affordable units.

Higher interest rates and inflation are having a mixed impact on the demand for commercial real estate. The pace of absorption has slowed in the industrial and retail markets as consumers cut back on spending amid high inflation. Meanwhile higher mortgage rates and continuing return of workers to the office have increased the pace of absorption of multifamily units and office space

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