With inflation affecting multiple markets due to the pandemic how do we navigate the challenges that 2022 brings to the real estate market? For a seasoned investor, being aware of the trends in the 2022 market could prove to be extremely profitable. When considering 2022 and taking into account inflation, and rising interest, the advantage of single family homes and the location of your investment properties…
We’re two years into the pandemic, and the economy is segmented into those who are thriving, those who are not doing well and those who are just getting by. There is suffering in industries related to travel, social and in-person businesses and certain companies affected by supply chain disruptions. While it appears that the economy is opening up to the concept of “just living with it,” inflation is now impacting everyone. Inflation is the byproduct of disruption in labor markets, supply/distribution systems and increased money supply.
So where does this leave the real estate market? Given the dramatically reduced travel, social gatherings and in-office work, real estate segments such as hospitality and lodging will continue to struggle through 2022. This article highlights the top three trends that will impact real estate values and the opportunities you can find therein.
1. Inflation And Rising Interest Rates
Everyone knew that inflation and interest rates had to rise sometime. We’ve been in a historically low interest rate environment for about 15 years now, with slow economic growth and negligible inflation. But there didn’t seem any reason to think now would be the time things would change. Then came Covid, and this comfortable economic equilibrium was knocked sideways. After coming to a screeching stop in 2020, the economy bounced back in 2021, advancing by 6.9%, the strongest growth in decades. Although the quick rebound is welcome news, Covid fallout will still impact the economy in 2022 as we deal with inflation brought on by growing consumer demand—government stimulus payments and increased wages have put money into consumers’ hands—coupled with a lack of supply of products and services to meet that demand-supply chain disruption and labor shortages that won’t be resolved any time soon. It appears the Fed is being cautious as it looks for ways to control inflation without hurting growth, but it will likely increase interest rates in 2022, possibly as early as March.
So, what does this all mean for real estate investors? Well, just like the Covid economy, the forecasts are mixed. Rising mortgage rates, whether for private or commercial property, are projected to put a damper on sales volume. In addition, rising inflation has already caused much higher costs throughout the real estate industry ranging from the higher cost of building materials, energy and utilities. At the same time, rising rents have helped landlords recoup these expenses in real time. Property values are also likely to increase as valuations are driven by a lack of supply—when building costs go up, development goes down—and rising income returns. On balance, real estate rents have gone up much faster than mortgage rates and costs, resulting in favorable acquisition pricing and financing. Property values will continue to rise along with higher net operating income. The big question is whether cap rates will rise with inflation, or will they remain low given the attractiveness of real estate as an investment allocation.
[ Read more here ]