Two years after the COVID pandemic hit the United States, more signs of hope emerged, particularly within the commercial real estate sector.
There has been a significant increase in real estate investment, which is expected to continue through 2022.
The market is on the right track, although it’s hard to make predictions: traditionally, commercial real estate has served as a hindrance against inflation, stock traders have shown an interest in portfolio diversification through real estate, and monetary policy supports economic growth.
Despite all of the positive trends and opportunities, they should be viewed in the context of the pandemic’s long-term impact.
First time home buyers and investors who move swiftly and exercise rigorous due diligence are well positioned to be rewarded. In addition, it may be helpful to prepare in advance. Here is a look at the trends below.
Housing Market Trends
1) Multifamily and Single-Family Rentals are Expected to Remain Robust
According to Zillow, home prices have risen 19.5% in 2021 and are expected to rise another 11% in 2022, despite higher mortgage rates.
This overheated market is driving young families out of the market since they prefer a single-family residence.
The answer can be found in single-family rental housing. A niche market segment that had historically featured mom-and-pop rentals is now seeing a surge of professionally managed portfolios, driven by large institutions that see long-term investment opportunities.
Blackstone, one of the largest investors in real estate, is sponsoring a new single-family rental REIT.
The concept has become more relevant now. The number of single-family homes sold to investors during Q3 2021 indicates that SFRs are here to stay, as evidenced by 18% of sales.
The National Realtors’ Association predicts that the vacancy rate will further narrow to 4.8% by 2022 (5.1% by 2021), resulting in 10% rent growth (7.8% by 2021).
Work-from-home is one of the main factors driving the upturn in the rental market. Several workers have benefited from the ability to work from anywhere by moving from high-cost areas to areas that offer greater lifestyle convenience.
2) Increasing Inflation and Interest Rates
As everyone knew, the interest and inflation rates had to rise eventually. Over the past 15 years, we have been living in historically low-interest rates, slow economic growth, and low inflation.
However, there were no indications that the situation would change now.
Until Covid came along and threw this economic equilibrium out of whack in 2021, the economy regained momentum after coming to a halt in 2020, advancing by 6.9%, the most substantial growth in decades.
We’ll still face inflation in 2022 as the government stimulus and increases in wages put more money into the hands of consumers–and there aren’t enough products and services to meet demands: supply chain disruptions and labor shortages that won’t go away anytime soon.
The Fed’s cautious approach to controlling inflation without hurting growth suggests that rates will rise in 2022, possibly even before that. How does all this affect real estate investors?
Similar to the current COVID economy, the forecast is mixed. Increasing mortgage rates will dampen sales volume, whether for commercial or private properties.
As a result of rising inflation, the real estate industry’s materials, energy, and utility costs have increased significantly. At the same time, rising rents have shown landlords an immediate return on their investment.
A lack of supply – when building costs rise, development drops — and a rise in income returns increase property values. Real estate rents have grown faster than mortgage rates and charges, resulting in more favorable financing and acquisition prices.
Property values will likely continue to rise in tandem with higher profit margins. Cap rates are the biggest question in real estate investment because of the rising inflation.
3) Invest in the Sunbelt
The latest Census Bureau statistics indicate that large metropolitan areas are losing their housing market share to smaller spaces. Data from the Census Bureau’s most recent report suggests that 811,000 newly constructed houses were sold in the United States in December 2021.
Just 3% of those homes were situated in the Northeast, whereas 56% were located in the South. The trend is not new, but Covid accelerated it as younger workers sought a better work-life balance and older workers retired in record numbers.
According to PricewaterhouseCoopers’ 2022 report, this phenomenon has been highlighted.
Following are a list of markets offering excellent investment opportunities.
Tampa-St. Petersburg, Florida.
Dallas-Fort Worth, Texas.
Small markets are experiencing exponential growth in southern states. As a result, the factors that attracted people to move there in 2021 will still appeal in 2022.
4) More Quants Will be Involved in the Real Estate Industry
We expect more quantitative firms to invest in commercial real estate in 2021 to deploy AI and machine learning. As a result of improving the inefficiency of CRE data, firms are searching for opportunities where there is historical growth, but prices are dislocated from value.
As a result of outsized returns, stable yields, hedges against volatility, and unique tax advantages, there will likely be an increased number of quants entering the market this year.
The recovery following the coal industry’s collapse and infrastructure investment are driving tailwinds across the market. This is of interest to sophisticated investors. Maintaining high value is dependent on maintaining a network of strong sponsors and partners.
Experts who know the market inside and out can provide risk-adjusted returns to investors.
5) The Office Layout Will Change, but Not Close
The physical office is not dead, despite headlines to the contrary – it is looking to upgrade. While the office market is experiencing its highest vacancy rate in recent decades, investors can expect stabilization in office occupancies and rent growth this year.
Increasingly, employers have moved out of high-density gateway core markets into larger, more cost-effective locations as hybrid work and employee preferences have evolved. Also, employers will adopt attractive amenities and flexibility to comply with the “flight to quality” that preceded the pandemic.
6) Secondary Markets Will Outgrow Major Cities
What markets are expected to grow the fastest? There is a tendency for prices to increase in areas where there are jobs and people are attracted. What site should grow slowly?
Areas where jobs are not available! Over the past few years, we have experienced a migration away from gateway cities such as New York to smaller markets, creating opportunities in the latter.
As a result of population, jobs, migration, and attractive market dynamics, we expect cities such as Phoenix, Atlanta, and Charlotte to have the most substantial rise in growth this year.
The demand for single-family homes is expected to remain strong as more people relocate to the suburbs and buy a home.
At the same time, the rental property market will remain in decline in large cities, which will serve as a significant advantage to real estate investors planning for the post-pandemic recovery of urban life.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Learn how to diversify and hedge your long-only stock portfolio. Sign up for a free insight into the Swing Trading 101 program developed over thousands of hours of trading over hundreds of thousands of dollars across stock, commodities, options, and cryptocurrencies. It’s designed to empower you to take a unique but strategic approach to the markets. Learn more about swing trading.
Tim Thomas has investments in real estate.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Pexels.