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The U.S. is by no means back to pre-pandemic “normal”, but there is no denying the strong bounce in economic activity that has occurred in 2021. Despite lingering challenges, many economists are optimistic that 2022 is positioned to be another good year for growth.
The quick recovery that many had hoped for did materialize in 2021. GDP growth surged to 6.7% in second quarter – surpassing the pre-pandemic level of 2.2% and providing a welcome relief to negative GDP growth in 2020. Although growth slowed to 2.1% in third quarter, economists are anticipating a fourth quarter rally with GDP expected to rise to nearly 5%. If holiday retail sales are any indication, the economy is clearly on track for a strong finish. The National Retail Federation is forecasting that holiday sales during November and December will increase between 8.5-10.5%, compared to 2020, to total between $843.4 billion and $859 billion.
Consumer spending is a key economic indicator to watch. Americans love to spend. Seventy percent of U.S. GDP is driven by consumer spending. The unprecedented government stimulus that put money in the hands of millions of people during the pandemic has helped to fuel spending and a rapid economic recovery.
Views are mixed on what’s ahead for 2022. However, many economists are optimistic about continued economic strength in the coming year. The Conference Board is forecasting that U.S. GDP growth will moderate but remain elevated at 3.5% in 2022, while economists from Morgan Stanley have released a bullish growth forecast of 4.5%. Although the stimulus money that supported the economy for much of 2020 is disappearing, job growth is returning. Led by hiring in the leisure and hospitality sectors, the U.S. added 531,000 new jobs in October, which lowered the unemployment rate to 4.6% – a new low since the onset of the COVID-19 pandemic.
Rising employment is contributing to a brighter outlook ahead for the coming year. Job growth and the wage income that comes along with it are expected to help maintain consumer spending that had been propped up by government stimulus checks. Another positive to come out of 2021 and the government stimulus is that the personal saving rate (how much of income is being spent versus being saved), soared during the pandemic and remains elevated by historical standards. What that means is that people have the ability to spend.
Yet there are still some potential headwinds ahead, including COVID-19 variants that continue to disrupt consumer behavior and business operations, rising inflation, labor shortages and supply chain disruptions. Supply chain disruption has impacted some goods and products more than others. For example, shortages in semiconductors and computer chips that are impacting inventory for items ranging from cars to smartphones. Supply chain issues also are contributing to inflation and the higher costs of certain goods. The inflation rate climbed to 6.2% in October, which is the highest rate in nearly 30 years.
Inflation creates potential risks for the U.S. economy as higher prices reduce the consumer’s spending power. People tend to buy less when things cost more, which is not good for an economy that is heavily reliant on its consumer spending. However, Morgan Stanley economists anticipate improvement in inflation in 2022 as supply chain issues are resolved, pricing improves and there is more inventory available for people to buy. In fact, that restocking of inventory could provide an added boost to the economy later in 2022 due to pent-up demand.
Confidence in the economic recovery brought a resurgence in commercial real estate investment activity in 2021. Commercial property sales for the first three quarters of 2021 surpassed pre-pandemic levels and hit a new record high of $462.1 billion, according to Real Capital Analytics. Buyer demand coupled with strong underlying fundamentals, including stable or rising occupancies and rents, is resulting in rising property values for best-in-class properties. According to the RCA CPPI National All-Property Index, prices across all property types jumped 16.1% compared to the prior year.
Concern about inflation is another tailwind for commercial real estate investment. Commercial property is viewed as an asset class that provides a good hedge against inflation. Property owners have the ability to raise rents along with rising inflation, although some properties are better positioned to increase rents than others depending on local market conditions. Industry research does show the benefits commercial real estate offers during inflationary periods. According to Nareit, dividend increases for REITs have outpaced inflation, as measured by the Consumer Price Index, in all but two of the last 20 years.
Certainly, potential disruption to travel and delays in the return of office workers due to COVID-19 variants will continue to overshadow the U.S. economy and certain segments of the commercial real estate market. However, the broader outlook for 2022 is a positive one, with some segments of the economy now outpacing pre-pandemic levels.