Research Update: May 2022


Will McIntosh, Ph.D
Global Head of Research

Jay Johnston
Senior Associate, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

May 2022

Given the fast moving nature of the financial markets right now, we would like to provide our view as it relates to the following topics:

A Mix of Economic Signals

The U.S. economy experienced a gain of 428,000 in nonfarm payrolls in April.  Employment growth was sweeping and leisure and hospitality rose 78,000, manufacturing grew 55,000, and retail gained 29,000.[1]  The unemployment rate was unchanged at 3.6% after the labor force participation rate slipped from 62.4% to 62.2%.  Average hourly earnings for workers rose to $31.85, up 10 cents from a month prior and 5.5% higher than a year ago.[2]  Employers were still struggling to meet hiring demands and the beginning of 2022 saw record job openings coupled with a record number of workers quitting, leading to tight labor conditions and such strong wage growth.[3]  Based on year-to-date employment gains, nonfarm payrolls are now back above their long-term trend since 1990 (Exhibit 1).

EXHIBIT 1: Drastically Improved Labor Conditions (Total Nonfarm Payrolls, Seasonally Adjusted – 1990 to YTD 2022)

Source: U.S. Bureau of Labor Statistics

Despite a backdrop of generally strong fundamentals (e.g. a sub-4% unemployment rate), the rapidly evolving nature of capital markets is adding considerable volatility to the financial system.  This is exacerbated by the beginning of a period of quantitative tightening by the Federal Reserve.  Going forward, the possibility exists for a mix of economic drivers that investors have never seen in this unique combination.  Markets may be setting up for a mix of rising interest rates, slowing economic growth, persistent inflation, and strong employment – a historic move in concurrent market forces – that will impact real estate demand and the flow of capital.

CRE Demand Drivers… A Sector Specific Story

In our opinion, the long-term demand drivers for commercial real estate (CRE) remain attractive on a broad basis, with the exception being the single-family for-sale housing market, which is showing signs of turmoil.  That being said, each sector is producing a unique experience.

  • Industrial: Fundamentals in the warehouse-logistics space remain strong, although we do anticipate a near-term impact from Amazon’s announced pull back in property and personnel investment. Demand continues to grow across all key markets and while Amazon may not drive the record levels of absorption witnessed in the past, robust demand and historically low availability rates will support healthy levels of absorption.
  • Multifamily: Rental growth and NOI continue to accelerate in the sector. Given a compelling long-term story underpinning multifamily demand, the sector continues to attract strong levels of institutional investor interest.  Increasing interest rates will reduce the demand of single-family for-sale housing, to which apartments will be the beneficiary.
  • Retail: The sector continues to evolve in the face of secular headwinds, although select retail assets have generated outperformance. Grocery-anchored retail in solid locations along with “fortress” malls with high-quality anchors are performing nicely.  Well positioned retail is showing growth in traffic and sales but is at heightened risk during a recession as consumer spending retrenches.
  • Office: Demand in this sector continues to play out, as newer Class A is benefitting from companies bringing employees back to the office. Class B and C office will likely be significantly impacted by an increased work-from-home environment.

Strong private CRE performance coupled with a broad sell-off in liquid securities – stocks and bonds – has caused a denominator effect in multi-asset portfolios, where investors may now be overweight to CRE based on first quarter figures and probably second quarter too.  At least temporarily, the fact that institutional investors find themselves overallocated to CRE could impact the flow of capital to the asset class.  That being said, long-term capital flows to real estate are still meaningful and strategic allocations are flat or higher in certain instances.  In the interim, investors need to remember that the numerator, or private real estate values, should also adjust over the next two quarters given their appraisal lag.  Hopefully, the appraisers will mark assets based on a keen awareness of current market dynamics.

Navigating today’s financial markets is becoming an increasingly arduous task.  Additionally, maintaining a long-term investment perspective is of paramount importance in times like this.


[1] Capital Economics. U.S. Employment Report (April). Published May 6, 2022.

[2] Bureau of Labor Statistics. The Employment Situation Report – April 2022. Published May 6, 2022.

[3] The Wall Street Journal. U.S. Inflation Eased in April to 8.3% Annual Rate. Published May 11, 2022


These materials represent the opinions and recommendations of the author(s) and are subject to change without notice. USAA Real Estate, its affiliates and personnel may provide market commentary or advice that differs from the recommendations contained herein. Certain information has been obtained from sources and third parties. USAA Real Estate does not guarantee the accuracy or completeness of these materials or accept liability for loss from their use. USAA Real Estate and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein.

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