The opportunities are even better for cash buyers, who still make up a sizable share of the market, particularly for high-priced homes, Sharga says. “If you are looking to invest in residential properties right now, a rising interest rate environment ironically gives you a competitive advantage over traditional home buyers,” who need mortgages to finance their purchase.
Multifamily And The Rental Market
The residential market, of course, also drives the multifamily and residential rental sectors, as many people who can’t afford to buy a home are left to rent. That market may be even hotter than residential and is expected to stay that way. In 2021, year-on-year rent growth topped 13.5%, more than double any previous year.
“If you buy a home, you should be in a very good position to rent it out and see a significant return based on price appreciation, amortization, and the amount of rent you’re able to charge,” Habib says, particularly in buildings with four or fewer units. “Financing is very attractive” in that niche, he says, while it gets more expensive the larger the property.
Sharga notes that the same demographics driving demand in the single-family housing market are propelling the rental market as well.
“Over the next several years we’re going to be looking at pretty high numbers of households being formed. At the same time, we are dealing with a 10-year undersupply of both single-family and multifamily construction,” he says. “So if you are able to buy these properties right now as an investor, you have a pretty ready market to rent them out.”
Watching The Fed
Perhaps the biggest risk in real estate is that the Fed raises interest rates too high and too fast, throwing the economy into recession.
“It is inevitable that Fed decisions will eventually impact the industry,” says KeyBank’s Lucca. “The general concern around inflation is uncertainty about how much it will grow and how long it will last, especially given the current crisis in Ukraine. Typically during these periods, investors look to long-term investments, such as real estate. Investors are watching closely and ready to adapt to change.”
“At some point, inflation has an impact on [consumers’] spending and their ability to save money for a down payment or afford a rent payment,” Sharga says. “With U.S. GDP 70% dependent on consumer spending, you could have a consumer spending-driven recession. And the Fed could overcorrect and cause a recession that could lead to job losses and a negative impact on both residential and commercial markets. So even though things are looking good right now from a supply-and-demand standpoint, there are some storm clouds we need to keep our eyes on over the next 18 to 24 months.”
For his part, Nareit’s Worth is “fairly optimistic that the Fed is going to proceed in a very cautious manner and that we are not going to see them derail growth.”
But even if the Fed does, that won’t necessarily spoil the party, because recessions usually lead to lower interest rates, which is positive for real estate, particularly residential properties.
“Every time the Fed has tried to fight inflation, they have sent us into a recession, and in eight of the last nine recessions we’ve seen accelerated appreciation of real estate values afterward,” Habib says. “That means rates will probably have a chance to improve and real estate should hang in there pretty well as it always has during recessionary periods.”
Of course, no investment—no matter how positive the premise—is a guaranteed lock. Sharga says investors should “discriminate your risk tolerance” among different sectors should something unanticipated happen.