Outlook 2022: Residential will remain solid, asset classes impacted by COVID will rebound


California-based Tides Equities recently purchased Wynn Palms, a 555-unit apartment community in Las Vegas. Investment demand for multi-family properties is expected to remain strong in 2022 as rental growth picks up and a plethora of markets continue to be under-supplied with housing of all types.

By Paul Getty, President and CEO, First Guardian Group

The calendar year is quickly drawing to a close and society is moving closer to pre-pandemic normalcy. Heading into 2022, we expect a combination of more or less identical trend lines punctuated by a few new developments that will reshape the residential and commercial real estate landscapes in 2022.

Asset-specific predictions

Due to a combination of scarcity, demand, and historically low interest rates, betting on the strength of residential real estate, both single-family and multi-family, appears to be a low-risk proposition in 2022.

Paul Getty, First Guardian Group

Paul Getty, First Guardian Group

According to the National Association of Real Estate Agents, the country is currently experiencing a housing shortage of some 6.8 million units. The Brookings Institute reports that millennials now make up more than half of America’s population, and a growing percentage hope to start a family and buy a home. Thanks to the Federal Reserve’s accommodative policies, the golden age of low-cost financing will continue until 2022.

Many owners and owners of commercial buildings have suspended rent increases amid the pandemic. But 18 months after the onset of the public health crisis, we are seeing rent increases across the country for investors to catch up and return to normalized rates of return.

The limited supply of single-family homes and the popularity of remote-working flexibility are expected to combine to drive rental rates up, especially in low-cost-of-living areas that are disproportionately attracting new tenants compared to to expensive urban areas.

As investors see increasing evidence that rising inflation is not transitory, more and more investors are looking to redeploy funds into inflation-resilient asset classes like apartments and self-storage. Unlike offices and retail businesses, owners of these multi-family and self-storage buildings can quickly raise short-term rents to keep pace with rising operating costs.

Many categories of commercial assets, including offices and retail businesses, typically have fixed-term leases that limit the amount of annual rent increases that can be imposed on tenants. Asset classes like apartments are best placed to keep rental income at a sustainable market level in times of inflation.

Restaurants, entertainment venues and hotels have been hit hard by COVID-19 but are starting to see a return to normalcy. Cash flow for these businesses and properties may not fully recover in 2022, but savvy investors may find top-notch investment opportunities amid market lows in these sectors.

COVID-19 has accelerated the rise of remote working, pushing employers to embrace hybrid work models, which offer more freedom to divide time between work and home. A recent report from Accenture found that up to 83% of workers prefer hybrid work, and 63% of high-growth companies have already adopted a “productivity everywhere” workforce model.

Hybrid work routines are expected to grow in 2022, further changing the office landscape. Companies like Google are already adopting smaller hubs for face-to-face interactions instead of huge office campuses. Owners and developers of large office buildings are scrambling to adapt to new post-COVID workplaces. Renovations will certainly increase in 2022 to meet these changes in demand and tenant preferences.

Other trends to watch

While not all of the currently proposed government spending programs are likely to pass, many will, starting with the recently passed $ 1.2 trillion infrastructure bill. Approval of this legislation will put more pressure on the Federal Reserve to create more liquidity to cover related costs.

With inflation expected to continue through 2022 and beyond, interest rates and mortgage rates are likely to rise. Mortgages will be more difficult to obtain, requiring higher credit scores and perfect payment history from borrowers. Variable rate mortgages may even be revived. The US government at least seems to be aware of it, as evidenced by recent announcements by Fannie Mae and Freddie Mac to support single-family home loans of up to $ 1 million. The move, a first of its kind for government-sponsored companies, is expected to help more buyers compete for rapidly appreciating assets.

As for the destination of investors, the Californian population fell by more than 182,000 inhabitants in 2020, the first known loss in its history. Many factors are to blame, including the cost of living, urban degradation, rent controls and moratoriums on evictions.

California real estate investors are accelerating the movement of their investment equity to homeowner-friendly areas that attract new employers. California’s problems are shared with other heavily taxed and overregulated states like New York, where residents are moving to seemingly greener pastures. Real estate investors know the benefits of deploying capital to growing areas, and many will be moving their equity to growth areas in 2022.

Construction costs have skyrocketed in 2021 due to high lumber prices, labor shortages and supply chain issues. Cost increases are likely to persist into 2022 with additional upward pressure from rising energy prices. High energy prices increase the costs of transportation and petroleum-based construction materials. To this end, fixed cost contracts are essential for any future construction.

The 1031 swap provision in the US Tax Code has been a powerful wealth creation tool that has been with us since 1921. It allows real estate investors to defer potentially up to 100 percent of capital gains on the sale of their property. investment properties and reinvest all their net sales are invested in new investment properties “of the same nature”.

Investors have been worried this year as politicians come up with various ways to pay for new government programs, fearing that the 1031 exchange will be phased out or at the very least revised. This has not happened yet, and so far there has been no mention of the proposed changes to 1031 in the “Pay” sections of recent spending proposals.

Recent efforts by various real estate lobbies have apparently succeeded in convincing politicians that maintaining the 1031 tax deferral is in the best interests of the US economy. Preserving this important part of the tax code will help fuel the necessary reinvestments in business assets in 2022. The demand for 1,031 qualifying replacement properties such as Delaware Statutory Trust (DST) options is also expected to continue to increase over the period. new Year.

First Guardian Group is a full-service investment and management firm based in San Jose, California.


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