2021 was a year marked by strong recovery in economic fundamentals. Supportive monetary and fiscal policy helped markets to perform very well. The key themes we see going into 2022 are:

Will inflation derail recovery?

  • Markets and the real economy have bounced back sharply from the pandemic lows, but the Federal Reserve’s era of accommodative monetary policy may be coming to an end.
  • Inflation concerns have pushed the Fed to accelerate the rollback of its accommodative stance. The key question is — will the Fed successfully engineer a soft landing for the economy? How will housing fare as interest rates rise?

Housing strength likely to persist into 2022

  • Higher interest rates are usually accompanied by strong economic growth, and historically, housing fundamentals remain strong in that environment. Home prices are also driven up by low inventory and high absorption rates.
  • New home supply has lagged demand and we expect material/labor shortages to delay new supply.
  • Markets are overvalued in pockets, but not near the levels seen in 2005. Rent growth has strengthened in 2021 but has still lagged the increase in Personal Consumption Expenditure.
  • Long-run demographics point to rising 21-45-year-old populations in the next decade, which should support household formation and housing fundamentals in the coming years.

Mixed recovery across CRE sectors

  • Commercial Real Estate prices saw a multi-track recovery in 2021 with industrial and multifamily leading the way.
  • Central Business District office has recovered from the lows, but remote/hybrid-working pose long-term questions. Retail prices rebounded strongly, but we expect longer-term concerns to continue to weigh on the sector in coming years, particularly in the mall segment.
  • We expect asset repositioning and adaptive re-use to drive demand for both value-add equity capital and transitional loans through 2022 and beyond.

Fed taper and wider spreads

  • The Fed taper is estimated to conclude in March 2022, and the Fed will go from being a big buyer of mortgages to a net seller. Bank demand for Mortgage-Backed Securities (MBS) might be weaker into higher rates, suggesting there may be more room for the basis to widen.
  • We believe there is some value at the top of the capital stack in securitized credit products, especially in SASB/SFR AAAs.
  • The risk reward to go down the credit stack remains weak.

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