Fed Researchers Cleveland Economy Continues to Improve Albeit Slowly
Hilary Provinse, executive vice president and head of mortgage banking at Berkadia, a Berkshire Hathaway company
Provinse said similar to the way that some American households are flush with money because of the pandemic so are companies, and that 2021 saw the largest transaction volume and interest in commercial real estate in the history of the markets. She expects an additional 5-10% increase for 2022. Investors need somewhere to park their money, Provinse said, and commercial real estate is a way to keep up with inflation because property owners can raise rent and lease costs.
"So we're seeing a lot of investment as this kind of potential hedge against inflation costs," Provinse said.
Another positive for the industry is that, although interest rates will go up in the coming two years, cap rates for commercial real estate will hold steady. That, combined with a slowed but still increasing GDP, is great for the long term in commercial real estate, Provinse said.
As part of her session, Provinse broke down three sectors of the commercial real estate business, how they have been affected by the pandemic and their outlook moving forward. The first sector was office space. Provinse pointed out that she was giving her talk virtually from her home office to underline the fact that many employers had to switch to offering remote or hybrid work schedules during the pandemic, but now companies want to know when employees will return for in-office work.
"I think now that we're kind of getting past Omicron, I think a lot of firms are saying April 1st is our return to office date," Provinse said.
Provinse said more companies will shift to requiring employees to return to the office, which will drive demand for commercial real estate, and is one of the reasons why most companies haven't made dramatic changes to their lease terms. Ultimately, companies believe in-person work is better for training and company culture, Provinse said.
Retail and the hospitality industry have struggled during the pandemic, but are starting to come back, Provinse said. In retail, people are shopping more online and regional malls are getting crushed. There is no data to show when that trend might change. But strip malls anchored by grocery stores have seen strong growth and traffic.
"We all still have to go to the grocery store," Provinse said. "We all want to get our nails done at the nail salon, so those strip malls are coming back and I think we see positive trends in retail for 2022."
The hospitality industry was absolutely hit the hardest by the pandemic, Provinse said. The world was on lockdown at home without places to go. The good news is that leisure travel has come back with high demand. Provinse said Americans have lots of money in their pockets from the pandemic and are willing to spend it on leisure travel, which has been great for hotels. She cautioned that business travel has not seen the same boost, and that because of how people are able to communicate via Zoom, she doesn't know if people are going to feel the urgency to travel as much for business.
Provinse concluded her remarks with what she described as the ''belle of the ball in commercial real estate": the housing market. It was the hottest sector and saw the most growth. What has stood out because of limited supplies to build homes is rental housing, Provinse said. Leasing activity is the highest it has ever been and apartment occupancy is at an all-time high, and that means that rent prices are going up.
This trend will continue in commercial real estate, she said, and it has spawned movement of people to the southern United States.
Provinse pointed out that 700,000 Americans moved to states like Georgia, Florida, Tennessee and the Carolinas in 2021. There were markets in Florida that saw 40% rent growth last year, Provinse said.
Effects of international events
Farr focused his portion of the talk on how the invasion of Ukraine by Russia might affect the world economy. He listed interesting facts about Ukraine and why it is so important. Ukraine is the 5th largest grain exporter in the world and it is the number one supplier of corn to China. Ukraine supplies more than 10% of food to 14 countries around the world.
Source: https://www.udel.edu/udaily/2022/march/economic-forecast-loretta-mester-federal-reserve-cleveland-ceee/
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