[User] Multifamily Economic and Market Commentary Multifamily Development Still Churning Multifamily development in the Seattle metro area has been elevated over the past several years. Since 2014, over 72,000 apartments have completed. Development really started to reach new levels during 2018 when more than 5,000 apartment units were completed in a single quarter. Since then, nearly 3,000 to 4,000 apartment units have been delivered to the metro each quarter. On the other hand, condo development has slowed tremendously since its peak levels during 2009. Even though condo development has slowed, it has not completely vanished from the supply pipeline as there are still nearly 4,000 condo units underway and scheduled to deliver by the end of 2022. Most of the new development has taken place in just two submarkets: Capitol Hill and Downtown. Together, both submarkets are scheduled to deliver approximately 7,300 units, or about 35 percent, of the total supply underway through 2022. It is not surprising that these submarkets are getting most of the attention from developers as both locations are located near most of the metro’s major employers, as well as local amenities. According to RealPage, a multifamily data vendor, concessions in the Seattle metro area for Q4 2020 were approximately negative 2.4 percent compared to negative 0.7 percent in Q4 2019. Furthermore, the discount on rents for Class A properties was about 10 days of free rent in Q4 2020 compared to just 3 days in Q4 2019.

[Assistant] Multifamily Economic and Market Commentary Seattle’s Outlook Remains Bright 4 Despite its recent difficulties, Boeing remains one of the Seattle metro’s top employers, and the high-tech sector is expected to be the local economy’s driving force over the long term. Amazon, for example, has expanded in the metro area for several years now. Microsoft is the metro’s third-largest employer with more than 50,000 workers. Google also has a sizeable presence in the metro, with more than 5,700 employees. We expect the multifamily sector’s performance in Seattle to rebound as the pandemic recedes and vaccinations become more widespread. The passing of the recent stimulus package should allow both renters and property owners some breathing room over the short term. Seattle has a population growth rate that is more than twice the national average, a rate that is expected to continue for the next five years. Furthermore, the growth rate of the prime renting cohort in Seattle is expected to expand much faster than the national rate, which should also help boost multifamily demand, bringing the metro a brighter outlook over the long term.


[User] 1 Multifamily Economic and Market Commentary DECEMBER 2021 Concessions Remain Elevated Despite Spike in Rents Multifamily market fundamentals have strengthened considerably this year, despite the ongoing challenges posed by the COVID-19 pandemic. The rebound in the economy, most especially in job growth, coupled with pent-up demand for housing and increased household savings, have led to significant rent increases this year, particularly during the spring and summer months. Yet, in many metros there has also been an increase in new supply, resulting in an unusual situation of both elevated rents and concession levels. Source: RealPage New Supply Impacts Demand – and Concessions Despite the challenges confronting the construction sector over the past 18 months, including supply chain constraints, volatile material prices, and labor shortages, many of the nation’s multifamily markets continue to see a surge in the supply of new apartments. So far in 2021, the industry has completed over new apartment units, with another -plus units scheduled to complete before the end of the year, according to Dodge Data & Analytics. That’s after the industry delivered more than units in 2020, despite the delays caused by the pandemic. 2 Multifamily Economic and Market Commentary Concessions Higher in Expensive Markets Although approximately new apartment units may be completed in 2021, these units are not evenly distributed on a national basis. As has been the case for the past several years, much of the new apartment supply is concentrated in specific submarkets in approximately 12 metropolitan areas. The most active metros in the country for apartment development continue to be New York, Washington, D.C., Dallas, Austin, and Los Angeles. New York has more than 74,000 units underway; D.C. has more than 41,000 units underway; and Dallas is at more than 31,000 units. At the end of 2019, the level of Class A concessions was 7.1%. It remained approximately at that level until April 2020, when it rose 0.7% during the month to 7.8%. It continued to rise throughout 2020 and into early 2021, peaking at 9.9% in March 2021. And although the concession rate has been trending lower since then, it remains high at 9.2% as of October 2021 due to competing new supply entering many local submarkets. Classes B and C were not immune to rising concessions in 2020 and early 2021, as seen below. Class B concessions ended 2019 at 5.5%, but recently peaked at 8.1% during the summer of 2021. Class C began 2020 at 5.4%, and while it surpassed Class B during the earlier part of 2021, it has now begun to trend downward, to 6.6% as of October 2021. Although the national concession rate remains elevated, fewer units are offering concessions.

[Assistant] That trend is expected to continue over the coming months. And as seen in the case of Class C units – the most affordable units in a location – the declining trend in concessions offered has recently started accelerating, most likely due to the improving economy and increased job growth. As a result, we expect that concessions will continue decreasing, particularly for Class B and C units. We expect that the trend trajectory for Class A units will lag slightly behind, as new supply delivers over the next several quarters. But with the economy expected to continue and rental housing demand remaining firmly in place, we believe that concessions will decline throughout 2022, returning to more normalized levels by the end of the year.


[User] Positive-but-Subdued Absorption Expected in 2021 Demand for multifamily rental units remained stable in 2020, according to data from Portfolio Strategy, which estimates that net absorption totaled units last year, compared to an estimated in 2019.

[Assistant] In contrast, anticipates a significant slowdown in multifamily net absorption this coming year, with only units of net absorption expected in 2021. 2 Rent Growth Expected to Remain Weak We believe that national rent growth turned negative in 2020, ending the year at an estimated negative 0.75 percent. That is in comparison to 2019’s estimated rent growth of 2.5 percent. From 2011 to 2019, rent growth was above historical averages, as illustrated in the chart above. Assuming 2020 has negative national rent growth, this would mark the first time that annualized rent growth was negative since 2009.


[User] The current expectation for 2021 is more of the same, at least in the first half of the year. We anticipate that rent growth will not turn positive until the second half of the year. Nevertheless, we are currently projecting that rent growth will end 2021 at break-even or just slightly positive levels, assuming widespread COVID-19 vaccinations and a sustained economic recovery.

[Assistant] We expect rent growth to be within a range of 0.0 to 0.5 percent by year-end 2021. Multifamily Economic and Market Commentary Vacancy Expected to Increase The national multifamily vacancy rate is expected to increase in 2020, primarily due to the amount of new supply expected to deliver this year, coupled with the effects of improving economic conditions. Since much of this new supply is expected to consist of more expensive, Class A units concentrated in a limited number of submarkets, particularly in urban core neighborhood locations, it is expected that supply could continue outpacing demand in some places this year. As a result, the national vacancy rate is expected to climb throughout most of the year, within a range of between 6.0 percent and 6.5 percent. Nevertheless, it is important to note that this range is well below the most recent estimated vacancy peak of 8.25 percent that occurred in fourth quarter 2009, as seen in the chart below.


[User] According to data from RealPage, Inc., year-over-year national Class A rents declined by more than 4.0 percent as of fourth quarter 2020. In comparison, Class B and C rents ended the year down but still positive, at 0.55 percent and 1.72 percent, respectively. It appears that although less expensive units remained in demand, that demand has been softening since last summer. Interestingly, Class B rents saw a slight uptick in fourth quarter 2020 after experiencing a similar decline in demand, which may suggest that some Class C renters are moving up to Class B and taking advantage of lower rent levels. Multifamily Economic and Market Commentary Multifamily New Supply Could Peak in 2021 According to estimates from Dodge Data & Analytics Supply Track, which distinguishes between multifamily properties consisting of either apartment or condominium units, more than apartment units were completed in 2020, making it the most recent peak year for new deliveries. Although the number of units slated for completion in 2021 is a staggering it seems that developers are uncertain that all of those units will actually be completed before year-end. Indeed, according to the Associated General Contractors of America’s 2021 Construction Hiring and Business Outlook Report, “most contractors report it remains difficult to fill some or all open positions. Fifty-four percent of firms report difficulty finding qualified workers to hire, whether to expand headcount and replace departing staff. Many contractors expect, despite the pandemic-induced downturn, that it will remain difficult to find qualified workers during the coming 12 months.

[Assistant] Forty-nine percent report it will either get harder, or will remain as hard, to find qualified workers, in 2021.” This is in addition to concerns contractors have regarding supply chain interruptions, increased competition, and overall fewer projects expected to be available in 2021. Multifamily Economic and Market Commentary Expect Weakening Before Improvement At a national level, a supply/demand imbalance is expected this year, based on the amount of new multifamily units expected to come online. Even though some of these new units may not be completed by year-end, the economic recovery and the amount of expected job replacement and growth are unlikely to produce enough demand for all the new Class A units that are anticipated to deliver in 2021.


[User] Unfortunately, annualized job losses were negative 6.2 percent in 2020, resulting in an estimated net loss of more than 9.3 million jobs. As a result, we believe it will take until 2022 at the earliest to replace the jobs that were lost in 2020, as well as to begin seeing any possible new demand – instead of mostly replacement demand – for multifamily rental housing. Much of the new multifamily supply consists of more expensive Class A units and is primarily concentrated in about 15 metros, as seen in the chart below. Many of these impacted submarkets are among the most expensive in the country and also bore the brunt of falling rents, rising vacancies, and increasing concessions throughout much of 2020. Multifamily Economic and Market Commentary Employment Recovery Will Take Time in Many Places As seen in the charts below, although we expect the improving economic conditions to continue throughout the year, the employment recovery will likely vary from metro to metro. Indeed, we expect that the employment recovery of many metros will remain negative in terms of where job growth had been pre-COVID, or as seen here, as of fourth quarter 2019. Metros with a significant amount of supply, such as Austin, Dallas, and Phoenix, are expected to see positive job growth by late 2021, according to Moody’s Analytics, which we expect will help boost demand, albeit modestly. However, many other metros with elevated levels of new supply, such as New York, Los Angeles, and Chicago, are expected to languish until at least 2022 before seeing any meaningful increase in job growth – and demand.

[Assistant] Multifamily Economic and Market Commentary 2021 Multifamily Outlook: Weathering the COVID-19 Storm We maintain a positive but cautious outlook for the multifamily sector in 2021. We expect the multifamily sector to be impacted in the first half of 2021 from a rising national vacancy rate and declining rents, but, overall, we still expect the multifamily sector to perform well relative to other commercial real estate property types, most notably retail and hospitality. Additionally, based on anticipated investor demand, increasing-but-still-low interest rates, and construction projects whose loans are expected to convert to permanent financing throughout the year, multifamily mortgage origination volume levels in 2021 are expected to be higher than in 2020. The Mortgage Bankers’ Association predicted that multifamily originations volume will be $288 billion in 2020 and $305 billion in 2021. Based on current trends, we believe that annual multifamily originations could easily surpass both estimates. For commercial real estate investors, if the economic recovery continues as expected, demographics and demand are a tailwind that should help keep multifamily as a favored asset class in 2021, leaving open the possibility for further cap rate compression, increased property sales, and, in turn, higher origination levels. 7 10-year Treasury and Multifamily Capitalization Rates Source: Real Capital Analytics, and Federal Reserve, Selected Interest Rates H.15, per Moody’s Analytics With interest rates remaining low over the past several months and increasing pressure on the performance of the hotel, retail, and to a lesser extent, office sectors during the COVID-19 pandemic, investors have remained steadfastly interested in the multifamily sector. As a result, there has been downward pressure on cap rates, especially during the second half of 2020, as seen in the chart below. Although multifamily cap rates started 2020 at approximately 5.3 percent, according to data from Real Capital Analytics, they are estimated to have ended the year at 4.9 percent, a new low. Although we have previously cautioned that a decline in the 10-year Treasury yield would likely compress cap rates as well, it is interesting to note that cap rates have continued to decline despite recent increases in the yield for 10-year Treasurys. We currently anticipate that cap rates will remain low again in 2021 despite an expected increase in the 10-year; however, because the spread between the two remains wide, as illustrated in the chart below, we do not expect significant increases in multifamily property prices in 2021.


[User] Supply Largely Uninterrupted, For Now Supply has been one of the most prominent fundamentals of the student housing sector and one that catches the attention of all at the start of each new school year. For the last few school years, supply had mostly moderated and was put on the back burner relative to more pressing issues within the sector. During the height of the pandemic in 2020, construction was considered essential and was largely unhindered. With minimal disruptions during construction, there were approximately 42,000 new beds delivered in time for fall 2021, which was practically level with fall 2020’s levels of 44,000 new beds, according to data from RealPage, Inc. Even though supply and deliveries were not disrupted in 2020 and in 2021, the impacts of supply chain disruptions are being felt in advance of the fall 2022 school year. Practically every industry around the world has been impacted by the supply chain shortages. Since the projects scheduled to deliver in 2020 and 2021 were already in progress and close to completion, deliveries for those school years was largely unimpacted. However, according to RealPage, Inc., as of October 2021, there are approximately 27,000 beds scheduled to deliver in time for the fall 2022 school year. Although supply numbers are subject to change until actual delivery, it appears that the next school year will feature among the lowest amount of new supply delivered to the sector in quite some time.

[Assistant] According to research from real estate data vendor John Burns Real Estate Consulting, the supply chain disruptions for lumber and windows have led to construction projects being delayed by at least two months. It is possible that many of fall 2022’s deliveries may be pushed out to deliver in spring 2023 or even fall 2023 due to supply chain disruptions. 2 Multifamily Economic and Market Commentary Student Housing Fundamentals Seeing Record Improvements Many student housing participants posit that the sector is recession-proof and, based on its performance over the past two years, many are now saying that the sector also appears to also be pandemic-proof. Although that’s certainly open to discussion, the performance of fundamentals for fall 2021 suggest the sector’s perseverance. Since many universities required students to be vaccinated, especially those living on campus – nearly 1,000 schools according to The Chronicle of Higher Education – this mandate has allowed off-campus student housing to seemingly return to normal and even out-perform the sector’s pre-pandemic results. Pre-leasing activity also improved by late summer, near the beginning of the actual school year. According to RealPage Inc., the final August 2021 pre-lease level was 92.2% compared to August 2020’s rate of 88.3% and 2019’s rate of 91.5%. It wasn’t until the late summer months of 2021 that pre-leasing activity gained steam; from October 2020 through June 2021, pre-leasing activity briefly lagged behind 2020’s levels as students waited to see what the plans would be for the upcoming school year.


[User] Economy to Decelerate, but Home Sales and Mortgage Originations to Begin Slow Recovery in 2024 With 2023 nearing its end, we provide a look back at the year and our forecast evolution. While inflation decelerated largely as expected, economic growth has proven to be more resilient than we anticipated. We are now expecting 2023 Real Gross Domestic Product (GDP) growth to be 2.6 percent on a Q4/Q4 basis, whereas at the start of the year we were forecasting a modest 2023 recession. While the combination of disinflation alongside continued low unemployment points to a soft landing within reach, the dynamics that led us to expect a contraction mostly persist. We currently forecast GDP to decline slightly in 2024 by 0.3 percent followed by 1.7 percent growth in 2025. In housing, our persistent view that affordability challenges, lock-in effects, and a lack of available inventory of homes for sale would keep existing home sales at the slowest pace since the Great Financial Crisis proved correct. New home sales, however, were more resilient in the face of high mortgage rates than we had expected. The recent pullback in mortgage rates to 6.95 percent from their peak of 7.79 percent in October points to an incoming rebound in sales, but even with recent declines, mortgage rates are currently similar to those of the summer of this year. Given further declines in the ten-year Treasury rate since completion of our forecast, there is some upside risk to our home sales and originations forecast; however, rates are still comparatively high, and we still expect another year of slow sales in 2024. We project 2023 total sales will finish at 4.8 million, followed by a similar 4.8 million pace in 2024 and 5.4 million in 2025. However, taking into account home price appreciation and some modest growth in refinance activity, we forecast total single-family mortgage originations to grow from $1.5 trillion in 2023 to $1.9 trillion in 2024, and then to $2.3 trillion in 2025. Quick Links Economic Forecast Changes Housing & Mortgage Forecast Changes Economic Forecast Table Housing & Mortgage Forecast Table 2023 Unfolded Better than Expected, but 2024 Still Poised to Slow The past year began with an inverted yield curve, rising interest rates, waning fiscal stimulus, a slowdown in both housing construction and home price growth, and, in March, bank failures. A 2023 recession appeared to be developing. However, as the year progressed, consumer spending remained resilient and acute banking stress subsided while home prices rebounded. Continued economic resilience has surprised many forecasters this year and led to financial markets backpedaling multiple times on the pricing of impending Federal Reserve “pivots,” ultimately helping drive a rise in longer-term interest rates, including mortgage rates, to a 23-year high by October. Since that peak, however, longer-term interest rates have fallen sharply recently on yet another anticipation of rate cuts and slowing inflation in 2024. Fundamentally, our long-held view that the economy would enter a recession as monetary policy tightening worked to fight inflation was based on historical business-cycle dynamics that suggested inflation was unlikely to be brought k to t d’s 2-percent target without a significant weakening in the labor market. While some supply chain drivers of inflation were expected to subside over time, there was evidence that services inflation associated with a tight labor market had gone beyond what was consistent with an overall 2-percent inflation target. Historically, this has only been reduced via a substantial rise in the unemployment rate. To date, however, cooling inflation and wage growth is occurring while unemployment remains low. Compared to a year ago, the Personal Consumption Expenditure (PCE) Price Index rose 3.0 percent in October while core prices were up 3.5 percent, down from cycle-peaks of 7.1 and 5.6 percent, respectively. While core inflation in particular remains elevated on an annual basis, much of this is due to ongoing high measures of shelter inflation which lag more timely market measures of rent by 4 to 5 quarters. Currently, measures of rent growth for new tenants show slowing or even negative rent growth. As such, it is only time before this is reflected in the PCE. And inflation less shelter, whether measured by the PCE or the Consumer Price Index (CPI), is already closer to t d’s t t than the overall measures. The question of whether inflation could be brought down without a meaningful rise in the unemployment rate appears to have been answered in the affirmative. However, we are not yet ready to declare that the window for a recession has passed. The labor market has cooled from extremely tight conditions in 2022 to a healthy level that broadly mimics its state in 2019. In November, the economy added jobs, an increase from October, but this was inflated by the ending of the United Auto Workers (UAW) and Screen Actors Guild (SAG) strikes. Removing the effects of the strikes from both reports would indicate job gains slowed from roughly in October to in November. If this pace of employment growth can be maintained, then it would be consistent with a soft landing. However, the current monetary policy stance is still restrictive, and past tightening is still working its way through the economy. Bank lending is slow, near-term indicators suggest business investment is currently sluggish, and consumer spending is still in excess of its historical relationship to incomes. Whether it results in a recession or not, we believe growth is likely to decelerate significantly over the coming 2-3 quarters. Given the current restrictive stance, to achieve a soft landing, monetary policy will need to ease sufficiently this next year to prevent a downturn, but not reanimate inflation – a difficult balance to achieve. An uptick in average hourly earnings in November illustrates the risk that the labor market could still overheat and contribute to future inflationary pressures if monetary policy is eased prematurely. As such, we are projecting the start of fed funds rate cuts in Q2 2024, but at a cautious pace. 2023 Home Sales Will Be Lowest Since 2010, With Slow Recovery Beginning in 2024 We entered the year forecasting existing home sales to be around 4 million, a pace below most other forecasters and the lowest since 2010. While our forecast oscillated over the year along volatile mortgage rates, and our view on economic growth evolved, the sales expectation held in a narrow range. The drivers of slow sales are well known at this point: unaffordability, lock-in effects, and a lack of existing inventories freezing much of the housing market. While we believe these dynamics will slowly dissipate over time, they will remain obstacles in 2024. We forecast year total 2024 home sales to only be marginally higher than in 2023.

[Assistant] With that said, the extreme low point in October, where existing sales dropped to an annualized pace of 3.79 million, is likely to be at or near the low point. While October pending sales point to November sales also being low, purchase mortgage applications, as measured by the Mortgage Bankers Association, have bounced about 15 percent off their trough in November, as mortgage rates have fallen considerably. Given an expectation of further moderation in mortgage rates, we expect sales to start drifting upward. While the difference between a soft landing and a recession would have an effect on purchase demand, given current supply constraints, we see the path of future mortgage rates as being more determinative of sales.


[User] We have long anticipated that new home construction would hold up better than what is typical in a downturn due to the fundamental shortage of housing units. This is one of the reasons why we still think the next economic downturn will be comparatively modest. However, the degree of resilience shown by new home sales and single-family starts in recent quarters in the face of mortgage rates rising to near 8 percent was unexpected. Homebuyers now appear more acclimated to higher mortgage rates then they were in 2022, as evidenced by a lower degree of order cancellations in the most recent episode of rate increases. Additionally, homebuilders who have been aided by lower materials costs and healing supply chain disruptions have been willing and able to offer concessions, including rate buydowns, to help drive sales. This trend continues into our 2024 forecast, in which we expect new home sales to decline from current levels only slightly due to a modest economic contraction. Along with the resilience in new home sales, so too have home prices exceeded our start-of-year expectations, with prices rebounding modestly off mild declines in late 2022. Our mortgage originations outlook, being a function of home sales and home prices, tended to drift upward over the year but remained within a 9 percent band of what now appears to be the level of originations for the year. Economic Forecast Changes Economic Growth GDP was revised upward to a 5.2 percent annualized rate in the third quarter of 2023, though the average of real GDP and Gross Domestic Income (GDI) show the economy grew 1.4 percent over the past year, which is below the long-term trend. We continue to expect a slowdown over coming quarters as consumer spending growth has exceeded income growth and higher real interest rates weigh on business investment. Conceptually our forecast is little changed from last month. Labor Market Nonfarm payroll employment growth was in November (though this was inflated by the ending of the UAW and SAG strikes, which contributed an increase of roughly 47,000 workers). The unemployment rate dropped two-tenths to 3.7 percent. Compared to last month, our forecasted unemployment rate was revised downward due to incoming November data and a modest recalibration of the expected economic growth/labor market relationship. Inflation & Monetary Policy The November CPI report was generally in line with our expectations. Headline CPI, weighed down by energy prices, grew just 0.1 percent over the month and 3.1 percent compared to a year ago. Core inflation was more persistent, rising 0.2 percent over the month, with the annual rate unchanged at 4.0 percent as shelter inflation remains hot.

[Assistant] Housing & Mortgage Forecast Changes Mortgage Rates Following the recent decline in interest rates, our interest rate forecast is lower this month, with the average FRM30 rate now predicted to average 7.4 percent over the fourth quarter of 2023. We expect the FRM30 rate to average 6.7 percent in 2024 and 6.2 percent in 2025. Our forecast was completed on December 11. Rates have declined further since then and are likely to remain volatile as we transition from monetary policy tightening to easing, which adds risk to our outlook for interest rates.


[User] Existing Home Sales Existing home sales were at a seasonally adjusted annualized rate (SAAR) of 3.79 million in October, below what we had anticipated, and the lowest level since 2010. With October pending sales also being weak, we have revised downward our Q4 sales estimate. However, we have revised our forecast modestly upward beginning in 2024, largely due to the lower projected interest rate environment. However, the continued heightened volatility of long-run interest rates continues to point to risk around the sales projection. New Home Sales New single-family home sales declined 5.6 percent to a SAAR of in October and were downwardly revised in September; however, the lower projected interest rate path led us to modestly upgrade the forecast for new home sales. New home sales continue to benefit from the limited inventory of existing homes o s d o i d s’ i it and willingness to buy do o o s’ i t st t s.

[Assistant] Single-Family Housing Starts Single-family housing starts rose to a SAAR of in October and permits were at a pace of . While we continue to expect a softening trend in line with our forecast for a weakening economic backdrop, we have revised our forecast upward in part to reflect the lower projected interest rate path. We continue to expect that the lack of existing homes available for sale will continue to boost new home construction in the medium term.


[User] Single-Family Home Prices Home prices grew 6.0 percent compared to a year ago in September, according to the most recently published non-seasonally adjusted FHFA Purchase-Only House Price Index (HPI). Our next home price forecast update will be in January. Single-Family Mortgage Originations We have upgraded our forecast for purchase mortgage origination volumes this month, consistent with upgrades to the home sales forecast. We now expect 2024 purchase volumes to be $1.4 trillion, an upgrade of $ i io d p t i s o ’s projected volumes of $1.3 trillion.

[Assistant] In 2025, we expect purchase origination volumes to continue to grow, reaching $1.6 trillion. For refinances, we now project 2024 volumes to be $451 billion, an upgrade of $23 billion forecast over forecast, given the more favorable mortgage rate expectation this month. As shown by recent data from the Refinance Application-Level Index, we have seen refinance application volumes rise slightly from their trough in October as rates have fallen, supporting more refinance activity. In 2025, we expect refinance volumes to grow to $686 billion.


[User] 1 FEBRUARY MF Affordability Outlook: LIHTC Outperforms but Affordability Still a Challenge LIHTC Seniors Vacancy Trends Stable As shown in the adjacent chart, both Moody’s Analytics CRE and data show the average vacancy rate barely moved at LIHTC Seniors properties even at the height of economic recession in 2020. Prior to the roll-out of the COVID-19 vaccine, many seniors housing properties experienced some of the highest COVID-19 infection and death rates, leading to an increase in their overall vacancy rate as some residents with means likely moved out. However, the vacancy rate at LIHTC Seniors properties only rose by 0.4 percent from Q4 2019 to Q1 2021 to a high of 2 percent, according to data from Moody’s Analytics CRE, with the vacancy rate now back in line with its pre-pandemic average. data shows a similar trend, with the average vacancy rate hovering around 2.7 percent. Market Rate Seniors housing fared much worse. The average vacancy rate at these properties rose by 7.8 percent points from Q4 2019 to Q1 2021 to a high of 18.1 percent. While the vacancy rate has been stabilizing – declining to 14.2 percent as of Q4 2022 – it remains much higher than the 1.7 percent average vacancy rate at LIHTC properties. Q4 Market Rate Seniors LIHTC Seniors (Moodys CRE) LIHTC Seniors () LIHTC Seniors Average Vacancy Rate vs. The lower vacancy rate for LIHTC Seniors properties is likely due to these lower-income residents simply having fewer housing options, keeping them from moving out. In addition, many of these seniors have a stable source of income in Social Security and are paying rents that are much lower than those offered at Market Rate properties. In fact, despite double digit vacancy rates, rents have continued to grow at Market Rate Seniors properties with the average asking rent increasing to $3,811 as of Q4 2022 from $3,460 as of Q4 2019. By contrast, the average asking rent at LIHTC Seniors properties for units affordable at 60 percent of AMI only increased to $982 as of Q4 2022 from $904 as of Q4 2019. LIHTC Family Vacancy Trends Also Stable As shown in the adjacent chart, Moody’s Analytics CRE data estimates the average vacancy rate remained unchanged at LIHTC Family properties even at the height of the economic recession in 2020. The vacancy rate at LIHTC Family properties remained at 2.5 percent from Q4 2019 to Q3 2021 before declining to 2.2 percent as of Q4 2022. The closest comparable market rate segment also tracked by Moody’s Analytics CRE, Market Rate Class B/C, also remained fairly stable with the average vacancy rate rising by just 0.2 percentage points over the same time period. But it had a higher average vacancy rate of 3.8 percent as of Q1 2021 before falling and rebounding to 3.5 percent as of Q4 2022. RealPage, which defines Class C properties as those with rents in the bottom 20 percent of a market, also estimates a slightly higher vacancy rate for Class C properties of 4.0 percent as of Q1 2021. While vacancy at LIHTC properties is expected to be low by design, the stability of their lower average vacancy rate over the past several years demonstrates that the various federal stimulus programs, as well as a quickly rebounding job market, generally helped both tenants and borrowers of subsidized properties. Q4 Market Rate Class B/C (Moody's CRE) Market Rate Class C (RealPage) LIHTC Family Properties LIHTC Family Average Vacancy Rate vs. As shown in the adjacent chart, LIHTC Family asking rents slightly exceeded Market Rate Class B/C properties during the height of the economic recession, according to Moody’s Analytics CRE data.

[Assistant] 4 Multifamily Economic and Market Commentary Share of Rent Paid at LIHTC Properties Stable During Pandemic Most units at LIHTC properties are rented to residents earning no more than 60 percent of AMI. However, maximum rent increases are set by income limits released by the U.S. Therefore, federal stimulus payments, emergency rental assistance, and extended unemployment benefits were able to go further at LIHTC properties than at most types of market rate multifamily properties during the height of the economic lock-down during the pandemic. This supported steady fundamentals and the share of rents paid by month’s end hovered around 90% from April 2020 to March 2021.


[User] Still, there has been some deterioration in both LIHTC and certain market rate properties in rents paid by month’s end since the start of the pandemic. RealPage defines Class C units as units in the bottom 20% of rents for a market. Rents paid by month’s end at Class C properties declined from 96.3% of all rents in March 2019 to 94.4% as of December 2022. In addition, rents paid at month’s end at LIHTC properties declined from 92.7% of all rents as of March 2019 to 89.5% as of December 2022. We believe the multifamily sector may face softening demand in 2023 due to the combination of a recession and stubbornly high inflation, but there is far greater demand for affordable units than supply.

[Assistant] This bodes well for the continued stable performance of LIHTC properties, particularly since we believe that rental affordability will continue to be a challenge in 2023. 5 Multifamily Economic and Market Commentary Ongoing Rent Growth Nationwide We project that the multifamily sector will see a decline in demand during the first half of the year, resulting in negative rent growth for at least the first quarter of 2023. However, we also expect demand to increase during the second half of the year, which will likely result in a more normal rent growth resumption averaging about 1.5% for the full year of 2023. After two years of above-average rent increases, a decline in rent growth would be welcome news for many renters but is not expected to contribute much to increased affordability, at least not at a national level.


[User] Source: Moody’s Analytics, RealPage Year-over-Year Change in Private Sector Nominal Average Hourly Earnings and Effective Rent* Jan. 2011– Dec. All nonfarm employees wage growth CPI-U Class B Effective Rent Growth Production and Non-Supervisory Employees Wage Growth CPI-U Class C Effective Rent Growth 6 Multifamily Economic and Market Commentary Average Vacancy Average Asking Rent Growth Average Vacancy and Asking Rent Growth Class B Multifamily (Q4 2013 – QAverage Vacancy Average Asking Rent Growth Average Vacancy and Asking Rent Growth Class C Multifamily (Q4 2013 – Q4 2025) As shown in the lower chart on the previous page, the gap between the wages of production and non-supervisory employees and effective rent growth has been smaller for Class C units than for Class B units and, even prior to the pandemic, there were 20 months when wage growth slightly outpaced Class C effective rent growth. Even so, since January 2011, overall cumulative Class C effective rent growth has outpaced the wage growth of production and non- supervisory employees, despite some of the strongest wage gains in a decade. In 2022, Class C effective rent growth was 5.8%, still outpacing wage growth of 5.0% for production and non-supervisory employees, leading to a further erosion in affordability for the workers who can least afford it.

[Assistant] Vacancy Rates Expected to Rise Slightly… Based on our currently predicted moderate recession in the second quarter of 2023, combined with Class B properties having to adjust rents to compete with an above-average amount of Class A new supply being delivered in certain markets, both Class B and Class C fundamentals are projected to soften in 2023. As shown in the left chart below, projects that the average Class B vacancy rate is expected to rise to 7.2% in 2023, then 7.5% in 2024, which is slightly above the 6.1% average over the past 10 years. Similarly, as shown in the right chart below, the average Class C vacancy rate is expected to rise to 4.6% in 2023, then again in 2024 to 4.9%. Even so, it is expected to remain below the 5.1% average over the past 10 years leaving a tight market for the lowest income renters. …and Rent Growth is Expected to Slow Slightly In addition, projects that the average Class B asking rent will likely slow to 2.9% in 2023, followed by a 2.0% increase in 2024. Excluding the double-digit spike in 2021, the average rent increase for Class B apartments was 3.0% since 2013. We believe that Class C rent growth will likely be slightly stronger at 3.1% in 2023 followed by a 2.0% increase in 2024. While the average asking rent is expected to grow more slowly than the 3.8% average over the past decade, nationwide, we do not expect Class C asking rents to fall.


[User] A New Normal For Annual Supply The amount of new off-campus student housing being added to the existing inventory has been trending downward since 2016, as seen in the chart above. For the second consecutive school year, new supply has been under 40,000 new beds delivered. For the semester ending fall 2022, there were approximately 36,000 new beds delivered.

[Assistant] Furthermore, as of May 2023, both fall 2023 and fall 2024 are expected to have approximately 38,000 and 39,000 new beds delivered according to RealPage Inc.


[User] Multifamily Economic and Market Commentary Improved Fundamental Performance For the last two school years beginning in the fall semester, student housing performance has continued to improve.

[Assistant] Although it is still early in the year, fundamentals for the upcoming fall 2023 school year appear to already be above the last two school years, as seen in the charts below. The pre-leasing period for the upcoming school year officially begins as soon as the current school year takes place. For example, for the fall 2023 school year, pre-leasing began in September 2022. According to Dallas-based student housing data vendor, RealPage, Inc., pre-leasing for the fall 2023 school year as of April 2023 was approximately 73%. Comparing that to the prior year, we find that the pre-leasing rate for April 2022 was approximately 71%, which was the highest amount on record, at the time. Multifamily Economic and Market Commentary Transaction Activity Halted – For Now? According to MSCI Real Assets, student housing apartment transaction activity has drastically slowed down compared to activity in 2022 and 2021. As a result of the current elevated interest rate environment, financing student housing properties has become much more expensive. Furthermore, market players have decided to hold on to student housing properties due to the continued bid/ask spread gap, as well as those property owners that have below-average mortgage rates. For the period ending Q1 2023, there were approximately 36 student housing properties traded for a total $635 million. Compared to the same time last year, when 83 properties were traded for approximately $2.9 billion, this represents a decrease of nearly 78% year over year. The last time that student housing activity stalled in a similar manner was during the first two quarters in which the pandemic was declared (Q2 2020 and Q3 2020). During these respective quarters there were 9 and 15 properties traded for approximately $182 million and $262 million in total volume. We believe that investors will continue to hold on to their student housing properties over the next 12 to 18 months at least, as they are likely not incentivized to sell with interest rates remaining elevated. Dollars ($B) Rolling 4-Quarter Volume Quarterly Volume Sales Volume for Student Housing Properties Since QStudent Housing Properties Traded Since Q1 2013 Source: MSCI Real Assets Continued Stabilization Over the Short-Term, More Upside Longer-Term The off-campus student housing sector has seen a resurgence in demand over the past two years, leading to elevated rent growth and occupancy levels, but that is not necessarily an indicator of future trends. New supply has continued to moderate, and fall 2023 is expected to see similar levels of new supply delivered. Gone are the days of 45,000-plus beds being delivered annually, as developers moved toward moderation. We believe that there are short-term headwinds that will persist for the student housing sector. Fundamentals have been at peak levels for the third year in a row, and it is widely expected that this year may be the sector’s apex. As supply continues to moderate, we expect fundamental performance will follow, slowing to a trend that resembles pre-2020 performance. The biggest headwind currently for student housing is the decreasing size of the college age population, coupled with higher tuition and student loan costs. However, we believe the longer-term outlook for the sector is brighter, as we expect interest rates to stabilize and the population cohort is expected to start increasing further out in the forecast. As a result, activity in the student housing transaction market could start picking up in the next year or two, as investors decide to get back into the market in anticipation of possible rising enrollment rates.


[User] of 7 Economy to Slow, but Home Sales Nearing a Bottom With the November forecast we include one additional year to our outlook; in this case 2025.

[Assistant] We remain in the camp of forecasters predicting a mild recession in 2024, with real gross domestic product (GDP) declining 0.4 percent on a Q4/Q4 basis. We anticipate that the recession will be brief and, for 2025 as a whole, we forecast the economy to expand by 1.6 percent. We expect the unemployment rate to peak at 5.4 percent in the middle of 2025, with core inflation trending toward the Federal Reserve’s 2-percent target. We project home sales will likely bottom out in early 2024, regardless of a mild recession or a “soft landing,” as the peak drag from rising mortgage rates passes. We forecast mortgage rates to decline gradually over the next two years. When mortgage rates do ease, we expect sales will begin to rebound, albeit modestly due to the ongoing lock-in effect. The continuing lack of existing homes for sale will likely remain supportive of new construction. We forecast total home sales to be 4.8 million in 2023, essentially unchanged from our prior forecast, 4.7 million in 2024 (4.8 million previously), and 5.3 million in 2025. Combined with an increase in refinance volumes and some home price appreciation, we forecast total mortgage originations to grow from $1.5 trillion in 2023 to $1.8 trillion in 2024, and then to $2.2 trillion in 2025. Quick Links Economic Forecast Changes Housing & Mortgage Forecast Changes Economic Forecast Table Housing & Mortgage Forecast Table Q3 2023 Growth Was Strong, but a Slowdown Remains Likely Real gross domestic product (GDP) surged to 4.9 percent annualized growth in the third quarter. However, despite the strong headline, the underlying details were less rosy. The strong 4.0 percent annualized jump in real personal consumption is likely to be unstainable given real personal incomes grew at only 0.6 percent annualized over the same period. The personal saving rate fell to 3.4 percent in September, well below its typical pre-pandemic level of roughly 7 percent. We expect consumption growth will moderate as spending and income return to a more historically normal relationship. Business fixed investment (BFI), which is typically more indicative of business cycle contours, contracted at a 0.1 annualized rate in the third quarter. Moving forward, we expect higher real interest rates and tighter credit conditions to weigh on investment. For the three months ending in October, the Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) showed that net lending standards for commercial and industrial lending, which typically leads measures of business credit outstanding in those categories, continued to tighten, albeit at a slower pace than before. We project real GDP growth on a Q4/Q4 basis to be 2.6 percent in 2023 (2.5 percent previously), negative 0.4 percent in 2024 (negative 0.1 percent previously), and 1.6 percent in 2025. The change in the 2024 outlook largely reflects a shift in timing of the peak-to-trough GDP forecast aligning more with year-end dates, rather than a revised view of a deeper downturn. Inflation and Labor Market Cooling The labor market added jobs in October and average hourly earnings rose just 0.2 percent over the month, indicating healthy but not overheated conditions. However, the unemployment rate ticked up to 3.9 percent, half a percentage point above its recent low in April, and both initial S , ous ayroll gains s ow gra ual so ening com are to earlier in t e cycle of 7 and continuing unemployment claims have trended upward. While recent data has been affected by the auto workers strike (which should reverse in the next data print), we think the labor market is now clearly showing a softening trend. The October Consumer Price Index (CPI) report was also cool, with headline inflation flat over the month and core inflation increasing just 0.2 percent. From a year ago, headline and core prices increased 3.2 percent and 4.0 percent, respectively, each a slowdown from September. Furthermore, the CPI continues to be bolstered by time-lagged measures of rent, which will continue to fall based on more timely measures of market rents. Not including shelter, the CPI was up only 2 percent in October from a year ago. While the topline was dragged down in part by falling energy prices, we expect that annual core inflation will continue to move toward the Fed’s 2-percent target over the next year. Given the unemployment rate is still below 4 percent, a premature easing of monetary policy would risk reanimating inflation, so we do not expect the Fed to be quick in cutting rates in coming months. With slowing inflation, however, maintaining the current fed funds rate likely equates to increasing real short-term rates moving forward, putting further downward pressure on economic activity. Near-Term Home Sales Poised to Slip Further Prior to Start of Rebound in Q4 2024 In response to mortgage rates approaching 8 percent this fall, mortgage application activity continues to trend downward, with purchase mortgage applications in October hitting the lowest level since 1995, according to the Mortgage Bankers Association. We are expecting Q4 seasonally adjusted existing home sales to be 3.90 million on an annualized basis, the lowest since Q3 2010. However, although mortgage rates remain high, longer-run interest rates have pulled back significantly in recent weeks. While rates have been volatile, with markets weighing a stew of changing inflation expectations, heightened Treasury issuance and fiscal deficits, and global growth outlooks, the sharp drop in yields following soft October inflation print is noteworthy. It suggests once bond markets are convinced that inflation is contained, either via a soft landing or the start of a recession, that mortgage rates will have some room to recede, especially if the currently wide spread to the ten-year Treasury rate tightens after near-term worries of higher long-run Treasury yields soften. We expect existing home sales to begin to rebound later in 2024 as mortgage rates pull back. While the lock-in effect and the low number of homes available for sale will likely persist for some time, these limiting factors will begin to diminish, and affordability will improve modestly on 30-year fixed mortgage rates below 7 percent. The recovery to a pre-pandemic level of sales will likely take years, but we forecast the bottom will be passed in 2024. We expect some softening in single-family housing starts soon, as homebuilder confidence surveys have weakened in light of higher mortgage rates. However, if rates are to pull back even modestly, the mid-term outlook for new home sales and single- family housing starts will remain on solid footing. The lack of existing homes available for sale and what we believe to be a long-run deficit in the housing stock relative to demographic trends will support construction. A pullback in commodity prices, combined with many large homebuilders having locked in previous long-run financing at attractive rates, leaves many with sufficient operating margins to allow for continued concessions as needed to drive sales. Homebuilders continuing to push toward more modestly sized homes and in comparatively less expensive geographies has also kept new home sales prices historically low relative to the median existing home sales price. Combined with rate buydown concessions, a newly built home is now often comparatively affordable for many would-be homebuyers, and we expect this to be the case for the foreseeable future.


[User] of 7 Economic Forecast Changes Economic Growth GDP grew at a 4.9 percent annualized rate in the third quarter of 2023. However, the underlying details were less robust. We continue to expect a slowdown over coming quarters as consumer spending growth has exceeded income growth and higher real interest rates weigh on business investment. Conceptually our forecast is little changed; however, we have shifted the primary quarters of our recession call back somewhat, with the peak negative quarter now expected in the second quarter of 2023. Labor Market Nonfarm payroll employment growth was in October (though this was weighed down by about 30,000 due to the auto worker strike). The unemployment rate ticked up one-tenth to 3.9 percent, a half-percentage point above its recent low in April. Compared to last month, our forecasted unemployment rate was revised slightly higher due to incoming October data and a modest recalibration of the expected economic growth/labor market relationship. Inflation & Monetary Policy The October CPI report was generally in line with our expectations. Headline CPI was flat over the month and grew just 3.2 percent compared to a year ago. Core CPI rose 0.2 percent over the month, bringing the annual rate down to 4.0 percent. The report is broadly consistent with a continued cooling in inflation. Our baseline expectation is that the Fed will not raise rates further this cycle but will keep policy tight until it is clear that inflationary pressures have abated.

[Assistant] of 7 Housing & Mortgage Forecast Changes Mortgage Rates Our interest rate forecast is higher this month, with the average FRM30 rate now predicted to average 7.7 percent over the fourth quarter of 2023. We expect the FRM30 rate to average 7.3 percent in 2024 and 6.9 percent in 2025. However, recent volatility at the long end of the yield curve adds additional risk to this forecast. As of this writing, the 10-year Treasury yield is nearly 50 basis points lower than the start of the month.


[User] Existing Home Sales Existing home sales were at a SAAR of 3.96 million in September, the first time the rate fell below 4 million since 2010. We have revised our forecast modestly downward largely due to the higher projected interest rate environment. Again, however, the heightened volatility of long-run interest rates in recent weeks points to risk around the sales projection. New Home Sales New single-family home sales jumped 12.3 percent to a SAAR of in September, causing an upward revision to our near-term forecast. We have also revised the timing of our projected new home sales trough to align with the revised macroeconomic outlook. New home sales continue to benefit from the limited inventory of existing homes for sale and homebuilders’ ability to buy down b w ’ , d b between the new and existing home markets.

[Assistant] Single-Family Housing Starts Following the completion of our forecast, single-family housing starts rose to a SAAR of in October and permits were at a pace of . While we continue to expect a softening trend in line with our forecast for a weakening economic backdrop, we have revised our forecast upward in the near term to reflect incoming data available as of the November 13 data release. We expect that the lack of existing homes available for sale will continue to boost new home construction in the medium term.


[User] Single-Family Home Prices Home prices grew 5.6 percent compared to a year ago in August, according to the most recently published FHFA Purchase-Only House Price Index (HPI). Our next home price forecast update will be in January. Single-Family Mortgage Originations We have revised downward our forecast for purchase mortgage originations this month given downgrades to the home sales forecast. In particular, we now expect purchase volumes to be $1.3 trillion in 2023, a downgrade $ b ’ t.

[Assistant] We expect purchase volumes to rise in 2024 to $1.4 trillion as housing sales increase, a downgrade of $31 billion from the prior forecast and $1.6 trillion in 2025.


[User] Office/Occupier Demand for office space will improve as more workers return to the office and occupiers take advantage of favorable market conditions. The shift to hybrid work will prompt more occupiers to redesign their spaces to enhance collaboration and employee well-being.

[Assistant] Contents Industrial & Logistics Amid record demand, rent growth and investment activity, industrial real estate will stay hot in 2022. E-commerce’s expansion will fuel the need for more warehouse space, as will the growing economy, population migration and the desire for “safety stock” onshore. Multifamily The multifamily sector is set for a record-breaking 2022 amid solid fundamentals and heightened investor interest. With tremendous liquidity and a growing range of debt options available, multifamily pricing will be as strong as ever. Hotels While the hotel sector could face renewed travel restrictions, we expect higher occupancy levels from an increase in inbound international and business travel in 2022. Data Centers Data center needs will continue to grow as cloud service providers and social media and content streaming companies expand and 5G, AI and edge computing gain traction, spurring development of additional capacity nationwide. CBRE is maintaining a positive outlook for the economy and commercial real estate in 2022, despite uncertainty over potential impacts of the COVID omicron variant and other risks. While the new variant will impact the timing of a large-scale return to the office, fiscal and monetary policy remains highly supportive of economic growth. There may be other bumps along the way, notably from the ripple effects of an economic slowdown in China and rising oil prices, but the factors that held back growth in 2021—labor shortages, supply disruptions, inflation and other COVID variants—will ease. Monetary policy will tighten to keep longer-term inflation pressures in check, which may trigger some short-run volatility in the stock market, but it will not be enough to dampen investor demand for real estate. We foresee a record year for commercial real estate investment, enabled by high levels of low-cost debt availability and new players drawn to real estate debt’s attractive risk-adjusted returns. Commercial real estate values will rise, particularly for sought-after industrial and multifamily assets. Investors will sharpen their focus on emerging opportunities in the office and retail sectors in search of better returns.


[User] The supply/demand balance in the office sector will remain highly favorable for occupiers, but the pace of recovery will pick up following a sluggish 2021. With hybrid work the new normal, office properties with amenities that enhance employee collaboration, connection and wellness will fare best. Industrial & logistics hardly broke step during the pandemic as e-commerce surged. 2022 will see slower demand for physical goods as the service sector reopens and attracts more consumer spending. This will give supply a chance to catch up with demand. Third-party logistics operators are beginning to dominate the sector and are looking to get ever closer to the end consumer.

[Assistant] Multifamily will continue its recovery in 2022, with downtown locations returning to pre-pandemic occupancy levels. Single-family rentals in the suburbs will also fare well as some millennials leave the city to raise families.


[User] A notable trend in the second half of 2022 will be the return of downtowns. As business and tourist travel picks up, we will see a sharp revival in the hotel sector in gateway cities, alongside the already recovering food & beverage sector. This, in turn, will stimulate the return to the office and the fuller recovery of downtown life.

[Assistant] The outlook for real estate in 2022 is positive, with big cities potentially surprising on the upside. Amid this recovery, ESG, demographics, digitization and decarbonization will take on a new importance. We have produced this report to help you navigate the macro environment we expect in 2022 and look forward to working with you in the new year. The outlook for real estate in 2022 is positive, with big cities potentially surprising on the upside.


[User] Economy & Policy 01 Inflation will remain well above the Fed’s 2% target through the first half of 2022 but will increase just 2.5% for the full year as supply chain and other economic headwinds abate.

[Assistant] While pandemic-related disruptions will continue, the economic outlook is still bright, with 4.6% GDP growth expected for 2022.


[User] GDP Growth, CBRE House View Source: CBRE Research. November 2021. GDP Growth Long-Term Trend Avg. Avg.

[Assistant] Growing economy to fuel commercial real estate’s recovery In terms of GDP, the U.S. has fully recovered from the pandemic-induced recession of 2020. Real estate’s recovery is generally in full swing, with some sectors progressing faster than others. The pace of GDP growth will slow in 2022 from 2021’s exceptionally high level but will remain above the long-term trend for the U.S. Alongside low interest rates, strong economic growth will provide highly supportive conditions for commercial real estate. COVID-19 outlook still uncertain but more optimistic As the delta and omicron variants showed, the pandemic’s course is difficult to predict. COVID will likely endure in some form for the foreseeable future, However, society is learning to adapt to life with the virus and the ability to manage its effects has improved considerably. This is largely due to broader vaccine availability and the emergence of antiviral and antibody therapeutics. So, while COVID-19 will remain present in 2022, its impact on people, health-care systems and the economy should be more subdued than in 2020 and 2021.


[User] Continued economic growth ahead We expect U.S. GDP to expand by a historically strong 4.6% in 2022. All four quarters will see more than double the long-term trend of around 2%. The recently enacted Infrastructure Investment and Jobs Act—as well as the social spending proposals under consideration as of this writing—may add some upside potential to our 2022 growth forecasts, with greater impact in 2023 and beyond.

[Assistant] We do not foresee interest rates rising sharply enough to disrupt property markets, with the 10-year Treasury yield expected to reach 2.3% (from 1.4% in early December) by the end of 2022. Inflation and interest rates in focus Inflation reached multi-decade highs in the U.S. during 2021, largely due to strong economic growth, labor shortages and hobbled supply chains. All of this conspired to increase costs for products and services. We expect that price increases (as measured by Core PCE, the Federal Reserve’s preferred measure) will remain elevated during the first half of 2022, but will increase just 2.5% for the full year amid cooling economic growth and fewer supply chain constraints. Headwinds to growth in China—the world's second largest economy— are a risk to growth in the U.S. and could impact the timing of monetary policy adjustments.


[User] Given the strong economic recovery and inflationary pressure, we expect the Fed will end its emergency quantitative easing—a key policy response to increase liquidity and improve market functioning during the pandemic—by mid-2022. This will set the stage for an increase in the federal funds rate, with the potential for more than one rate hike before year's end.

[Assistant] However, we do not foresee interest rates rising sharply enough to disrupt property markets, with the 10-year Treasury yield expected to reach 2.3% (from 1.4% in early December) by the end of 2022. Policy changes and commercial real estate The recently enacted Infrastructure Investment and Jobs Act includes $550 billion in new spending on physical infrastructure over the next 10 years that could boost commercial real estate in 2022 and beyond. One positive effect is higher short- and long-term economic growth, which translates into more demand for commercial real estate, as new projects get underway and long-run productivity improves. In local markets, new areas could be opened for development, and better infrastructure supports the growth of local businesses. This bill also carries major implications for the tax code, which pose some degree of risk for commercial real estate. The most notable changes are a 3.8% net investment income tax expansion (which will cover rent and capital gains), surtaxes on taxpayers with adjusted gross incomes over $10 million and new tax incentives for clean energy infrastructure and building retrofits. Importantly, many of the proposed tax changes that would have been most detrimental to property markets are now off the table—including those affecting the 1031 exchange and carried interest treatment as well as an increase in the tax rate on capital gains.


[User] Slowing growth abroad and the normalization of monetary policy Economic headwinds in China and supply chain issues will factor into inflationary pressures in 2022 and influence monetary policy. Should economic growth in China outperform and supply chain issues persist, the resulting inflationary pressures could hasten the Fed’s first rate hike since 2018. Alternatively, slowing growth in Asia and a resolution of supply chain issues could slow the U.S. central bank’s reduction in monetary stimulus. These are the main factors—along with COVID-19—that could shape the overall economic environment in 2022.

[Assistant] A growing focus on ESG Environment, social and governance (ESG) initiatives will play a larger role in real estate in 2022. According to CBRE's 2021 Americas Investor Intention Survey, more than 75% of investors have adopted or are considering ESG criteria, a trend that will continue. Impacts will not only come in the form of legislation, including elements of President Biden’s spending proposals, but also from federal regulation. The Securities and Exchange Commission (SEC) is expected to issue rules to improve ESG reporting consistency across various disclosures and reports to investors. These rules will touch on each of the ESG principles, including climate change, human capital management and board diversity. This will likely heighten investor and occupier focus on how their real estate decisions may hasten ESG compliance. Beyond the federal level, it is important to note that policymakers on the state and local levels are also focused on ESG—many have already enacted notable policies in this regard—and this too is worth watching in 2022.


[User] In real estate terms, ESG will lead to more demand for efficient buildings and retrofits. Given the fact that commercial buildings account for 16% of U.S. CO2 emissions, according to the U.S. Department of Energy, property portfolios will play an important role in meeting ESG targets in the coming years.

[Assistant] Capital Markets 02 Investment activity in 2022 is expected to top pre-pandemic highs and cap rates will remain stable or slightly compress amid strong investor demand and abundant capital—even as interest rates rise. Investment volume approaching record territory Commercial real estate investment activity roared back in 2021 thanks to strong investor demand and abundant capital flows. Capital availability will continue to support a buoyant acquisition market in 2022, with equity capital targeting U.S. real estate near all-time highs and low-cost financing readily available. More foreign capital is expected to target U.S. assets in 2022, as international travel restrictions ease and costs to hedge against dollar depreciation remain very low. Total investment volume in 2022 is projected to increase 5%-10% over 2021 levels, which are on track to roughly equal pre-pandemic volumes from 2019 (currently the highest annual total on record). Although industrial and multifamily assets will likely continue to capture the most investor interest given the tailwinds of e-commerce and demographic shifts, investment in office and retail assets should also pick up. Industrial and multifamily volumes are projected to increase 10%-15% over 2021 levels, while office and retail volumes will rise 5%-10%. Meanwhile, hotel volume in the first three quarters of 2021 recovered to pre-pandemic levels, a positive sign for the sector heading into 2022. Cap rates to hold steady Strong demand for assets will push pricing higher, helping to hold cap rates generally steady even with minimal increases in long-term interest rates. We expect real estate spreads to remain wide by historical standards, helping to offset the impact of rising interest rates. The all-property average cap rate is expected to be basis points (bps) higher than the 10-year Treasury yield during the first half of 2022, on par with the 290-bp average from 2013 to 2018, before narrowing to 250 bps in H2 2022. In addition, rents should continue rising, supporting higher property net operating income (NOI) for most asset types. Although cap rates typically follow the direction of real interest rates in the long run, NOI expectations are more influential in the short term. Despite some lingering challenges for certain retail, hotel and office segments, real estate fundamentals are expected to strengthen throughout 2022. Economic and employment growth in 2022 will drive NOI higher as landlords fill vacancies and raise rents, though this will vary by asset type, quality and market. Overall, NOIs are forecast to increase for the multifamily (8%), industrial (4%) and retail (2%) sectors. The hotel sector will see a material improvement in NOI, though the omicron variant could impact by how much. NOI is expected to decrease modestly for the office sector (-1.5%), as lower-quality assets contend with a flight-to-quality to Class A properties by occupiers adopting hybrid work arrangements. Overall, as real estate values appreciate, real estate investors will be rewarded by the high yield spread versus risk-free Treasury rates. Additionally, we expect that inflation will increase 2.5% for the year, a level below our forecast NOI growth. Consequently, the opportunity for relatively low-risk yields, coupled with the ability to hedge against inflation, will make real estate a particularly attractive investment option in 2022. 10-Year T-Bond Retail Office Apartment Industrial Hotel (Upper Tier) Forecast Average U.S. Cap Rates, 10-Year Treasury Yield (%) As investors rebalance risk and return in the post-pandemic real estate environment, both core and opportunistic investment strategies are expected to accelerate further in 2022. Given the strength of underlying fundamentals, multifamily will likely make up a large share of opportunistic acquisitions. The flight-to-quality trend will likely be most apparent for office assets, including demand from institutional investors that paused acquisitions during the pandemic and now are under pressure to efficiently deploy large amounts of capital. Alternative lenders driving debt market Loan origination volumes will likely remain elevated through 2022—building on the marked increase in 2021—as borrowers seek to lock in lower rates ahead of the Fed’s tightening of monetary policy. 2021 saw a surge in activity from alternative lenders, particularly debt funds making use of collateralized loan obligations (CLO). This shift reflects a growing risk appetite from both borrowers seeking bridge loans and other transitional financing and investors who are eager for the higher yields, especially given current corporate and government bond spreads. CLO and traditional commercial mortgage-backed securities (CMBS) issuance should remain high in 2022 assuming the Fed tapers its asset purchases in a way that does not roil credit markets. Life insurance companies have been very active as well, finding good value in commercial real estate lending, particularly for multifamily and industrial assets. At the same time, private equity firms have increasingly been interested in acquiring loan portfolios from life companies, as their investment parameters (which can be more aggressive than the low-risk, low-yield life company approach). Life companies are expected to remain active lenders in 2022, though some portion will likely continue moving into private equity. Also notable is the growth in single-asset, single-borrower deals. Many investors are still cautious about segments of the office and retail sectors and prefer the security of evaluating a single property and sponsor rather than combing through the financials of a larger conduit deal. We expect that both investors and lenders will become more comfortable underwriting office and retail deals in 2022 as fundamentals improve and the impacts of remote work and e-commerce become clearer. A good year ahead for capital markets Putting the pieces together, 2022 is set for a record level of investment activity, fueled by ample liquidity and stable cap rates. Improving economic conditions will support both asset value appreciation and NOI growth, boosting returns. The largest risks to this outlook are from a COVID-19-caused disruption, an unforeseen spike in interest rates or elevated inflation that proves more durable than currently anticipated. At this point, these factors do not appear to be major threats to the outlook.


[User] Office/ Occupier 03 Demand for office space will improve as more workers return to the office and occupiers take advantage of favorable market conditions. The shift to hybrid work will prompt more occupiers to redesign their spaces to enhance collaboration and employee well-being. Office Rent and Vacancy Forecast Source: CBRE Econometric Advisors, Q3 2021.

[Assistant] Office market inches closer to its “next normal” U.S. office market activity strengthened in the second half of 2021, and the momentum likely will continue in 2022. Although the outlook depends on how new COVID variants impact society, effective medical advancements will make occupiers more comfortable with making long-term leasing decisions. At the same time, however, occupiers are still determining how best to support hybrid work and how it will impact their portfolio strategies. Although demand will be greater in 2022, the U.S. office market will contend with the highest vacancy in nearly three decades and lower rental rates until the second half of the year.


[User] Occupier-favorable market conditions to persist Throughout 2021, new lease transactions increased from pandemic lows, negative net absorption diminished and sublease space began to recede amid strong job growth nationally. These trends will accelerate in 2022—fueled by the expected creation of 1 million new office-using jobs—resulting in nationwide positive net absorption for the first time since Q1 2020. Despite the positive momentum, the national office vacancy rate will reach its highest level since 1993 in 2022 due to the delivery of more than 53 million sq. ft. of new office construction.

[Assistant] The rise of hybrid work Workplace flexibility will become even more embedded in corporate business models next year. Our research suggests the average U.S. office employee will spend 24% less time working in the office, and our 2021 Occupier Sentiment Survey revealed that 87% of large companies plan to adopt a hybrid work approach. The shifting role of the office will likely accelerate a flight to quality, with office buildings that offer the most desirable technology, amenities and flexible space capturing a growing share of demand. Life sciences impacting more markets The life sciences sector will continue growing in key U.S. office markets throughout 2022, fueled by advances in biotechnology and record levels of venture capital and other sources of funding. This is resulting in the largest pipeline of life sciences laboratory construction on record, with 23.6 million sq. ft. underway in the nation’s top 12 life sciences clusters as of Q3 2021. Average lab rents are at record highs in the premier life sciences clusters of Boston- Cambridge, the San Francisco Bay Area and San Diego. Life sciences’ growing labor pool and new development activity continues to spread to emerging hubs such as Pittsburgh, Houston and Salt Lake City, among many others. The shift to hybrid work will prompt occupiers to consider flexible office space for more agility. Flex providers were resilient and agile during the pandemic and will continue to shift their strategy to meet the demand for flexible space options. Flex office supply should grow in 2022 as providers resume acquiring new locations, landlords increase their own offerings and demand from small and large businesses grows.


[User] Retail’s recovery stokes optimism and investment The retail sector is recovering relatively well from the pandemic’s major disruptions. Existing retail space is more efficient, with sales per sq. ft. improving due to few new stores being built and rising retail sales. The mall sector, thought to be in deep peril, is experiencing foot traffic above pre-pandemic levels and reporting double-digit sales growth. Investors, meanwhile, are taking a fresh look at retail’s attractive yields compared with other asset classes. In addition, record levels of venture capital are targeting retail-focused companies. Consumer spending is forecast to rise in 2022, as a build-up of personal savings during the pandemic is released. The revival of inbound international travel, responsible for more than $150 billion in expenditures annually according to a 2019 U.S. Travel Association report, will provide an additional boost to retail in coastal and other tourism-focused markets.

[Assistant] Modest development pipeline aiding recovery With developers focused on industrial and multifamily projects, the retail construction pipeline will remain modest heading into 2022. As supply chain issues impact building materials, including delayed deliveries and higher overall costs, retail development will remain constrained, allowing space productivity to improve even more. Capital markets showing signs of life Retail investment roared back in 2021. REITs increased acquisitions, which already reached their second-largest annual total over the past 10 years through Q3 2021. Grocery-anchored centers attracted $5 billion in investment activity in the U.S. in Q3 2021, the segment’s second-most active quarter over the last decade. Grocery-anchored retail assets were resilient during the pandemic. This sub- sector adapted quite well to online innovations such as curbside pickup and third-party delivery services. With grocery-based e-commerce expected to grow more than 20% in 2022 and double by 2025, grocery-anchored centers will remain the gold standard of retail investment amid favorable supply-demand dynamics and attractive pricing on a risk-adjusted basis. And as debt liquidity for retail improves, the buyer pool will increase.


[User] The mall sector continues to surprise. Mall-owning REITs' Q3 2021 reports have been positive. Despite growing vacancy in lower-classed properties, foot traffic data from Placer.ai suggests an underestimated resilience within regional and super-regional malls. In July, indoor malls exhibited a year-over-two-year visit gap of just negative 0.1% for the month, with outdoor malls growing their total visits by 2.1%, suggesting a complete recovery in foot traffic.

[Assistant] With grocery-based e-commerce expected to grow by more than 20% in 2022 and double by 2025, grocery-anchored centers will remain the gold standard of retail investment. Venture capital entering the retail sector 2021 has been a record year for venture capital investment in companies supporting the retail trade. Technology that drives e-commerce—logistics and supply chain management, in particular—is especially attractive. Investment activity is also high for mobile payment applications. Also known as m-commerce, this conduit of retail trade has been growing as a segment of total retail, with an estimated $295 billion in U.S. retail sales in 2021 and up to $660 billion in annual sales by 2025 when it will account for over 10% of total retail sales, according to eMarketer. Venture capital is also seeking investments in location analytics, enterprise software, artificial intelligence and machine learning. Funding this growing technology could help ease the stress on the supply chain, which remains an issue as the nation emerges from the pandemic. Industrial & Logistics 05 Amid record demand, rent growth and investment activity, industrial real estate will stay hot in 2022. E-commerce’s expansion will fuel the need for more warehouse space, as will the growing economy, population migration and the desire for “safety stock” onshore. 2022 will be another banner year for industrial real estate On the heels of record transaction volume and rent growth amid extremely tight supply and high demand, the industrial real estate market will remain very strong in 2022. Demand will primarily be driven by growing e-commerce sales, the improving economy, population migration and the need for onshore “safety stock” inventory to avoid the supply chain disruptions of the past 18 months.


[User] E-commerce sales exploded at the onset of COVID-19, rising to 21.6% of total retail sales in Q2 2020, up from 16.2% in the previous quarter, and are still above pre-pandemic levels at around 20% as of Q3 2021, according to CBRE Research. With consumers continuing to buy more goods online, e-commerce will keep expanding in 2022. Demand for space from e-commerce will trickle down the supply chain from retailers to wholesalers, who will need to hold more inventory.

[Assistant] These businesses will continue to outsource to third-party logistics companies (3PLs) at a greater clip due to rising costs, a lack of available space in highly populated areas and challenges with finding enough workers to operate facilities. Supply chain volatility will drive demand The top concern for occupiers in 2022 will be rising transportation costs and supply chain delays. The cost to ship goods via ocean freight increased more than 200% in 2021 and the cost for domestic freight increased over 40%, according to Drewry Supply Chain Advisors and the Cass Freight Index. While the increases may ease as 2022 unfolds, transportation costs will likely remain elevated for the foreseeable future. Manufacturers are still not at full capacity amid pandemic-related shutdowns, and it will likely take them until 2023 to fully recover. At the same time, demand for goods will continue to rise, leading to increased competition. This demand will keep supply chain costs elevated, including transportation. Transportation costs make up 40%-70% of a company’s total logistics spend, while fixed facility costs, which include rent, make up only 3%-6%, according to CBRE’s Supply Chain Advisory. While rents will continue to rise significantly, it will pale in comparison to rising transportation costs. Therefore, companies will continue to lease more space to cut down on transportation costs.


[User] Outsourcing to accelerate in 2022 3PLs led industrial leasing activity in 2021 with a market share of 30%, compared with 13% for e-commerce. 3PLs will expand further in 2022 as companies look to reduce direct logistics costs and avoid the hassle of finding space in record- tight markets with limited labor availability. As a result, 3PLs’ market share will increase in most U.S. markets as vacancy rates decline, rents increase and labor markets further tighten, leading to a projected leasing market share of 35% by year’s end. Notwithstanding, 3PLs will need to overcome labor shortages, leading to the greater use of automation and other technologies to lower the reliance on human labor.

[Assistant] Manufacturing on the rise Companies will also look to onshore more manufacturing. U.S. manufacturing output was solid in 2021, bolstering real estate fundamentals for manufacturing space, including positive net absorption, lower vacancy rates and record-high rents. This will continue in the coming year with technology, defense, automobile and medical companies leading the way. While demand for manufacturing facilities will increase in traditional Midwest and Southeast markets, Arizona, Texas and Florida are expected to be the top growth markets for manufacturing real estate in the coming year, largely because of growing populations, available land and business incentives. Emerging logistics markets The top emerging markets for distribution facilities will once again be those with growing populations and superior logistics hub connectivity. Population growth will be robust in the Southwest and Southeast, stimulating demand for logistics real estate in those regions. Markets like Nashville, Las Vegas, Reno, Central Valley California, Salt Lake City, Central Florida, San Antonio and Austin should see significantly more activity in 2022. As companies look to alternative transportation modes, occupiers will also flock to inland port markets with air and rail connectivity like Louisville, Memphis, El Paso, Columbus, Indianapolis, Kansas City, St. Louis and Greenville. Supply pipeline keeping up with demand A record-setting 448.9 million sq. ft. of space was under construction as of Q3 2021. The elevated level reflects both projects that broke ground in 2021 and 2020 starts that were unable to be completed amid the COVID-19-related disruptions. Still, occupier demand continues to outstrip supply. If this trend continues in 2022, availability will remain tight, particularly for Class A space, leading to a higher number of lease renewals. While this will support high rents, it may slow the pace of new leasing activity in 2022. Investors bidding up assets in emerging markets Robust investor appetite for industrial assets will push up prices and further compress cap rates across markets and product types in 2022. The cap rate spread between primary and secondary markets will continue to narrow in 2022. Phoenix and Las Vegas will post cap rates in line with the Inland Empire, Indianapolis and Columbus cap rates will drop to Chicago levels, and prices in the PA I-78/81 Corridor will come close to those in the New Jersey markets. We also expect Northern and Central Florida cap rates to approach those of South Florida in the coming year. With institutional capital flowing into the market, it will remain difficult for new investors to find Class A space to purchase. As a result, we expect more capital to target Class B facilities, lowering cap rates for this product type. Automation on the rise ESG to impact industrial Increased demand from industrial occupiers, combined with an extremely tight job market, will lead to the expansion of automated technology and robotics. Since automation will require building amenities found mostly in newly constructed facilities, this will increase the demand for first-generation facilities in 2022 and beyond. Given the need to reduce carbon emissions, the industrial sector will face more regulatory pressure, particularly for energy efficiency. While much of this effort will likely be focused on improving passenger and freight transportation efficiency and reducing manufacturing emissions, warehousing may be impacted as well. Consequently, developers may use more sustainable construction materials like timber instead of concrete and steel. Multifamily 06 The multifamily sector is set for a record-breaking 2022 amid solid fundamentals and heightened investor interest. With tremendous liquidity and a growing range of debt options available, multifamily pricing will be as strong as ever. 8% projected growth in urban effective rents in 2022 +300k new units expected to deliver in 2022 +95% forecast multifamily occupancy levels Record-high demand and construction pipeline The U.S. multifamily sector is poised to finish 2021 with overall occupancy and net effective rents above pre-pandemic levels. While certain markets face challenges, the overall health of the sector will lead to a record 2022. The growing economy is boosting household formation, which had been artificially suppressed by the pandemic. New households are catalyzing demand for rentals, which is expected to match the pace of new deliveries in 2022. We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year. Construction will remain elevated in the near term. Completions in 2021 will likely reach a new high, and another -plus units will be delivered in 2022. For context, deliveries averaged units annually since 2010 and per year since 1994. Despite strong demand, the volume of new Class A product coming online will limit the performance of higher-quality assets. However, Class A rents were most negatively affected during the crisis and there is more room to recover. Overall, we project 8% growth in urban effective rents in 2022. These exceptional growth rates will moderate to 3% in 2023 and slightly below that in subsequent years. These strong fundamentals, together with the expectation that debt will remain available and at a relatively low cost, is welcome news to developers as construction costs rise.


[User] From urban to suburban—and back again Downtown multifamily properties are filling back up and occupancy rates are nearing pre-pandemic levels, spurred by a confluence of factors: fewer restrictions on urban amenities, higher vaccination rates, a growing willingness to use public transit, the reopening of college campuses and more workers returning to the office. Urban areas saw an average vacancy rate increase of nearly 200 bps during the peak of the pandemic.

[Assistant] As of Q3 2021, urban vacancy rates average 5%, just 70 bps above their pre-crisis level, and are expected to fall to 4% by the end of 2022. By contrast, suburban properties fared better, as both secular and cyclical factors— income uncertainty, a preference for outdoor options, a need for more space and more millennials with growing families requiring schools—drove demand for apartments in lower-density and lower-cost submarkets. As of Q3 2021, urban vacancy rates average 5%, just 70 bps above their pre-crisis level, and are expected to fall to 4% by the end of 2022. Source: CBRE Research, Real Capital Analytics, Q3 2021. multifamily investment volume will reach a record of nearly $213 billion in 2021 (year-to-date volume totaled $179 billion through Q3 2021), well above 2019’s level of $193 billion. For 2022, we expect at least a 10% increase from 2021 to $234 billion. This level of liquidity should facilitate strong value growth. In addition, we expect a resurgence in the flow of foreign capital targeting multifamily assets. Liquid multifamily debt capital markets, which includes traditional lending sources and alternative lenders like debt funds and mortgage REITs, will further stabilize and could even compress cap rates—even as interest rates rise. Lower-risk, lower-reward markets include strong secondary ones that were less affected by the pandemic. Markets like Atlanta, Dallas, Denver and Philadelphia are expected to offer more modest income and appreciation returns compared with gateway markets and a relatively stable investment return outlook. The rise of single-family rentals Return to the office will spur urban demand The single-family rental market will gain traction with both renters and investors as more millennials reach child-rearing life stages. Urban apartment operators will rely more on Gen Z to backfill the resulting vacancies. Hotels 07 While the hotel sector could face renewed travel restrictions, we expect higher occupancy levels from an increase in inbound international and business travel in 2022.


[User] International travel: The recovery catalyst for many U.S. gateway markets Even though hotel demand plummeted by 57% early in the pandemic, leisure travel was enough to double the overall hotel occupancy rate from its pandemic low by late summer 2020. By July 2021, overall revenue per available room (RevPAR) reached 94% relative to 2019, according to Kalibri Labs. What’s still largely missing, however, are individual business, group business and international travel bookings. As a result, core urban areas—particularly U.S. gateway cities—are languishing, with some markets down as much as 67% in RevPAR relative to 2019. However, the easing of inbound international travel restrictions will catalyze hard-hit global gateway cities in the U.S. and aid the recovery over the course of 2022. As recently as August 2021, international travel was down nearly 78% relative to 2019.

[Assistant] For 2022, we expect inbound travel, led by leisure travelers from Europe and Asia-Pacific, to drive increased hotel demand. Based on vaccination rates by country and several key consumer sentiment surveys, we forecast the rollback of international travel restrictions for vaccinated travelers to account for approximately one-sixth of our 23% total revenue growth forecast for the hotel sector in 2022. The benefits will not be uniform. Resorts and all-inclusive destinations will continue to be strong performers in 2022 as travelers seek simplicity and price certainty. Already operating at 13% above 2019’s summer RevPAR, Miami has benefited from the shift in travel patterns, and thus may end up with less growth. Harder-hit markets like San Francisco and New York, with RevPAR still down 61% and 56%, respectively, compared with 2019, may benefit more in 2022. Overall, supply growth will continue to moderate given increased construction costs and labor shortages.


[User] The return of business and international travel Getting back to business as usual Business and convention travel will slowly rebound, with “bleisure” becoming more common as business travel, still less frequent, will include additional leisure travel days. Meanwhile, the return of international travelers will provide a much- needed boost to global hubs that have been particularly hard hit by the pandemic and have experienced a slower recovery.

[Assistant] For hotels that have been limiting occupancy levels and amenities to stay open, we expect to see lower operating margins but strong cash flow growth, as accelerating top-line trends will be partially offset by wage pressures and the resumption of normal amenity and service levels. Overall, hotel owners will work to drive rates instead of chasing occupancy.


[User] The resumption of inbound international travel will provide a lift to hotel fundamentals in 2022. When combined with the continued recovery in individual and group business travel, this might just make the difference between profits and losses for some struggling hotel operators.

[Assistant] The resumption of inbound international travel will provide a lift to hotel fundamentals in 2022. When combined with the continued recovery in individual and group business travel, this might just make the difference between profits and losses for some struggling hotel operators. To date, investor demand for hotel assets has mirrored consumer demand trends, with many leisure-oriented hotels trading hands at premiums seen before the pandemic. As the pace of recovery in corporate and group demand unfolds, we expect pricing for group and corporate-oriented hotels will increase. Data Centers 08 Data center needs will continue to grow as cloud service providers and social media and content streaming companies expand and 5G, AI and edge computing gain traction, spurring development of additional capacity nationwide. Data center development flourishing Data centers are becoming an ever more important and larger commercial real estate asset class as businesses expand their digital infrastructure. With emerging technologies like 5G, AI and edge computing adding to already high demand for data centers, development will increase in 2022, spurring growth in established primary markets, as well as secondary and tertiary markets. Since 2016, wholesale colocation inventory in primary markets (Northern Virginia, Silicon Valley, Chicago, New York Tri-State, Dallas, Phoenix and Atlanta) has more than doubled to 3.08 gigawatts (GW). With 527.6 megawatts (MW) under construction in primary markets—an increase of nearly 350 MW from 2016— the accelerated growth of the data center sector will continue in 2022. With 527.6 megawatts (MW) under construction in primary markets—an increase of nearly 350 MW from the first half of 2016—the accelerated growth of the data center sector will continue in 2022. With 290.5 MW currently under construction and an additional 586.5 MW of planned future capacity, Northern Virginia is expected to outpace all other North American markets through 2022. Secondary markets will continue to grow as developers seek to expand capacity, focusing on affordable land in favorable climates, network connectivity, clean and inexpensive power sources and favorable tax incentives. Hillsboro, Oregon, which possesses many of these qualities, is expanding faster than other secondary markets and will see increased activity through 2022.


[User] Asking rates dip as new supply delivers On average, pricing continues to decline across both primary and secondary markets, largely due to more competition as new data centers come online. Some lower-vacancy markets, as well as markets facing potential supply bottlenecks, are beginning to see prices flatten out or, in some instances, tick up. We anticipate this trend to continue in 2022, with space availability and power having the largest impact on asking rates.

[Assistant] High-quality, highly connected assets such as carrier hotels will continue to command a premium for both new and existing tenants. ESG drives changes in data center operations As companies evaluate their digital transformation in relation to their ESG initiatives, both providers and end users will seek clean power solutions. Providers attempting to satisfy the environmental standards of their customers, or to meet their own carbon neutrality targets, want to lessen their reliance on traditional, carbon-intensive fossil fuels by powering their operations with clean, affordable energy. Industry professionals are focused on solving this issue, though it remains difficult as rapid growth and an ever-increasing demand for power persist. These environmental considerations will likely impact site selection, benefiting markets with an abundance of clean energy like Montreal and Hillsboro, Oregon, and adding challenges to markets with tighter resource restrictions like water conservation in Phoenix, Las Vegas and Salt Lake City. Going vertical in land-constrained markets Power availability key Markets with limited land availability will begin to see more vertical construction of data center space. There will also be a continued premium in asking rates at highly connected, high-quality data centers. Power requirements for data center occupiers will continue to grow, leading to larger lease deals and lower rents on a per kilowatt basis in 2022. Power constraints will remain the biggest threat to new developments in markets like Northern Virginia and Silicon Valley. ESG initiatives will also prompt providers to seek renewable and more efficient energy sources to power their centers.