How To Spot A Good Real Estate Investment In A Tumultuous Market
Amid a myriad of factors contributing to instability in the financial markets around the world, and with the U.S. economy on the brink of a potential recession, the Federal Reserve has taken drastic action in 2022 to temper the effects of high inflation, supply chain issues and geopolitical conflicts overseas. With June’s inflation report indicating a 9.1% increase over the same period last year, the Fed in July raised its benchmark interest rate by 75 basis points for the second consecutive month. As the year-over-year increase cooled only slightly to 8.5% in July and 8.3% in August, the Fed decided to raise its benchmark rate by another 75 basis points in September. Moreover, economists are predicting that the Fed may employ further rate increases later this year.
The tandem of rising interest rates and inflation have made commercial real estate transactions more difficult to execute in the first half of 2022, with some deals that would have closed months prior having their value cut or going back on the market. Regardless, multifamily and other commercial real estate asset classes, like industrial, continue to see transactions pushed across the finish line.
Is real estate still a good hedge against inflation? What’s happening in the market?
Based on widespread speculation that the Fed’s rate increases may go too far and tip the U.S. economy into a recession, the stock market has been unpredictable, reacting with a high degree of volatility. Comparatively, I believe that real estate can remain an attractive way for investors to stabilize their portfolios. For example, higher interest rates are making it more expensive to finance a home purchase, thus keeping would-be homebuyers in the rental market and supporting demand for multifamily and the single-family rental/build-to-rent (SFR/BTR) asset classes. Multifamily rent growth is moderating from its record pace in 2021, but the national average rent still increased 10.9% year-over-year in August. Rents for SFR/BTR properties, which have become an extremely popular subset of the rental market, have continued to grow as well. These factors demonstrate that investing in rental properties should continue to provide relative stability in a portfolio. But in a tough environment—like the one we’re faced with today—investors need to be exceedingly diligent when deciding which deals to participate in.
What steps can investors take to ensure their capital is protected?
Reviewing investment materials and identifying red flags is important in any market, but it is especially critical now. If a deal looks too good to be true, it very well could be, and no investment decision should be taken lightly. Here are some critical factors investors should think about when evaluating a deal in today’s unpredictable environment:
As the Fed considers further action to help temper inflation while facilitating a soft landing for the U.S. economy—ideally, a gradual relaxing of inflation without a massive unemployment spike or economic meltdown—I believe multifamily real estate remains a viable component of a diversified investment portfolio. At the end of the day, people always need a place to live, regardless of what’s happening in the economic environment.
That said, no investment is truly risk-free, and in the case of real estate transactions, individual investors must perform some due diligence to ensure they are investing with a responsible and transparent platform. Evaluating factors such as the deal sponsor, the deal terms, the business plan and underwriting can help maximize a return on investment and increase the likelihood of a successful realization of that return when the time is right.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.