Global Economic Report: Optimism Amid the Headwinds
Major events have marked 2022 so far, ranging from the geopolitical (the Russia-Ukraine war), to the economic (inflation). Topping it all off are continued logistics bottlenecks caused, in part, by COVID-19 lockdowns in China. Despite this, global economic reports issued by CBRE and JLL haven’t predicted gloom and doom. Both reports note that, while headwinds are continuing to blow across the economic landscape, look for economic strength—though with a few “buts.”
Real estate investment volume in Q1 2022 was the “most active first quarter on record,” with volumes increasing year over year by 47%, totaling $292 billion. This was due to “robust demand and abundant liquidity.”
Investment in hotels, retail and offices is catching up, with investors focused on portfolio diversification.
Allocations to real estate continue to increase, with a “depth and diversity of investors and lenders supporting strong liquidity.”
Continued economic re-opening in Europe and the U.S. is ongoing, potentially leading to additional above-trend growth.
China’s currency depreciation could mean an export of deflation to the West.
In the U.S., the government infrastructure spending program could boost 2023 economic growth
Now, for the “buts.”
Interest Rate Hikes
The CBRE analysts point out that the U.S. Federal Reserve is anticipated to hike the Federal Funds rate 10 to 12 times within the next year and a half, with the rate between 2.5% and 3.5% by the end of 2023. Historically, rates of more than 2.5% above the previous cycle average have triggered a recessions.
If ongoing COVID variants weren’t enough, continued lockdowns in China are impacting the technology and real estate sectors. China, in fact, is experiencing a slowdown, as 45 cities that collectively account for 40% of China’s economic output were either under full or partial lockdown as of the end of April 2022.
Cost of Capital/Debt Markets
Both CBRE and JLL analysts expressed concern about debt markets and liquidity, especially in light of increasing interest rates. According to CBRE, while substantial debt remains available for deals, uncertainty abounds concerning the impact of future rate hikes. In the meantime, JLL pointed out that the increase cost of debt will likely lead to a focus on price discovery. Investors will focus on income growth and “nuanced bidding dynamics.”
JLL researchers indicated that flight to quality will be the hallmark of office space investments worldwide, while the logistics/industrial sector will struggle to keep up in light of space scarcity and record occupier demand. Meanwhile, retailers are moving forward on brick-and-mortar expansions and new store concepts. Investors will continue seeking out residential properties, and interest in lodging assets is increasing as COVID restrictions ease.
At this point, higher interest rates aren’t impacting the U.S. corporate sector just yet. But CBRE analysts note that consumer sentiment is weakening because of gas prices. Europe could also experience an economic slowdown due to the Russia-Ukraine war and a dearth of natural gas exports. “Embargo and/or ongoing increases in gas prices will negatively impact the industry energy supply, which will lower consumer confidence and curtail corporate spending,” the CBRE report said.
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