United States

Real estate and construction industry outlook

Volume 9, Winter 2022


  • Overall, the real estate investment market has defied broader trends in the economy, which has reacted to volatility caused by the pandemic.
  • Competition has ramped up to attract capital as the number of new funds hitting the market declines.
  • Multifamily property has shown exceptional resiliency this year, with rental rates rising nationwide.
  • The data suggests that the incidence of nationwide pandemic-driven evictions may be overhyped in the media.
  • Nationally, a shortage of Class C rental property presents a market opportunity.
  • The construction industry has experienced a divided recovery, with residential construction initially contracting before explosive growth, and nonresidential showing a gradual decline.
  • The next six months will likely result in ample new project opportunities for contractors, as investors look to deploy the considerable liquidity that has been injected into the economy.

Capital markets: A year of hesitant growth

Red light? Green light? Growth in commercial real estate has been stop and go this year. Overall, the real estate investment market has defied broader trends in the economy, which has reacted to volatility caused by the evolution of the coronavirus pandemic. Public real estate investment trusts, or REITs, are among the best-performing sectors in the S&P 500, up 27% this year through September, despite broader doubts about revenue forecasts due to the delta variant. But the environment is not without risk: Despite assurance from the public markets, the ongoing fear of inflation has nonetheless invaded the psyches of some investors, negating the historical view of real estate as a safe haven.

Evidence of hesitation exists in the private equity real estate market, which has stumbled since the beginning of the pandemic. In 2020, fundraising by American and Canadian fund managers declined to $110 billion from a peak of nearly $125 billion in 2019, with this year seeing further decline, according to market research firm Preqin. The pandemic prevented fund managers from holding face-to-face meetings to build confidence with potential institutional investors; meanwhile, many investors chose to sit on the sidelines to see the impact of COVID-19 on the markets.

Initial fears around a pandemic-driven downfall in real estate have subsided and fundraising should rebound in 2022. Investor outlook remains positive: 3 in 4 investors expect their volume of real estate investment activity to increase in 2021, according to the March AFIRE International Investor Survey, underwritten by Holland Partner Group. Domestic investors still represent the largest share of capital targeting U.S. real estate (35%), and capital flow from foreign sources is expected to grow in the next three to five years, led by the Asia-Pacific, Europe and Canada regions, the AFIRE survey said.

Competition has ramped up to attract new capital as the number of new funds hitting the market declines. Larger fund managers can rely on their proven track record and established relationships for new funds, but emerging managers are not as fortunate. In fact, the average time for a first- or second-time fund to reach its final fundraising close has climbed 50% in the past decade, according to Preqin. It now takes almost two full years to reach the target; by comparison, more senior funds reach their final fundraising close in under 18 months.


Institutional investors now seek customized information to meet their own tracking needs and objectives, driven partly by growing interest around environmental, social and governance issues. To meet demand from institutional investors, transparency around a fund’s track record has risen in importance and is considered essential for the survival of emerging funds. Frequent communication to investors, accelerated by the pandemic, keeps them apprised of property performance and ESG-related measures such as energy use. The AFIRE investor survey indicates that 9 in 10 investors view ESG as increasingly imperative over the next three to five years. Nearly a third already require new investments to meet established criteria. As investors stress the importance of both financial and societal returns on their investments, fund managers must provide sufficient evidence that these concerns are reflected in the properties they hold.

Sector-specific performance

The cost of building materials and labor has proven volatile since the outset of the pandemic, making it increasingly difficult for new construction projects to meet developers’ profit targets. Cost volatility has postponed delivery of new projects and further constricted the new supply of property that allows demand to recover across sectors. This phenomenon has created landlord-favorable conditions, allowing landlords to raise rents and demand higher transactional values at sale compared to a year ago.

Meanwhile, the industrial sector—largely reliant on the reconfiguration of existing space rather than net new builds—is surging. Second-quarter leasing was 80% above average for the same periods in 2017, 2018 and 2019, amounting to “one of the most rapid expansions in U.S. commercial real estate history,” CoStar said in a Sept. 23 report. There were 724 industrial transactions globally in the private equity real estate markets through the second quarter, lagging only the residential sector, which had 860 in the same period, according to a quarterly update from Preqin.

In the U.S. market, both the industrial and retail sectors have benefited from higher consumer spending; consumers are flush with cash and spending at historic levels on goods in stores and online, bolstered by significant government support throughout the pandemic. In fact, real estate’s retail sector is back on the upswing, with leasing and sales activity at multiyear highs through the first half of the year. At the same time, store closures and bankruptcies have significantly decreased, and are on pace to affect the least amount of space since 2016, according to CoStar. Transactional volume for retail more than doubled to 221 in the second quarter, compared to 102 a year earlier, Preqin reported. This indicates the market may have bottomed out in last year’s second quarter.


Multifamily property in the United States has shown exceptional resiliency this year. Nationally, rental rates rose 7% in the first half of the year, data from CoStar’s national real estate report shows, demonstrating the ability of landlords across the country to capture inflationary upside in real time. It’s even more impressive that year-over-year rent growth is evident in every major metropolitan area, including markets that bore the brunt of the pandemic and were the subject of negative headlines, such as New York and San Francisco. Globally, all sectors, apart from office space, saw an average increase in transactional activity in the second quarter compared to a year earlier.


From an investment strategy perspective, it seems as though the time has all but passed to target what had been expected to be ample distressed assets; they never materialized. The largest concentration of investors surveyed by Preqin instead said that value-added real estate assets—including Class B and Class C property in sectors that include multifamily, retail and office—present the best opportunity at this point in the cycle.


Competition has ramped up to attract new capital as the number of new funds hitting the market declines.

Multifamily: An opportunity to change the landscape

On Aug. 26, the Supreme Court ended a federal eviction moratorium implemented in March 2020, at the onset of the pandemic. Some news headlines have suggested that the halt will lead to significant nationwide evictions and a housing crisis for the multifamily sector. Our analysis, however, posits that those headlines may be overblown.

Government data alone makes the impact of the Supreme Court’s decision difficult to predict. The government’s Household Pulse Survey began measuring the impact of COVID-19 on Americans in April 2020, with housing-specific questions about respondents’ ability to pay rent and utilities. The limited sample size over 37 weeks was just 1.085 million, with an average response rate of only 8%, or roughly 80,000 renters. This survey data shows that an estimated 3 million renters, or 6.8% of U.S. renters overall, are at risk for eviction as the moratorium ends.

In the absence of a larger dataset, research groups and real estate firms have tabulated their own eviction estimates. Drawing on sources that include the HPS data, on Sept. 1 Zillow estimated about 268,000 evictions would be tied to the end of the national moratorium through the end of October, resulting in a 6% eviction rate, slightly lower than the government’s projection. Meanwhile, the Eviction Lab at Princeton University has been tracking weekly evictions prior to and during the pandemic. Princeton’s eviction tracking system, which relies on national and local government data, as well as other sources, has tallied 520,000 evictions since the start of the pandemic in March 2020. Its estimates peg evictions at just 0.5% of the total renter population.

Certainly pandemic evictions are tragic for renters and problematic for landlords; but the data suggests that the incidence of nationwide pandemic-driven evictions may be overhyped in the media.

Meanwhile, additional rental relief—although slow to roll out—has been made available through the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. Both measures provide for the Emergency Rental Assistance Program, known as ERAP, that assists households unable to make rent and utility payments. ERAP funds slated for all U.S. states and territories amounted to $46 billion. Through July 2021, however, only $4.7 billion had been disbursed to applicants nationally, Treasury data shows, largely due to the lack of infrastructure at the state and local levels. On Sept. 16, the House Committee on Financial Services passed H.R. 5196, the Expediting Assistance to Renters and Landlord Act of 2021. The bill includes a clause stipulating a 120-day moratorium on rental evictions, independent of the recently expired federal moratorium.

Delayed collections are not disrupting the explosion of values of multifamily properties (according to CoStar data, the national average cap rate decreased to 7.0% in the second quarter from 7.5% in the fourth quarter of 2019), but the extended moratoriums may have greater consequences in certain markets the hardest hit during the pandemic. Various state-level eviction moratoriums continue and may receive additional extensions, such as New York, which is seeking to extend its moratorium into 2022.

According to results from the largest public multifamily REITs, the Sun Belt states have continued to outpace rental revenue growth, with the growth rate after concessions reaching 4.3% on average, from 2019 through the second quarter. By contrast, the urban coastal markets experienced a 12% decline in the same period, driven by New York and San Francisco.


However, as companies continue to return to the office, demand in public REIT portfolios throughout the urban coastal markets is showing signs of life, and is expected to grow heading into 2022, compared to a reduction of units in the Sun Belt states. Extending eviction moratoriums in coastal markets such as San Francisco and New York amid the rise in market rent rates and reduction of concessions prevents investors from capitalizing on the increase in demand. Operators may have their hands tied as they seek opportunities to replace tenants who were able to lock in rental rates at discounted pandemic-driven prices or who have been unable to pay rent.


The impact of rental moratoriums is exacerbated by the lack of affordable housing in the United States, but it signals a clear market opportunity for developers. The National Low Income Housing Coalition, a public policy group, estimates a shortage of 6.8 million affordable homes for low-income renters. The estimate is based on tabulations in the 2019 American Community Survey, the most recent available, conducted by the U.S. Census Bureau.

Nationally, Class C properties serve as a reasonable proxy for the housing sector most in need of rental relief. Class C apartment occupancy climbed to the highest point since 2011 in the third quarter of 2021, reaching 96.1%, while asking rents have jumped 7% since the beginning of the pandemic. Class C renters typically come from lower income brackets, and the price hikes in rents appear to signal distress that could be mitigated by the available rental assistance.

Limited supply in the Class C housing sector represents a chance for investors to increase much-needed supply, while also assisting a struggling portion of the population. The accompanying graph shows demand units and net-delivered rental units since 2011. Net-delivered units turned positive in 2020, while demand was steady at approximately 7.1 million in the same period.


Incentives may help to spur growth in the Class C space. Recently, under the American Jobs Plan, the Biden administration has proposed expanding the Low-Income Housing Tax Credit program, offering an incentive to investors to construct or rehabilitate affordable rental properties. Government-sponsored enterprises can now purchase $850 million in LIHTC loans, up from a prior $500 million.

The convergence of the supply shortage and policy incentives in the Class C rental space has led to recent consolidation of investors by syndicators in the LIHTC market. Syndicators buy or syndicate tax credits, serving as general partners with minority ownership.

At the end of 2020, Boston Financial Investment Management LP acquired Boston Capital’s LIHTC business, boosting combined equity under management to $15 billion. The newly combined group raised a $221 million fund to finance work on nearly 1,800 affordable housing units across the country.

In August 2021, Walker & Dunlop acquired Alliant Capital, resulting in a combined $16 billion of assets under management.

Boston Financial Investment Management LP and Alliant Capital were ranked among the top 10 national syndicators this year by the National Multifamily Housing Council. The ranking is determined by the number of units syndicated in a year. The total syndicated by the top 10 firms in the survey was approximately 1.1 million units, up 9% over 2020.


Limited supply in the Class C housing sector represents a chance for investors to increase much-needed supply, while also assisting a struggling portion of the population.


Construction typically follows a regular pattern during and after most recessionary periods. It is usually one of the last industries affected by a recession due to the longevity of contracts, and also one of the last to return to pre-recessionary levels. But the recession caused by the COVID-19 pandemic marks a divergence from this trend.

Since the pandemic’s outset, the industry has experienced a divided recovery, with residential construction experiencing a short and severe contraction followed by an explosion in growth. By contrast, nonresidential construction has seen a more gradual decline, with contractors able to work through existing backlogs; however, beginning in the second quarter of 2021, backlogs began to expand.

On a recent earnings call, Jacobs Engineering Group President and Chief Operating Officer Bob Pragada said that backlog rose 6% in the quarter ended July 22, “resulting in greater than a one-time book-to-bill for both revenue and gross margin.” Skanska reported book-to-bill of 120% from January to June 2021, underscoring increasing opportunities throughout the ecosystem. Meanwhile, the forward-looking Architecture Billings Index, a monthly indicator of nonresidential construction activity with a lead time of nine to 12 months, has posted levels above 50 since February of this year; levels of 50 and higher indicate growth.


So, are short-term prospects in construction all sunshine and roses? Not so fast.

The next six months offer ample new project opportunities for contractors, as investors look to deploy the considerable liquidity that has been injected into the economy. In addition, the anticipated passage of a massive federal infrastructure bill—which as currently drafted would result in $550 billion of new federal U.S. infrastructure investment over five years—should provide contractors no shortage of projects to add to their backlogs.

But as we have seen multiple times throughout the pandemic (consider shortages of toilet paper, lumber and semiconductor chips), to satisfy a spike in demand, it is critical to have the necessary supply. For the construction ecosystem, supply can be divided into two buckets: materials and labor.

Materials holdups dampen production

Contractors have faced an acute shortage of raw materials, which has put recovery under pressure as demand continues to surge. Staples such as lumber, steel and concrete, primarily made in the United States, saw prices skyrocket earlier in the year. Prices have recently dipped as supply comes back on line, although they remain above pre-pandemic levels. Beyond basic products, other supplies such as roofing, insulation and PVC piping, which depend on raw materials from overseas, as well as assembled products like appliances produced outside the United States, are experiencing delays as other countries continue to deal with lasting supply impacts from the pandemic.


The production of materials represents only half the battle. Getting products to the job site becomes another challenge as logistics companies struggle to keep up with surging demand for imported goods.

These supply chain disruptions are expected to persist through the remainder of the year as exporters continue to face disruptions from the spread of the delta variant and demand increases with the approaching holiday season. Supply logjams will likely push materials prices higher before steadying as we head into 2022.


The war for talent in construction began in the post-Great Recession recovery. The industry lost about 2 million jobs from June 2007 to December 2009, and did not return to pre-Great Recession levels until early 2020, just prior to the pandemic. While the pandemic has had a profound impact on employment across many ecosystems, construction has largely been unscathed, with employment down just 3% from pre-pandemic levels through August.

When layering in the expected increase in construction services and a potential $550 billion in new infrastructure spending over a five-year period, the construction industry will likely be well short of the talent needed to deliver on expected growth; a recent study from Markstein Advisors calculated that every $1 billion in extra infrastructure spend will generate 3,000 new construction jobs on average, putting the construction industry well below necessary staffing levels when an infrastructure deal eventually passes.


Preemptive measures

On the materials front, contractors should look to pursue two strategies to help them weather the current storm. First, manage customer expectations by working to keep them informed of anticipated timelines, especially if delays are expected due to events that are out of their hands, such as supply chain issues. Additionally, contractors should try to include stipulations in new contracts for price increases outside of industry norms to help reduce any upside volatility in material or supply chain pricing.

Next, consider other supply sources. When materials come from foreign sources, builders can be subject to economic shutdowns in other countries and to the higher shipping costs resulting from surging consumer demand in the United States. Sourcing goods domestically can offer some relief, even if limited, from these pressures.

The labor challenge is likely going to be a long-term issue for the industry. To cope, contractors should consider the following steps:

  • Review recent technological innovations for the ability to augment job site labor to improve productivity without employment increases. Recent advances in robotics have resulted in robots that can complete bricklaying and masonry work with little to no human involvement.
  • Continue to participate in mentorship programs (like the ACE Mentor Program) to engage and encourage high school and college students to pursue careers in architecture, engineering and construction.
  • Help to promote more efficient and effective immigration laws to allow for easier recruitment and transition of legal immigrants to America to help resolve temporary worker shortage issues. Immigrants account for approximately 30% of all workers in the construction trades, according to data from the U.S. Census Bureau. Helping to create a better stream of legal candidates to reinforce urgent labor needs in the ecosystem is a critical method to address construction labor issues.

A pending boom in construction services could continue to present challenges for contractors as prices for materials continue to rise, supply chains remain fragile and labor shortages become exacerbated. Contractors should take steps to help reduce the impact of these uncertainties on their businesses.


Supply chain disruptions are expected to persist through the remainder of the year as exporters continue to face disruptions from the spread of the delta variant and demand increases with the approaching holiday season. Supply logjams will likely push materials prices higher before steadying as we head into 2022.

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