For consumers, 2022 is starting as some of the worst of times, but for real estate investors, the current inflationary environment might create some of the best of times, depending on the sector.
Inflation is up 7.1% from last year, the greatest increase since 1982, observed Marcus & Millichap, compelling the Fed to tighten monetary policy. That can have some interesting effects on real estate investment.
“This will, in turn, put upward pressure on interest rates, raising the cost of capital for commercial real estate investors,” said John Chang, senior vice president and director of research services at Marcus & Millichap, in a video discussion.
Supply chain issues have resulted from difficulties in moving product to consumers because of shipping container shortages, declines in manufacturing due to the pandemic and even a shortage of trucks and truckers. Compared to August 2019, the amount of product moved by trucks has declined by 5.1%. Retail sales, however, have risen by 16%.
“Basically, people want to buy more stuff than our supply chains can handle right now, so there are shortages, and that means prices go up,” Chang said.
A labor shortage is driving up wages, which creates broad-based long-term inflation. Then add in a housing shortage (about a two-month supply on the market right now, well below the four- to six-month supply considered healthy), and inflation may have been inevitable.
In response, the Federal Reserve is accelerating the tapering of quantitative easing it put in place during the pandemic, decreasing its purchase of securities and will increase interest rates this year. For the week ending January 13, 2022, the 30-year, fixed-rate mortgage averaged 3.45%, up from 2.79% a year ago.
Inflation will remain a key issue in 2022 for consumers and investors, noted Integra Realty Resources Viewpoint 2022 report. Both the housing market and the stock market are now priced in such a way that the risk of a correction is inadequately reflected, it noted.
“Where we are finding inflation is in asset prices: both in the stock market and in the housing markets, where the marginal propensity to save has greater impact. The debate about inflation will not go away in 2022, but inflation hawks will almost certainly fail to distinguish between directing spending toward consumers and toward investors,” the report said. “Both the housing market and the stock market are now priced in such a way that risk of a correction is inadequately reflected.”
On the residential side, as interest rates continue to rise, prices will stabilize, and inventory will begin to reach equilibrium. Cash will continue to be king. The number of transactions without mortgage contingencies hit an all-time high in 2021, as buyers faced stiff competition for prime property, according to Nest Seekers International Chief Economist Erin Sykes.
“New housing starts will begin to catch up to demand if we are to at least partially quell supply chain issues,” she observed. “Once production and delivery timelines normalize, we might even have an over-abundance of materials which will put downward pressure on prices. Though this is likely years away.”
Imbalances in the for-sale housing market is setting the stage for volatility, not only in single-family sector in 2022, but also in the surging multifamily sector, noted Integra Realty. Transaction volume in the apartment sector surpassed all prior annual records based on year-to-date October 2021 numbers tracked by Real Capital Analytics (RCA). It is poised for even more growth. Developers are responding to an environment marked by ample capital and strong renter demand by increasing production. But investors clearly remain in control.
“Multifamily capital flows were, by and large, rational and disciplined even in such an overheated market environment,” Integra observed.
Other real estate sectors are seeing increased interest as investors flock to safety in the current environment.
“Investors may see more competition for assets,” Marcus & Millichap’s Chang said. “Commercial real estate is considered one of the best places to invest money during periods of high inflation, especially properties that can increase rents with the market, like apartments, hotels and self-storage properties.”
The office market still holds some uncertainty, the Integra report noted.
“There is a chasm between those who expect the work-from-home motif that marked the world of office work after the onset of COVID-19 to be the basic template of white-collar employment and those who anticipate that in-person office work will return to dominance,” the report observed. At this point, no one seems to believe this is an either/or proposition. Some form of hybrid work management seems more likely, but there is still deep disagreement on where the relative weighting of working styles will fall. And that chasm translates into divided expectations for office space occupancy, rents, and ultimately, office building values.”
But the booming industrial sector may see a slowdown. A decline in the growth of online shopping, no longer bolstered by stimulus money, could see warehouse demand drop.
The Integra report observed that even retail may stage something of a comeback. Although data on market rents and vacancy are mixed, the trends are no longer entirely dire. “Where a year ago we reported that more than half of U.S. retail markets were mired in the Recession phase of the cycle, this issue can announce that that dire situation has been cut in half. As we analyze conditions, just 25% of American retail property markets are in a recessionary trough. A remarkable 42% can be said to be in recovery and a further 27% in expansion with 5% in the development-positive hypersupply phase,” the report said.
Caution and control seem to be the short-term watchwords.
“The real estate market in 2021 was driven by plentiful capital availability, but it’s probably time to tap the brakes. We survived and thrived under a radical worldwide pandemic that isn’t over yet but will most certainly improve as immunity expands worldwide,” said Anthony M. Graziano, chairman of Integra Realty Resources. “There will continue to be major shifts in the employment base, and everything is going to continue to get more expensive, including debt. As we welcome the new year with strong balance sheets and good prospects, our challenge is to forge ahead confidently, but not recklessly.”
