Historically low interest rates have fueled confidence, growth and activity among all real estate asset classes but the lingering pandemic, rising inflation and interest rates are contributing to uncertainty among financial institutions and investors ever-searching for the highest possible yield. On a positive note, capital is still readily-available and volatility in the equities market is prompting many investors to seek safe haven with real estate investments, which are considered a hedge against inflation. Chris Beach, Group Manager, M&T Bank; John Black, President, MacKenzie Capital, LLC; and Bill Libercci, Senior Vice President, NorthMarq weighed in with their perspectives on the capitals markets for the year ahead.

Activity impacted by geographic region and asset class

Chris Beach (CB): “There remains a tremendous amount of capital searching for a home in the real estate industry, and we are detecting more optimism than at any time over the past two years. We believe the direction of the current Omicron strain will play a significant role in the pace of activity in the coming year and, once we move past the peak, we will be headed for stronger activity in 2022. The industrial and multifamily sectors should continue to be drivers, but our team is starting to see more activity in other sectors. A couple examples are more office leases being signed and increased bookings in the hospitality sector.”

John Black (JB): “We are operating within a highly bifurcated and extremely choppy market with property values rising in some areas and declining in others. The Baltimore-Washington, D.C. region has generally out-performed other sections of the country based on above-average fundamentals, including the labor market. A new wave of asset classes is attracting investor interest, led by adaptive reuse projects, self-storage and marinas and we see retail centers being reinvented and repurposed which contribute to increased value. There exists an incredible amount of capital, but much of it is not placed and is waiting on the sidelines. The capital is looking for core plus or opportunistic-level returns.”

Bill Libercci (BL): “There is tremendous concern over interest rates, and we are carefully watching the movement by the Federal Reserve in an effort to tame inflation, with some anticipating as many as five different increases in the coming year or so. We are not certain where that is headed but, if risk comes back, that needs to be factored into the return on equity. Many are closely tracking the direction of the stock market for several reasons. A sinking market will drive some investors out and into real estate holdings, which historically perform well during inflationary times. Secondly, a poorly-performing market creates negative sentiment in general and adversely impacts everything.”

Industrial and multifamily assets

CB: “The commercial office market is a slow bleed and the sector I worry about the most. With 5, 10 and 20-year leases, it will take a long time to sort out. I am intrigued to see how this plays out in the long term and how the sector morphs and changes in response to the current disruption. Traditional multifamily remains strong, and it is expanding into new places such as townhomes or single-family homes used as rental properties. We see significant capital heading that way with entire communities being developed for that purpose.”

JB: “Industrial product and last-mile logistics facilities have enjoyed a tremendous run, and we predict a long runway to go, but we are starting to hear whispers about a peak. The bottom of the barrel is assuredly the hospitality sector, especially in downtown locations with large conference center hotels on a long path to recovery. On a positive note, resort hotel markets and marinas are coming into favor, with Ocean City enjoying among its best years ever. And then there is self-storage, which is rising in tandem with the multifamily industry.”

BL: “Industrial and multifamily remain the surest bets and is where the bulk of the capital is flowing, with Blackstone selling several portfolios locally with cap rate whisper below 4 and, most likely, closer to 3. It is hard to produce acceptable yields at that number. Most construction is centered on the self-storage sector and retail is roaring back as assets get repositioned and more space becomes dedicated to entertainment, medical-related uses and logistics. Commercial office remains out of favor but that is where your value play exists now. Investors are making the contrarian move and scooping up distressed buildings.”

Rising interest rates and mid-term elections

CB: “Even though interest rates are projected to rise and have an impact, it is important to take a step back and remember that we are operating at historic lows and have significant space to absorb some increases when compared to historical rates. This would not be a catastrophic occurrence. As we better learn to live with the pandemic, we believe costs and market conditions will normalize a bit and particularly envision an increase in construction lending.”

JB: “With inflation and rising interest rates at our doorstep, there is the constant search for the highest possible yield and income-producing assets, with financial institutions and investors pivoting more actively towards real estate because of its historically-proven hedge against inflation. Labor shortages, supply chain issues and peaking demand for products and materials are all contributors to inflation. Real estate is the preferred investment due to the recent volatility in the equities market as it provides investors with a current return and appreciation potential.”

BL: “Don’t dismiss the significant impact of the upcoming mid-term elections as our country is dealing with a highly divided political environment and, when people are not happy, they begin looking for change. This will have major ramifications across all industry sectors including real estate so we have a lot of unknowns on the horizon. Rising Inflation and interest rates dampen everything.”

Empathy and communication

CB: “A slogan used in our organization is ‘we work better together’ and that has been a common theme during the past two years. The office will remain an important part of the culture going forward. While apart, we’ve learned that it is impossible to over-communicate.”

JB: “These are unprecedented times. I have two millennials on my team and it was important to get them into the office to train them and teach corporate culture. They are doing great. It is also important for people to get out of the office, kick the tires and look into people’s eyes.”

BL: “I would much rather sit in a room with a borrower and get into the heart of what they want, read body language and have face-to-face interaction. Something is lost otherwise. We learned the importance of a work-life balance and having empathy for the situations of others.”