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Boom, bust or time to buy?

Will the Real Estate market Crash in 2022?? …There is no question that current volatility in the debt market is causing turbulence in the market, but are rising interest rates enough to break the fever of a historically hot housing market? And how does a potential real estate correction impact multifamily investors? 

Boom, bust, or time to buy? 

I personally think that the current environment will present a buying opportunity for multifamily investors. The trick will be financing properties such that they will generate consistent and predictable cashflow after paying debt service. 

The fundamentals of low inventory, strong demand, and increasing barriers to home ownership that have driven a rapid and historic appreciation in multifamily asset values have not changed. In fact, there may be increased demand pressure for multifamily housing, as first-time home buyers are further priced out of the residential real estate market due to increased mortgage costs. 

Construction starts and velocity of new housing inventory is also still miles behind. An estimated five million homes are still needed! And increasing construction costs, combined with a sluggish supply chain, and labor shortages, further compound the housing supply problem.

But is this rent growth sustainable? 

The overall lack of housing supply, and shifting regional migration patterns that have been driven by Covid-19 have led to historic rent growth in some south-east markets, leaving many asking the question “is this rent growth sustainable?”. 

Surely, long term rent growth at this level, even with the extreme lack of supply, is unsustainable. Rents will naturally hit an affordability ceiling, where wages will no longer support higher rents. Yes, we are currently experiencing a very tight labor market and that is driving wage growth. However, higher incomes are starting to be eroded by inflation and that is acting as a counterbalance. 

If the Federal Reserve can get inflation under control without breaking the job market, we are likely to see a period where wage growth will keep pace with inflation, and this could extend the period of high rent growth that we are currently experiencing. 

While we do not expect a repeat of the 30%+ rent growth that we saw in some markets in 2021, we do expect above average rent growth in many markets in 2022, while this supply/demand imbalance perpetuates. 

We still see opportunity in multifamily 

As investors navigate the turbulence of a more hawkish Fed, yields across all investment classes are coming down. 

However, I am a firm believer that multifamily still represents the best risk-adjusted returns available amongst the various real estate classes. The low-risk nature of the class was demonstrated by the asset’s performance through the sub-prime mortgage crisis, where default rates for multifamily were the lowest of all real estate classes. 

Multifamily is a proven and resilient asset class, through all market conditions and all phases of the market cycle.

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