If you are aiming to get into the real estate investment arena in 2022, this blog is going to help you with much-needed information on what you should expect from the industry in 2022 and how you can prepare yourself for eventual success.
Real estate has always been one of the most preferred investments in the US. Even in the post-pandemic era, the opening months of 2022 saw the commercial real estate sector recovering and benefiting from positive macroeconomic opportunities, a rise in GDP, robust consumer spending, record job growth, and stimulus programs. However, individual investors, asset owners, and portfolio managers in the private real estate markets also face several obstacles going forward in the current economic climate. This article by Lilypads explores what are the challenges facing the real estate industry in 2022 that the investors can anticipate and how they can overcome them.
1. Keeping Up With The Latest Technology
The real estate industry has the reputation of being late on catching up on technology. However, the last two years have seen some drastic changes and rapid growth in the adoption of the latest technology.
The pandemic-induced work from home culture has resulted in growing demands for smart devices and IoTs being incorporated into homes and apartments.
Moreover, due to lockdown and social distancing Virtual Tours became a hit for showing properties to potential buyers.
Commercial real estate investors need to make sure they keep themselves updated with these technological demands to remain ahead of the competition.
Moreover, technologies like Artificial Intelligence, Data Analytics, and Blockchain are the next-gen revolutionary technologies in real estate.
Using Artificial Intelligence, investors can gain insights into the commercial real estate market based on market trends and historical patterns.
By analyzing past transactions and purchase patterns, investors can target potential clients using predictive data analytics. Moreover, AI can use these data to even simplify and ease property valuation.
On top of that blockchain technology can make payments and lengthy transactions simpler and shorter by automating the process. Smart contracts help investors in automating leasing agreements along with automatic rent payments.
To stay ahead in the tough competition, real estate investors must adopt these technologies at their earliest.
2. Instability in Capital Markets
The aftermath of the pandemic has led to an unstable capital market that has made it almost impossible to determine the cost of debt. As interest rates have dropped to near-zero levels, the cost of debt is being determined by valuation metrics and underwriting.
Markets like commercial mortgage-backed securities have seen quite a bit of volatility during Covid. During the early phase of the pandemic, mortgage REITs took a significant hit, with some recent recovery being attributed to rearranging credit lines and paying off margin calls on credit facilities. Despite property type and market uncertainty, the market continues to be flush with debt capital liquidity.
Despite the slow growth in transaction volumes, private equity funds raised $371.8 billion last year for deployment across a variety of real estate sectors. Although the market has access to the public, institutional, and private equity capital, an active transaction market has yet to emerge.
Logistics hold one of the biggest challenges this year by disrupting commercial real estate. In an online shopping era of modern logistics, redundancy and process disruption are two important requirements.
Physical stores will witness less dependency compared to e-commerce warehouses with more capital being allocated to Industrial real estate than Retail real estate. Moreover, Cap rates for industrial real estate are expected to be lower, which will eventually disrupt pricing.
With the Monmouth MREIC and EQC REIT merger, Golden Triangle markets can now enjoy the 4%-5% cap rates originally reserved for Los Angeles/Long Beach and Inland Empire.
4. Structural changes in the economy
Covid has caused disarray in the key segments of the economy. With many people still without jobs, multiple industries will continue to be affected for a long time.
In the first quarter of 2021, CBRE 2021’s report shows that net absorption for office space was negative 34.8 million square feet. Moreover, office spaces witnessed the greatest degree of vacancy rates for a prolonged time. As remote working culture has become a significant trend, office owners are likely to face challenges throughout this year to maintain a positive ROI.
On the other hand, the retail industry has been suffering long before Covid with the retail apocalypse, demalling trends, and the latest, rise of e-commerce websites. US hotel occupancy was also at an all-time low of 61.8% within the last five years and is expected to remain that way since air travel, bleisure vacations are still yet to recover.
Despite expectations of an uptick in demand, real estate investors find it difficult to predict when occupancy and rent will rise. With this condition, investors are focusing more on tenant retention and defending cash flow.
5. New infrastructural bills
The American Society of Civil Engineers grades the infrastructure of the country as C-, classifying it as a poor and at-risk condition. According to them, U.S. infrastructure funding is also projected to fall short by $2.6 trillion in 2021. This failing infrastructure is seen as one of the biggest challenges in real estate.
However, investors can rest easy knowing that the Infrastructure Investment and Jobs Act will invest $1.2 trillion in fixing, maintaining, and building new infrastructure all over the country. The Bipartisan bill aims to invest in roads, bridges, public transportation, clean energy, better power infrastructure, and others.
Better roads and transportation will result in a better supply chain and logistics. Therefore it’s important to invest in automation, optimization, supply chain strategy, and transparency as essential infrastructure areas. Cities and neighborhoods that adopt new transportation modes like electric buses, rails, and others, contribute to a cleaner world. Real estate owners who adapt to these changes will save money and enjoy a steady profit.
6. Secondary Marketplace Is Attracting More Crowds
With the growing popularity of remote working people found WFH is more convenient. As a result, many people started moving to the suburbs or Tier-II cities. According to a poll conducted by U-Haul 40% of employees migrated from cities and states like Tennessee, Texas, and Florida were the top-ranked states where people were migrating.
The primary reason for people migrating from metropolitan cities is because of high rental prices and the cost of living. Unlike metropolitan areas where prices and rents have hardly increased, secondary markets have seen rents and occupancy rates skyrocket.
Besides employees, businesses are also looking to expand their facilities in suburban areas since they get more square footage and cheaper rents.
Therefore investors must be ready to face this shift in demand for marketplaces as urban and metro cities show a dive in crowd attraction. As the real estate market continues to witness these behavioral patterns, investors must extend their reach into different marketplaces as well.
7. Declining supply of Affordable Housing
The affordable housing market took a big hit due to the pandemic. With the economic downturn, the nation saw a huge lack of affordable housing. The National Low-Income Housing Coalition estimates that there is a shortage of affordable housing of 7.2 million.
People are having trouble locating affordable residential units near their places of employment. Due to this crisis of dwelling units, the real estate market will see a higher demand for affordable housing. As a result, it will eventually lead to higher rent and home prices.
8. The Growing Need For ESG
With the awareness of climate change and its impact on the world and businesses, the real estate industry has adopted environmental, social, and governance measures as crucial investments.
Climate changes like rising temperatures and sea levels have a severe impact on the real estate market. Increasing temperature leads to the implementation of better HVAC systems which in turn leads to rising operational costs of a rental property.
Furthermore, coastal properties are under a constant threat of rising sea levels and floods as it degrades the structural integrity of properties.
Investors must identify and avoid disaster-prone areas as property valuations are severely affected by these kinds of weather events. Moreover, investors must look toward implementing more sustainable solutions and reducing carbon footprints.
In the past year, Reuters reported that government stimulus funds had reached over $15 trillion, with a part of funding going to ESG programs. To create value for investors, the real estate industries must conform to a way to assess risk and implement strategies to mitigate it.
9. Rising Interest Rates Has Got Investors And Buyers Concerned
Mortgage rates were at an all-time low in the past year, which led to high competition in the housing market. However, since the past year, the mortgage rates have been gradually increasing and are likely to maintain that uptrend this year.
This year investors can anticipate seeing a less competitive market due to increasing interest rates. Moreover, it will also lead to slower refinancing and growth in home prices. In 2021, a whopping $1.6 trillion loans were refinanced which is 33% higher than that of the year before. Similarly, the astronomical growth of home prices is expected to simmer down this year. As Freddie Mac predicts a mere 2% increase in home prices this year over last year.
Investors must keep in mind these changing market scenarios before they plan on investing.
10. The Pandemic Provoked Adaptive Reuse
Due to the pandemic, the commercial real estate industry had witnessed a lot of vacancies in several asset classes. The retail stores, shopping malls, hospitality, and office sectors were all heavily impacted during the pandemic which even resulted in foreclosures of some.
While some properties are subjected to foreclosure or shutting down, others are opting for adaptive re-use and converting their spaces to other uses. Transforming and repurposing properties benefits the entire real estate ecosystem. By doing necessary retrofits, adaptive reuse results in increasing the valuation for much less money.
However, investors should consider the economic and social factors as these might pose challenges in the future. Furthermore, they should evaluate the reusability of spaces based on current demographic trends and the building’s structure.
The Lilypads Bottomline
Adaptability – The New Mantra For Investors
There is no doubt that 2022 will be the year for Real Estate Investors. However, it may not be a smooth ride, as with all industries there will be challenges in the marketplace. The new world brings huge demand-driven changes and trends. Therefore, investors must adopt these changes and plan strategically to overcome the challenges facing the real estate industry and turn them into opportunities.