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Why the US Could Be Headed for a “Richcession” in 2023

 

Economic downturns typically affect everyone irrespective of class, but the poor almost always bear the brunt of recessions. To the wealthy, a recession is nothing but an inconvenience. Not this time round.

Research by financial experts suggests that the next recession predicted to occur in 2023 will likely hurt the rich more than any other economic class. With that in mind, it’s easy to see why they’ve dubbed the 2023 downturn the ‘richcession.’ That is, of course, assuming there will be a recession in the first place.

But, what are the odds an economic downturn will occur in 2023, triggering a richcession? Using the ABC model, the Federal Reserve predicts a 35% chance of a recession in 2023 if there is a tightening of the policy gap. The unconditional estimate is a mere 16%, although a more restrictive policy gap results in a 60% chance of a recession marked by a rapid decline of inflation under the baseline.

Additionally, Lahart argues that the wealth of households in the lower classes grew more throughout the pandemic than those at the top. That could increase the chances of richcession due to the decreased wealth growth among the wealthy caused by a decline in the stock market and a comparatively modest paycheck rise. 

What is Richcession?

A richcession is a sub-branch of a recession, a widespread and prolonged economic downturn that occurs when a country typically experiences decreased economic activity, rising levels of unemployment, and a fall in the nation’s gross domestic product.

In most instances of a recession, the most hard-hit classes are the poor and lower-middle class members. However, this is not always the case. Sometimes recessions affect the rich the most, an isolated circumstance industry insiders refer to as a richcession.

While the US may not be experiencing a recession, the evidence seems to point to one in the near future. A recent Bloomberg survey suggests a 70% chance of a recession in 2023.

Factors like high-interest rates and inflation have fueled the chances of a recession in 2023. Unlike other instances when the US experienced a recession, experts speculate that the 2023 recession will likely affect the rich more than the poor, hence a richcession.

Signs of a Richcession in 2023

Several factors suggest why there is a strong likelihood of a richcession occurring in 2023:

The Decline in the Net Worth Gap

For the first time in decades, the economic inequality in America has improved. Before the pandemic, the lower 50% were collectively worth $2 trillion. By the end of Q3 2022, that figure had more than doubled to $4.5 trillion.

That is in stark contrast to the fortunes of the high earners. Research shows that individuals between the 50th and 90th percentile’s share of the total net worth dropped from 30.1% before the pandemic to 28.7% by the end of Q3 2022.

As for earnings, the Federal Reserve Bank of Atlanta data shows that workers in the bottom quartile received a 7.4% increase in monthly wage over the same period in November 2021. That measures favorably against workers in the top quartile, who only received a 4.8% increase using the same parameters.

The fall in income for the well-off is significantly attributable to the dip in the stock market. Conversely, the lower 50% can link their fortunes to the government’s COVID-19 relief initiative and the strong labor market. 

Changes in the Labor Market

Although unemployment reached an all-time high of 14.7% in April 2020, December 2022 data shows it edged down to 3.5%, well below the long-term unemployment average of 5.73%. Moreover, data from the Bureau of Labor Statistics (BLS) show that job openings still outnumber that of unemployed workers.

The other end of the scale shows that high-income earners felt the brunt of the economic slide, with white-collar workers at the center of recent layoffs. The news is full of stories of big tech companies such as Amazon, Meta, and Twitter letting go of high-profile workers, most of who were earning more than $200,000.

Effects that Richcession Will Have On the Wealthy Class

A richcession could impact the well-offs in the following ways:

Termination of White-Collar Jobs

The richcession will mainly compromise high-income earners. For instance, Salesforce plans to let go of about 10% of its workforce, about 8,000 workers, in the coming weeks of January 2023. They are doing so to reduce expenses due to concerns about the downturn. 

That comes hot on the heels of Meta laying off 11,000 workers, Amazon 10,000, and Twitter 7,500 employees. Vimeo also announced in January 2023 that it plans to lay off 11% of its workers following a similar exercise in July 2022.

Plummeting Stock Market

Investing in the stock market is beneficial, but not in the current climate. The looming fear of a recession is negatively affecting the stock market. A continual fall in stock prices will eventually lead to one thing—plummeting net worths. 

Businesses that Target the Well-Off in Trouble

2023 might not be a great year for businesses that target the affluent, as that market segment is likely to run into economic headwinds. White-collar jobs are at risk, the stock market is taking a pummeling, the real estate market is cooling, and the economy is on shaky grounds. That will only spur the affluent to tighten their purse strings.

Those that rely on the lower 50% could be on better footing as the jobs market seems to favor lower-level workers. Even if there is a recession, experts expect the jobs market to remain relatively unscathed and wages to remain stable.

How to Prepare for the Richcession

It’s prudent always to have a backup plan in case the richcession hits. You could use these strategies to help minimize the impact of a richcession:

  • Build an emergency fund and always budget: It’s good practice to have some money put aside, no matter the state of the economy. That will come in handy when there is a financial emergency like a richcession. An excellent target is to have an emergency fund that should sustain you for at least six months.
  • Pay off your high-interest debts first: Such as debt from your credit cards. That should free you from punitive debts and give you enough time to build your cash reserves, enabling you to engage in meaningful investments.

Final Word

If 2023 is to experience a recession, it will likely be a recession. It is a highly unusual downturn that affects the affluent disproportionately to the other economic classes.

Already the signs point to a recession. The stock market dip is affecting the rich, more companies are cutting white-collar jobs than blue-collar jobs, and the lower-income earners have received higher income increases than their well-off compatriots.

Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment. 

While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective. When you are ready to reap the rewards of real estate investing let’s talk.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

How Digital Twin Technology Will Impact the Real Estate Industry

The growth of digital twins is one of the most fascinating developments in proptech currently. In 2022, the global digital twin market was worth $3,660.8 million, with a projected growth CAGR of 35.46% between 2022 and 2027, reaching $22,612.42 million.

The digital twin concept has spread throughout the residential, commercial, and industrial real estate sectors. It has the potential to introduce novel efficiencies and reduce operating costs in the long run.

However, real estate developers must adopt a comprehensive strategy to benefit fully from the technology’s potential. This article delves into what digital twin technology is, its place in real estate, and how it could transform the real estate industry.

What is a Digital Twin?

A digital twin is an identical virtual copy of a physical object, location, or future project. To adapt to and reflect the real-world environment, digital twin technology uses internet of things (IoT) data sensors, machine learning (ML), artificial intelligence (AI), and simulation.

Digital twin technology in real estate

In real estate, a digital twin is a digital representation of a property containing all the relevant features of the actual building and its surroundings.

A digital twin can contain data about a building, such as data from lighting and fire sensor system, floor plans, heating, ventilation, and air-conditioning (HVAC) systems, security system, and tenant interaction data with your building.

How digital twin technology may transform the real estate industry

1. Reduce Operational Cost

In a recent white paper, EY states digital twins can cut real estate operating expenses by as much as 35%, lower carbon emissions, make workplaces healthier, and enhance user experiences. Operating costs usually include all regular expenditures, such as utilities, maintenance, and repairs. 

Lights and HVAC systems may account for 50-70% of operating costs, while energy use accounts for 10-15%. Using digital twins has the potential to increase the transparency of such systems, providing new insights into the impact that users have on environmental outcomes.

You can use the collected data to determine the best way to control the building’s temperature and lighting. The digital twin technology can help optimize operations, which reduces costs without negatively impacting client satisfaction.

2. Foster Sustainability

Real estate development usually has many processes, including operations, construction, and design, which generally require economic, social, and environmental sustainability decisions. By 2020, buildings accounted for more than 39% of global energy-related carbon emissions, including 28% from building operations and 11% from building materials and construction.

The digital twin real estate strategy can help improve your real estate business’ environmental footprint. Using the digital twin of your buildings’ ecosystems, you can monitor pollution (such as carbon dioxide CO2 emissions) and waste management.

Additionally, designers can test speculative adjustments to their models, like adopting a greener energy system to gauge its impact in a simulated environment. When you link user data to the twin, you can make adjustments to enhance safety and protect users’ health.

3. Refine the Development Process

You can program digital twins to simulate your project at any stage of the construction process. That allows you to map out what the building will look like in the future and track its progress to see how closely it matches the ideal design.

Using digital twins also enables better oversight of material usage and equipment. When you completely understand the construction process, variables, and environment, you can optimize operations and maximize productivity.

4. Quicker Decision-Making

The complicated procedures and diverse factors, such as shifting market dynamics, new legislation, and environmental concerns, usually make decision-making challenging in the real estate industry.

Digital twin technology enables quick and informed decision-making by utilizing cloud-computing technology that uses real-time insights into operational activities. The technology can also serve as a standard for your entire property portfolio and offer advice based on historical data.

5. Facility Management

By simulating new technologies and processes, analyzing performance concerns, and gaining predictive insights, digital twins help you build a more productive and environmentally friendly workspace. And the data shows 63% of companies use analytics to enhance productivity and efficiency.

You can use a building’s digital twin to design floor plans that optimize the natural light your facility receives. That will also foster an environment where plants thrive, and encourage collaboration while ensuring everyone’s comfort.

When you combine tenants’ preferences with ML, it becomes simpler to design a maintenance plan that reduces expenses through automated procedures, cutting down on labor and utility expenses and remote monitoring. Through digital twins, you may gain insight into predictive maintenance and handle any problems before they occur.

6. Improved Communication

Using the digital twin as a portal to data provides you with real-time information and a holistic perspective with complete transparency. 

The digital twin connects to the IoT, allowing machine data and real-time sensors usage, technical data for installation, performance and material employment, digitalized design data for buildings, and other valuable data sources to create an improved product.

High-speed calculation speeds enabled by digital twins allow quick problem identification and resolution, improving reliability, security, and user satisfaction. Additionally, the digital twins serve as an open communication channel for all ecosystem users, promoting both collaborative innovation and collective insight.

7. Enhanced User Experience

As a real estate developer, you should heavily factor your clients’ needs and wants into your decisions and strategies. With the help of digital twins, you can better determine your clientele needs and respond with innovative new offerings.

Since many clients now expect tailored experiences, niche real estate markets have a place in the digital value network. There’s a market shift towards individualized units to help meet the needs of each home buyer, meaning mass production of homes is off the table. An Epsilon survey shows that 80% of consumers are more likely to purchase from a company that offers personalized experiences.

Digital twins also allow real estate companies to quickly identify and fix problems, improving customer experience. Developers can find issues and provide excellent products by creating a connected digital twin.

Final Word

With all these potential transformations in the real estate industry, it looks like the digital twin is here to stay. These 3D models are a massive step in the real estate industry, helping with everything from decision-making to streamlining day-to-day operations. Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment. 

While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective. When you are ready to reap the rewards of real estate investing let’s talk.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

7 Common Mistakes Rookie Real Estate Developers Make

Real estate development is undoubtedly one of the most popular ways to invest in the industry. According to a recent survey by CNBC, 23% of American adults chose real estate investment as the most effective way to build wealth, making it the most preferred investment vehicle. 

As long as there are people, you should expect some returns when you choose to develop properties, as everyone needs a roof over their head.

Although real estate investing seems a pretty straightforward endeavor, there are habitual mistakes novice real estate developers make that jeopardize their chances of making healthy returns.

Here are some of the blunders newcomer real estate developers make and what you can do to avoid or solve these miscalculations.

1. Get-rich-quick mentality

Most developers enter the real estate industry with the expectation of making a fortune quickly. The industry may seem like a solution for your financial woes, but keep in mind that short-term gains in this industry are more the result of speculation than a strategic investment. 

Indeed a 2022 ATTOM Data Solutions analysis shows that the profit received from 3-bedroom home rental units decreased in 72% of US counties.

You can succeed in real estate development if you put in the time and effort. In most instances, however, you will not realize instant success or wealth. It requires patience, effort, experience, and access to the right information to get the most out of your projects. When you commit to a plan with a longer time frame, you may spread out your losses and maximize your returns.

2. Poor Location

Any real estate developer should pay close attention to the property’s location, as it has a massive bearing on the benefits of the investment. Location may determine the property’s costs, revenue, tenant pool, laws and regulations, and market conditions.

According to the National Association of Realtors (NAR), 49% of homebuyers cited the quality of a location as a significant factor influencing their decision when looking for a home. If you develop a property in the wrong spot, it won’t fetch the right price to cover the development costs.

You should always study the cost, price changes, and trends, which can help determine if it is an excellent time to develop a property in a given location. Find out about the amenities, vacancy rates, and historical values of other properties in the area to help you make the right decision.

3. Investing Without a Strategy

Failing to establish clear goals is a common mistake among beginner real estate developers. You are more likely to make poor choices and decisions if you don’t have a clear master plan in advance.

A clearly articulated development strategy will help you achieve your objectives more quickly and hassle-free. By sticking to it, you ensure you are not wasting time and effort running in circles and instead making progress in the right direction.

Consider whether you are more interested in short-term returns or long-term capital growth or how you can achieve both goals while maintaining a steady cash flow.

4. Overpaying

Another common mistake developers make is buying or developing a property for more than what it would fetch in the market. Some potential real estate developers are more than happy to pay a premium when they come across a suitable property, especially in a hot market.

However, if you overpay for a project, you may find it challenging to meet your bottom line after settling the property’s costs. An excellent rule of thumb is a minimum 7% annual return on the amount invested in relation to the annual mortgage payments (cash-on-cash return).

Before you dive into developing a property, ensure you have done all the necessary research or consult with a professional to ensure you spend a fair amount on a property.

5. Failing to Conduct Due Diligence

Beginner property developers need to understand how the local real estate market works and how the economy can affect their projects. Without doing your research, there’s no telling if a property will bring in the kind of returns you are hoping for.

Your project’s success will depend on your ability to conduct due diligence. Before starting your project, you need to assess the impact of external factors on your business, allowing you to make informed decisions on the nature, timing, and target market of your projects.

Research the types of properties available, the prices at which they sell, and the nature of the competition before signing any sale contract.

6. Underestimating Expenses

Most developers typically consider the initial expenses required to buy or finish a project only. However, developing a property has many other potential hidden costs, which you should consider before breaking ground.

While budgeting, the smart move is to establish a hard cap and save up some money in case of emergencies or unforeseen expenditures. Conducting a feasibility study enables you to make an accurate financial evaluation and minimize surprises.

In your budget, factor in bills such as paperwork charges, property taxes, utility costs, insurance fees, or necessary property renovations. 

7. Not Hiring Professionals

The urge to avoid spending money on experts because you think you can do the job yourself can be intense. Yes, hiring professionals such as qualified home inspectors may be more expensive. However, it can help you save money in the long run by preventing costly mistakes.

Successful real estate development begins with building a competent team. If you don’t hire the right people in your team, you risk having inaccurate financial structures or poorly thought-out strategies, which can spell disaster for your project.

You should get advice and help from professionals in different fields to ensure appropriate planning, design, and execution of your project according to your strategy. Consult lawyers, architects, accountants, and urban planners to help you.

Final Word

Real estate developments are a solid investing path, and the stats back this assertion. However, not all real estate developers will realize returns on investment, especially if they are new to real estate investing.

If you want to make the most of your money, it is crucial that you avoid the mistakes mentioned above, such as wrong location, underinvesting, and sinking money on a property without an investing strategy.

Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment. 

While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective.

When you are ready to reap the rewards of real estate investing let’s talk.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

What does 2023 hold for the real estate industry? Big banks Predict Fed Pivot, Recession

According to a recent survey, most economists at major US financial institutions expect a recession to hit in 2023. The Wall Street Journal surveyed 23 firms that deal directly with the Federal Reserve, and most of them anticipate that the US will enter a recession in 2023, with only two expecting a recession in 2024.

While many analysts surveyed are becoming more pessimistic about the economy, Credit Suisse, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS Asset Management, and HSBC believe the economy will defy the unfortunate trend as the price rise slows.

This article looks into the big banks’ predictions about a looming 2023 recession, a Fed pivot on the interest rate hikes, and how these could impact the real estate industry.

What the Big Banks Anticipate

These companies, also known as main dealers, have raised the alarm about several issues, including Americans’ expenditure of their pandemic savings, bond maturities, and the downturn in the property market, directly leading to banks being more stringent with their lending requirements.

The economists mostly agree that the Fed is mostly to blame, as it has been gradually increasing interest rates over the past few months in an effort to slow the economy and control inflation. Although inflation has slowed recently, it is still significantly greater than the Fed’s target.

Seven rate hikes by the Fed in 2022 brought the benchmark rate to a 15-year high of 4.25% – 4.50%, up from 0% to 0.25% the year before. In December, Fed officials clarified they were committed to a gradual rate hike that would bring the target range for interest rates in 2023 to between 5% and 5.5%.

Yields on US government bonds with maturities of three months to two years are greater than those of 10, 20, and 30 years. This phenomenon, known as an inverted yield curve, has preceded every recession since World War II.

In October 2022, the Fed’s estimate reports showed that Americans still have around $1.2 trillion in excessive savings, down significantly from a high of more than $2.3 trillion in 2021. Additionally, the personal savings rate fell to 2.4% in November from a high of 4.7% in January 2022 and 7.3% in 2021.

Most economists also expect higher rates to raise the unemployment rate from November’s 3.7% to above 5%. While this is still historically low, continued rate increases would result in the loss of millions of jobs. The economists cited the number of people filing for unemployment has remained relatively low.
They have also predicted that the slowing effects of higher interest rates will become more noticeable in 2023, even though the economy has held up reasonably well during the rate hikes of 2022. That said, this current US interest rate is the highest it has ever been since 2008.

If the economy contracts, most economists believe it will be a mild recession. By late 2023, they anticipate a recovery in the economy and the stock markets, partly due to the Fed’s shift toward a monetary policy of rate decreases. Many economists expect high returns from bonds and modest gains from stocks in 2023.

How the Looming Recession Could Impact the Real Estate Industry

Although it may seem counterintuitive, the property market may thrive during economic downturns. Here is how the impending recession might affect the market:

Rising Mortgage Costs

Following a year of increases, mortgage rates continued their upward trend in the final week of 2022, ending the housing bubble that the 2021 pandemic had spurred. According to Freddie Mac, the average rate for a 30-year fixed mortgage has increased to 6.48% as of January 5, 2022, compared to 3.22% from the same time in 2021.

Increasing mortgage rates would make it harder for some would-be buyers to get mortgage financing. However, the Federal Reserve is likely to decrease rates to stimulate the economy in the event of a recession, so consumers can expect any challenges brought on by the increase in rates to be transitory.

Decline in Existing Home Sales and Less Affordability

According to the National Association of Realtors (NAR), existing home sales plummeted 7.7% in November 2022 compared to the previous month and dropped 35.4% from November 2021. NAR also reports that this current fall had been ongoing for 10 months, the longest streak since 1999.

The trend may continue with the forecasted economic slowdown coupled with affordability concerns. Moreover, the fact that many mortgage holders still have rates below market rates will contribute to a decrease in home sales in 2023.

Experts also anticipate that refinancing mortgages will continue to be infeasible for most current mortgage holders, restraining mortgage origination activity.

Historical increases in interest rates have led to less affordability. Although home prices slowed and fell in some areas, they are still significantly higher than before the pandemic, making it difficult for many families to afford homes.

The low supply of homes in the market to fulfill buyer demand is one of the main reasons home prices are currently high. Although most economists agree home prices will drop, there’s no consensus on whether home prices will continue to slow down or plummet in 2023.

The recent decline in mortgage rates notwithstanding, a section of the experts believe home values may plummet if buyer demand decreases in 2023 due to the recession and rising interest rates.

Some economists expect home prices to fall considerably further in 2023 due to rising mortgage rates. Most firms predict that the prices could fall by as much as 20%.

However, some analysts say a sharp drop is unlikely, so investors can keep their hopes up. That’s because home prices rose sharply during the pandemic housing boom, and a 20% decline would return the industry to February 2021 levels. They don’t expect the slowdown to throw many borrowers into negative equity.

Final Word

Most of the major financial institutions predict a recession will likely occur in 2023. Recessions are a normal part of the economic cycle and may impact the housing market, possibly slowing home sales. However, investors should treat these predictions cautiously as the economy continually shifts.

Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment. 

While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective.

When you are ready to reap the rewards of real estate investing let’s talk.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

How Hybrid Working Environment Has Impacted Real Estate Industry

The COVID-19 outbreak and accompanying move to remote work have impacted real estate. Many firms have rethought their physical workspace needs as workers work from home. This has reduced demand for traditional office space and increased demand for co-working spaces.  Some commercial real estate developers have had to focus on residential properties or retrofitting office buildings for hybrid work environments. This comprises specialized workstation locations, social distancing techniques, and increased cleaning processes for in-office and remote workers.  Hybrid work settings have affected real estate development. With the option to operate from anywhere, corporations may seek properties in lower-cost places, changing real estate values and development patterns. 

According to the 2022 Accenture report, 68% of fast-growing companies have adopted a hybrid work model, and more than 83% of employees prefer it. Although the hybrid workplace model has been around for some time, it increasingly became common during the pandemic because of the lockdowns.

Inevitably, the real estate market is changing in response to the evolving trends in office attendance and the widespread belief that hybrid working models are here to stay. Here’s a look at the impact of a hybrid working environment on the real estate industry and how investors can adapt to its changing demands.

Impact of Hybrid Work Models on the Real Estate Industry

Reduced Demand for Office Space

It is no secret that the widespread adoption of hybrid work models has revolutionized the commercial real estate market. According to a report from CBRE, demand for office space fell in September for the fourth month in a row as occupiers delayed lease decisions.

One of the reasons for the decline is evaluations of hybrid working arrangements by companies. Some organizations may also reduce the size of their workspace due to underutilization.

In addition to catering to employees’ interests in working from home, many companies realize they can make substantial savings by minimizing office space.

Reduced Market Value for Commercial Spaces

A working paper by experts at NYU and Columbia warns that the value of commercial real estate across the country could drop by as much as $500 billion from its pre-pandemic level by 2029 if current trends in working from home don’t change.

The locations of both workplaces and residences significantly impact real estate values and development. When there is less demand for office space, the lease income that the building generates decreases, and so does the building’s market value.

That’s a disaster for commercial space owners, equity investors, and lenders and may lead to bankruptcy and foreclosures.

Increased Demand for the Residential Real Estate

After companies started adopting hybrid working environments, many employees considered moving out to the suburbs, rural areas, or smaller towns because of preference and the high cost of living in the city. 

As people no longer commute to and from work daily, there’s no need to live close to a place of employment or a public transportation hub and incur high costs of living. That has led to a dramatic increase in the demand for suburban real estate, which may cause a rise in average prices.

What can Real Estate Investors do?

Low occupancy is costly and may render your office building redundant if you do nothing. That said, you can optimize your property in a few ways to help attract occupants, increase demand, and enhance tenants’ satisfaction.

Repurpose Existing Buildings

Office space is becoming obsolete due to the rising popularity of home office workstations. Overbuilt office buildings in areas where property values are declining, vacancy rates are growing, or places far away from public transit are particularly at risk.

RentCafe believes that in 2020 and 2021, 41% of apartment conversions resulted from previously used office space. Investors whose assets are in this position may find that converting their property into residences is their best choice to avoid foreclosure.

Integrate Home Office in Living Spaces

Recent 1-year estimates from the American Community Survey (ACS) by the Census Bureau show that the number of persons who work from home increased from 5.7% to 17.9% between 2019 and 2021.

The necessity for several home offices to support two or more persons working from home has expanded in recent years. Investors can introduce a home office idea tailored to the specific requirements of people working from home. Adding a space specifically for work can drive up the price of new houses and raise the value of existing ones.

Open Data Centers

Companies used to host their private networks and resources locally. However, companies are recently shifting their IT operations to data centers to reduce the need for expensive commercial real estate while improving their IT assets’ performance, reliability, and cost-effectiveness. 

Further, the need to securely store and share data among employees who spend time in and out of the workplace has prompted businesses to explore new solutions to accommodate mobile workers.

Hybrid work may cause a surge in demand for data centers, which would be good news for investors in the sector. One thing that is certain about cloud, colocation, and managed data centers is that their global relevance will grow with the speeding up of digitalization.

Co-working Spaces

Research and forecasts indicate that the co-working space industry will grow by 11% annually ($13.35 billion) between 2021 and 2025. In reality, not everyone can work from home. To make use of time when they don’t have to be at the office, employees who need to clock in a few days a week of office time may look into renting a shared office. 

After over two years in business, 72% of co-working spaces reported a positive financial return. That bodes well for real estate investors who put money into shared office spaces.

Short-Term Leasing

Landlords rarely signed short-term leases in the past because it was easy to find new tenants prepared to commit to longer terms. The economic situation is not as rosy at the moment. Currently, landlords are eager for any kind of tenant they can get, as many experts believe it will be years before occupancy rates return to pre-pandemic levels.

Companies that wish to keep a physical office presence but are still unsure about their long-term needs often opt for flexible lease terms. You can increase your office space occupancy by providing shorter lease periods, cooperative rates, and adaptable layouts.

Final Word

There is little question that the hybrid working model is here to stay. However, this may not inevitably indicate a sharp downturn in the real estate industry. It is essentially an opportunity for the sector to adapt in response to consumer and market demands. Real estate leaders must conform to the shifting preferences of their customers by offering fresh, cutting-edge products and services.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

What Does the Fall in Personal Wealth Mean to the Housing Market?

According to the latest Federal Reserve report, total US household wealth dropped to $143.3 trillion in the third quarter of 2022. That’s a slight drop from $143.7 trillion in the previous quarter and $150.1 trillion at the end of 2021. 

The Fed, which determines wealth by deducting total debt from total assets like savings and stocks, identified a drop in stock prices and a rise in inflation as contributing factors.

While investors recorded a $700 billion gain in their real estate worth, there was an opposite and unequal reaction as their stock portfolios lost $1.9 trillion in value. Losses in the stock market in 2022 accounted for almost all the $7 trillion in wealth lost by Americans this year.

Between June and September, the Fed hiked interest rates from 1.50% to a range of 3.00% – 3.25%. The Fed’s efforts to slow the economy and cool down the home price inflation have hit the housing market hard, which is vulnerable to changes in interest rates.

The Fed also reports that the total amount of cash held by households, which they calculated by adding up their savings accounts, checking accounts, and money market funds, remained relatively stable at approximately $18.4 trillion in the third quarter of 2022. Compared to its first-quarter high, that is a decline of over $134 billion.

Consumers saw a slight increase in their money market funds and current account but a decrease in their savings and time deposit accounts. The Fed needs people to cut back on spending to bring inflation down. So, what does all this mean for the housing market?

Impact of Drop in Household Wealth on the Housing Market

American households’ wealth is intrinsically linked to the property market’s health. A fall in household wealth could lead to severe impacts on the market.

Decrease in House Demand

The National Association of Realtors (NAR) reports that the annual sales rate of existing-home sales dropped to 4.4 million in October, down from over 6.5 million in January. That is the ninth consecutive month the market is experiencing a drop.

Potential homebuyers trying to save for a down payment on a house in today’s market will feel the strain even more if their net worth declines, fuelled by the expected rise in inflation and cost-of-living crises.

On the other hand, homeowners with more disposable income tend to look at the big picture when making significant purchases. In economically challenging times when their wealth dips, such as this, they usually delay purchasing homes to protect themselves against economic uncertainty.

Drop in House Supply

Because of a decline in the number of potential buyers, builders naturally slow the development of new properties. That makes it more difficult to find a new home, leading to a rise in the price of the scarce product (buildings), which may be a deal breaker for potential buyers.

The construction of new homes often provides a glimpse into the housing market’s future. A glance at the latest data from the Census Bureau shows that the adjusted annualized rate of housing starts in the US fell 4.2% from the previous month to 1.425 million in October 2022.

That was lower than the 1.41 million predicted by the market. Starts on detached single-family homes decreased by 6.1% to 855K, while starts on multi-family dwellings decreased by 0.5% to 556K.

Higher Mortgage Rates

The Fed continues to increase interest rates to curb inflation, increasing the cost of borrowing, including mortgage loans for potential homeowners.

Mortgage payments can add hundreds of dollars to a household’s monthly budget for a 30-year mortgage loan, and most individuals are hesitant to make such a huge commitment when they see their net worth drop. 

Households might delay their home purchase if mortgage interest rates continue to rise. Valuations firms also believe that getting loans may become more challenging as lenders’ perception of risk increases because of these uncertainties.

Low Home Values

After reaching a record high of $413,800 in June, the NAR reported that the median sales price of an existing home dropped to $379,100 in October. The law of supply and demand states that product prices tend to fall as demand decreases; a weakening demand will lead to a fall in property prices. 

With less interest in purchasing a property, fewer people are searching for the same number of properties. When the demand drops, sellers would have to accept a lower price than they had hoped for or would have received in a highly competitive environment.

Households are also more likely to feel the effect of outside variables, such as stock market fluctuations, which might lead to hesitation in purchasing decisions. In short, there will be less interest in buying houses, leading to lower pricing.

Rising Foreclosures

According to ATTOM’s Q3 2022 US Foreclosure Market Report, foreclosure filings increased by 104% year over year, affecting 92,634 properties.

Many households usually file foreclosures when their net worth tremendously falls, and they struggle to make ends meet. It will lead to many families losing their homes to foreclosure because they cannot keep up with their mortgage payments.

Moreover, lenders have tightened their requirements for who they would extend credit to in light of increased foreclosures. To qualify for a mortgage today, a borrower needs a strong credit score, a manageable amount of debt to their income, and a sizeable down payment.

 

What can you do as a Real Estate Investor?

Although the real estate market is currently in the dark, it can provide some stability for investors when household wealth falls. Here are some activities investors can engage in:

  • Shifting to rentals: During a downturn, fewer people will spend their money on a property purchase. However, everyone still needs a place to stay, and their only choice is rent.
  • Buy and hold: Home prices do not automatically decline when the net worth of households falls. However, if a property market crash cools out because of a drop in household wealth, you can buy homes at lower prices and later recover your investment when the market returns to normal.

Final Word

Generally, when the net worth of households falls, it can significantly impact the housing market. It can lead to decreased home demand, low inventories, difficulty finding financing, and low home values and foreclosures. That makes it harder for families to buy homes.

However, there are still meaningful activities real estate investors can engage in, such as switching to rental units and buying and holding, ensuring they score a profit in turbulent times.

By Gurpreet Singh Padda, MD, MBA, MHP

Categories
Real Estate

How Do The Events of 1971 Affect Real Estate Today?

Something seismic happened in 1971 that drastically changed the economic climate, the effects of which you can still feel to date.

1946 saw the introduction of the post-war international monetary order, the Bretton Woods Agreement, which lasted till 1971. They decided that the US dollar would be a reserve currency that foreign governments could redeem for gold.

The US dollar was tied to gold, pegged at an exchange rate of $35 per ounce, the so-called Gold Standard. All the other international currencies were pegged to the dollar, which they hoped would be an effective hedge against competitive devaluation of currencies and boost global economic growth.

In 1971 however, the US government stopped the Gold Standard after learning it had insufficient gold to cover all the dollars in circulation. President Nixon temporarily decided to pause gold redemption, but the system collapsed entirely in 1973.

Since a lack of gold supply couldn’t stop them from printing more money, they couldn’t resist the temptation to print more money. That saw the US system change to a fiat currency system, which devalued the dollar.

As a result, more people decided to diversify their assets by investing in stocks, real estate, and bonds, which were relatively safer. That saw a rise in GDP and real estate prices, but wages remained the same, a trend that persists.

Real GDP, Real Wages, and Trade Policies

Studies show that home prices correlate with GDP per capita by 95%. In the long run, their growth trends correspond. After 1971, the real GDP rose due to increased productivity, but there was no change in the worker’s wages, and there was a rise in the real estate price.

Government tax policies can also boost or impede demand for real estate. Real GDP growth affects real estate as it is the primary driver of fees and rates. Real estate, finance, and insurance investments contribute directly to GDP growth by 21%. Since 1971 the GDP trend has been high, leading to increased real estate investment.

Home values change vs. Income change

The house value change has risen compared to income change since 1971. From 1971, productivity increased, the inflation rate increased, and home prices increased due to inflation, but wages stagnated.

Government tax policies can also boost or impede demand for real estate. Real GDP growth affects real estate as it is the primary driver of fees and rates. Real estate, finance, and insurance investments contribute directly to GDP growth by 21%. Since 1971 the GDP trend has been high, leading to increased real estate investment.

Home Values Change vs. Income Change

The house value change has risen compared to income change since 1971. From 1971, productivity increased, the inflation rate increased, and home prices increased due to inflation, but wages stagnated.

 

Interest Rates

When considering investing in real estate, one of the key factors to consider is interest rates. Demand is affected by a change in interest rates: demand increases when interest rates go lower and vice versa. You should note that a rise in interest rates leads to an increase in the cost to obtain a mortgage, lowering demand as before 1971.

Income Gains

Since 1971, the gap between the average American and the affluent seems to grow even wider. The income inequality and wealth since 1971 are due to massive asset appreciation. Wealthy individuals decided to invest in real estate due to its profitability, but the less affluent couldn’t keep up, further widening the inequality once appreciation kicked in.

The consumer price index vs. Real Estate Measures Inflation

Inflation leads to high mortgage rates due to increased interest rates by the Central Bank, which will lead to an increase in rental rates; increased inflation since 1971 has increased the consumer price index. This is good for real estate investors.

The graph below illustrates how house prices are compared to minimum wage. The minimum wage adjusted to inflation shows that it has declined over the past few decades. Less than 2% of the people in the workplace earn minimum wage.

Interest Rates

When considering investing in real estate, one of the key factors to consider is interest rates. Demand is affected by a change in interest rates: demand increases when interest rates go lower and vice versa. You should note that a rise in interest rates leads to an increase in the cost to obtain a mortgage, lowering demand as before 1971.

Income Gains

Since 1971, the gap between the average American and the affluent seems to grow even wider. The income inequality and wealth since 1971 are due to massive asset appreciation. Wealthy individuals decided to invest in real estate due to its profitability, but the less affluent couldn’t keep up, further widening the inequality once appreciation kicked in.

The Consumer Price Index vs. Real Estate Measures Inflation

Inflation leads to high mortgage rates due to increased interest rates by the Central Bank, which will lead to an increase in rental rates; increased inflation since 1971 has increased the consumer price index. This is good for real estate investors.

The graph below illustrates how house prices are compared to minimum wage. The minimum wage adjusted to inflation shows that it has declined over the past few decades. Less than 2% of the people in the workplace earn minimum wage.

Hyperinflation

Financial asset inflation is today’s most significant cause of inequality, hence monetary expansion. Because investors need an asset with an intrinsic store of value is essential, there was a decline in using fiat money and an uptake in financial assets investment such as stocks and real estate.

Many hold their wealth in financial support, which causes wealth stratification because most people cannot access financial assets. Due to higher productivity, the GDP rose, and real estate prices soared.

It thus meant an increased rate of hyperinflation. When inflation rises, some investment vehicles, such as real estate, appreciate, which is an advantage for real estate investors.

How Long it Takes to Save for a House

With the increased GDP and real estate prices, most people used their savings for real estate values due to their stable income. The personal savings rate fell, and people had to work more and longer to save for a house.

Most younger people are starting at a disadvantage. It is more expensive to get an education or assets that increase in value because of inflations, such as real estate or stocks. Many build their financial base by storing it in depreciation currency in the short term.

In 1971, for instance, a new house cost an average of $25,200 while the average annual income was $10,622. In 2022, the median house price is over $400,000, but the average income is slightly above $54,000 annually. Even if you were to use the current GDP per capita calculated by the World Bank, that figure is $69,287, well below the 1971 figures.

Income Growth vs. Income Inequality

Moving away from the gold standard incentivized the government to print more money, encouraging investors to find other ways to store their wealth. That increased asset price inflation since 1971 due to people holding their wealth in assets.

Investing in stocks, bonds, and real estate is the best financial tactic because the more assets you invest in, the better because, during inflation, you will gain.

This system affected the balance of economic equality since it made the rich wealthier and the poor poorer. The rich will gain during inflation due to their investments, while an average American will spend most of their dollars on rent, groceries, and insurance.

Since 1971 income inequality has increased significantly, meaning those who invested in stocks and real estate became richer.

Final Word

Because the US shifted from the Gold Standard in 1971, which allowed the government to pursue a fiat currency system that allowed them to print money at will. That created some instability, so most investors opted for more solid investment options such as stocks and real estate.

These promised more reliable paths for wealth growth because of asset appreciation. Even though wages stagnated, real estate investors can rely on real estate investments as a store of value because they hold intrinsic value and likely will appreciate.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

Property Tech: Massive Opportunity for Entrepreneurs

Just like many other sectors of the economy, technology is taking root in real estate. Using technology has become such a buzzword; it has earned the moniker proptech (property technology).

Although it’s in its infancy, experts envisage that proptech has a bright future. Future Market Insights predicts it will expand from its current value of $18.2 billion in 2022 to $86.5 billion by 2032. Here is why you should consider integrating proptech into your business. 

What is Property Tech?

Proptech refers to using technology in real estate. It aims to help customers and businesses optimize how they conduct real estate transactions such as buying, selling, researching, marketing, and managing real estate assets.

Benefits of Proptech to Entrepreneurs

Like other sectors, the real estate market would inevitably undergo a technological revolution. Here is a look at some benefits of prop-tech to entrepreneurs:

1. Increased productivity

Investors handled real estate transactions offline in the pre-digital era, which was inefficient and slow. However, because of advancements in property technology, all of this is accessible online, keeping all parties in the loop with greater ease.

Additionally, using data analytics technologies in proptech can help real estate professionals make better property-related decisions and streamlined portfolio management.

2. Improved communication

In the past, it was challenging for buyers and sellers to communicate during real estate transactions because they handled many deals offline.

Proptech can make all transaction data accessible online, streamlining communication between all parties. Property owners may also improve their communication with clients and give them timely, relevant information with the help of property technology solutions like chatbots.

3. Transparency

Traditionally, most real estate deals were closed in person, which made it difficult for buyers and sellers to find up-to-date information on transfers.

There are several ways in which proptech can increase transparency. For instance, it can provide information that enables consumers and corporations to make informed decisions regarding properties. It can also facilitate transparent and effective communication between buyers and sellers.

4. Improved marketing

Previously, you could only find property listings in print or via word of mouth, limiting its ability to reach a broader range of potential homebuyers and tenants. However, online real estate listings are accessible to a much wider audience because of technological advancement.

Moreover, you can use virtual reality, virtual staging, and other proptech tools to provide prospective buyers with a more in-depth look at a property without requiring a site visit.

5. Improved turnover and occupancy rates

Before proptech, property owners had to rely on a small pool of potential customers to sell or rent their units. However, with advancements in property technology, investors can now leverage online resources, such as online listings and social media, to attract potential clients. 

Landlords and property sellers can save time and effort by using proptech tools, such as smartphone apps, that make it easier for them to manage their properties and keep tabs on tenants, potential customers, and sale agreements.

How Proptech is Changing Real Estate

Here’s a look at some of the growing trends in Proptech:

1. 3D printing

3D is no longer constrained to printing small things in a studio; some 3D printers can create an entire house. Presently, 3D printing’s primary application in the property industry is in construction, explicitly printing building components like walls, work surfaces, floor tiles, and other functions.

However, it has become necessary in modular building, enabling more economically priced, environmentally friendly, and versatile building materials and prefabricated structures. 

2. Online listing

According to NAR, 43% of homebuyers search online for available properties. A real estate business is at a significant disadvantage if it doesn’t list its available properties online. Use pictures and videos to create an immersive experience for web visitors.

3. Internet of Things

According to a poll by Statista, 42% of respondents admitted they are optimistic about Smart Building technology, while 56% said they have already felt the effects of technological advancements.

The Internet of Things (IoT) describes a network of connected devices and systems that exchange data and instructions in real-time. You can even use the IoT to create smart homes with various connected devices you can manage remotely.

Besides automating property controls and taking care of routine maintenance, modern IoT systems may also identify faults and defects and optimize environmental performance by modifying operating systems depending on the actual or expected use. That leads to less energy usage, cheaper maintenance, and better air quality inside your property.

3. Blockchain

You’ve probably heard of blockchain when a conversation about Bitcoin and cryptocurrencies broke off. It refers to a distributed digital ledger technology that you can use to streamline real estate transactions, including renting and selling.

For instance, you can utilize the blockchain to make a distributed ledger of all your real estate deals, allowing streamlined monitoring of transferring property ownership. You can also use blockchain to create smart contracts. The blockchain can store and automate contracts when parties meet specific conditions.

4. Crowdfunding

Budding real estate investors that do not have deep pockets can take advantage of crowdsourcing. These are platforms where many investors can raise money to purchase a property.

Thereafter, professional property managers will take over the management and maintenance of the property, so the investors don’t have to worry about taking care of those responsibilities.

5. Big data and analytics

Big data describes extensive or complicated data sets that are too massive for conventional data software to process. A McKinsey research found that machine-learning models used in real estate applications are 90% accurate at predicting rent rate changes and 60% at predicting changes in other property variables.

That knowledge about market or customer behavior provided by big data can aid in pricing, identifying market trends, and weighing the risks and rewards of an investment. Analytics allow investors to build homes with the features the target occupants want, ensuring steady occupancy levels.

Final Word

Proptech is still a relatively new byword in real estate, but its benefits are evident in helping develop, sell, and manage properties. It helps to integrate it now to reap its benefits and ready your business for the future when it is more prevalent.

By Gurpreet Singh Padda, MD, MBA, MHP

Categories
Real Estate

What 2023 Promises for Home Prices in Your Local Housing Market

The annual inflation rate in the US was 7.7% for the 12 months ending in October 2022, and for the third week in a row, the 30-year fixed mortgage rate stayed above 7%. After several years of ups and downs, no one is quite sure what the local housing market has in store for 2023.

The housing market in the US is currently experiencing a significant slowdown. However, experts have different opinions and forecasts regarding the impact of the economy on home values in the US in the coming year.

Here is a look at predictions made by major financial institutions, research firms, and real estate investment companies on the 2023 home prices. 

Wells Fargo

According to their latest predictions, median prices for single-family homes throughout the country would fall by 5.5% between now and the end of 2023.

Their economists predict that the median price of an existing single-family home will rise to $385,000 this year, an increase of 7.8% from last year but much less than the 19% annual increase predicted in 2021.

The analysts also expect the median home price to drop to $364,000, a decrease of 5.5% from this year. They forecast a 3.3% increase in prices in 2024, bringing the median price to $366,000 by that year’s end.

Morgan Stanley

This major financial institution is the most recent member to join the growing group predicting a housing correction in the housing market.

Its analysts predict that 2023 will see a decrease in home values throughout the United States’ most expensive housing markets due to the impact of rising mortgage rates. Morgan Stanley forecasts housing prices in the US will drop by 7% by the end of next year.

Zillow

Zillow issued a bold prediction during the hectic spring house-buying season, claiming that US home prices would increase by an additional 17.8% between February 2022 and February 2023 due to the Pandemic Housing Boom.

It, however, reported that property values fell in 117 local markets throughout the country between May and August. There were 36 markets where the drop was more than 3%. These marketplaces fall into two categories: expensive tech hubs like San Francisco or overheated boomtowns like Austin (7.4% decline) and Boise (5.3% decline). 

Although property values fell in 117 markets this summer, they increased in 779 others. These increases were especially noteworthy in East Coast cities like Miami (up 4.1%) and Myrtle Beach, South Carolina (up 4.5%).

Going by current trends, Zillow forecasts a 2023 housing price decline in some areas while gaining traction in others. Zillow revised its house value prediction downwards between August 2022 and August 2023 from 2.4% to 1.2%. 

According to Zillow’s researchers, recent home market indications show buyers are holding back while affordability barriers remain as high as they have been in recent memory, prompting the downward revisions.

Home prices in Boise and Phoenix, for example, fell sharply last summer, but Zillow predicts a slight recovery in those cities in 2023. Zillow forecasts an increase in Boise and Phoenix home values by 4.3% and 1.7% over the next 12 months.

Zillow also predicts that property values will decrease in 271 locations throughout the country between September 2022 and September 2023 while rising in 607 markets and remaining unchanged in 19 others.

Goldman Sachs

In August 2022, Goldman Sachs forecasted that the housing market would decline further in 2023, with home price growth coming to a complete halt, averaging 0%. They expect that by October, prices will slip down further.

According to an analysis posted on the investment bank’s website, their analysts, using their G-10 home value model, predicted that home prices in the United States will fall by 5% to 10% due to rising mortgage rates from their recent highs.

The economists warn that the housing market could fall even more than their model predicts because of the dire signals from home price trends and housing affordability.

Moody’s Analytics

As of August and again in September, Moody’s Analytics lowered its prediction for the US housing market. According to Fortune, Moody’s forecasts a peak-to-trough decline in US home prices between 5% and 10%, but the organization is also watching what it considers highly overvalued property regions, where it expects reductions of 10% to 15%.

This forecast has its basis on the assumption that the US will not enter a recession. Moody’s Analytics chief economist Mark Zandi estimates a 15%-20% drop from peak to trough in home prices in the event of a downturn.

Fannie Mae

According to Fannie Mae, several economic indicators indicate a possible recession in 2023. Doug Duncan, senior vice president and chief economist at Fannie Mae noted that the Fed’s efforts to combat inflation have the intended impact on the housing market.

Duncan anticipates the housing slump to persist through 2023 due to rising mortgage rates and property prices, making purchasing a home challenging for many people. However, Fannie Mae has given no negative annual forecast for home prices in 2023.

CoreLogic

According to the S&P US home values tracking CoreLogic Case-Shiller Indices, prices nationwide soared by 13.5% in August 2022 compared to last year.

The index predicts home prices will remain unchanged month over month from August to September but will rise by 3.2% year over year from August 2022 through August 2023.

Final word – Will 2023 be a buyer or seller market?

Real estate has been a seller’s market for two years since the epidemic struck. However, recent economic changes seem to suggest the tide is shifting.

The rising cost of borrowing has significantly reduced the affordability of purchasing a property. The housing affordability index published by the National Association of Realtors shows that existing-home sales have declined for seven consecutive months through August.

Many economists, researchers, financial institutions, and investment firms predict that home prices across the US will drop by at least a few percentage points, possibly as much as between 5% to 15%, in 2023. Significant declines will likely occur in the more expensive markets.

Further, there is still limited inventory in the market, and considering the unfavorable market conditions, builders will likely scale down production. All this points to a market that will probably maintain equilibrium without tipping drastically toward one side or the other.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

Have the Economic Changes Affected The Built-For-Rent Business?

Real estate has been a great investment option over the years, as it promises commensurate returns. That explains the over 19 million rental properties in the US, with about 70% owned by individual investors.

Consequently, the built-for-rent (BFR) business has been a buzzword in real estate circles, with everyone clamoring for a piece of that pie. However, there’s been a seismic shift in the economy, which could impact that market segment.  

There’s been a general economic decline. There are fears of a possible recession, playing to the soundtrack of doubled mortgage rates and home sales crashing while wages have stagnated. 

To some real estate observers, the built-for-rent business model is about to take a significant hit, but will this come to pass? This article investigates the truths and misconceptions about the impact of the changing economic climate on BFR. 

Economic Factors Affecting the Built-For-Rent Business

Economic changes affect rental prices and housing demand and can lead to extensive periods of vacancies. Some of these factors include:

Interest Rates 

Change in interest rates dramatically affects the cost of mortgage. For instance, in a period of high interest rates, the mortgage payment cost will rise, leading to a drop in the demand for home purchases. The knock-on effect is that since fewer people can afford homes, the only alternative is leasing, which increases the demand for rental housing. 

Economic Growth

A country’s income growth determines the demand for housing. People will spend more on houses as the economy grows and incomes rise, increasing demand and pushing up prices. 

Indeed, housing demand is income elastic (luxury goods), with rising incomes leading to a more significant percentage of income spent on houses.

Similarly, people can’t afford to buy in a downturn, and those who lose their jobs may fall behind on their mortgage payments and have their homes repossessed.

Affordability

Another economic factor that affects the rental market is the ratio of the house to price-earnings. From 2015 to 2022, house prices are higher than income growth by 36%, which means the number of people who can afford homes has reduced since 2015. 

Effects of Rent Control on BFR

With the various changes experienced in the economy leading to the steady rise in house rent, many states have come up with multiple strategies, such as enacting rent control. This program limits the amount you can demand from the house you lease.

While rent control benefits tenants, these programs directly affect the house markets, which would impact you as a real estate investor.

The research at Brookings University shows that although the effects of rent control will decrease rent prices for tenants in the short run, its long-term effects include:

  • Reduced affordability
  • Fuels gentrification
  • Creates negative consequences in the neighborhood  

Further research shows that 8% of owners of rent-controlled buildings are likely to convert their facilities to condos to avoid the effects of decreased market prices. That led to a 25% drop in the number of renters in rent-controlled rental units as the property owners replaced the existing units.

Rebound in Rental Market  

The pandemic period greatly affected real estate, but its market reignited in 2021, and the housing demand rose. According to the Census Bureau of Housing Vacancies and Homeownership, the number of rental households increased to 44 million during the post-pandemic period, leading to a decrease in rental vacancies by 5.8%. 

The strong demand for rental units also fueled the rise in the price of properties. In 2022 alone, the price of rental properties rose by 13.4% from 2021. Therefore, although mortgage rates rose, rental property acquisition has remained the same since property owners have access to rental income and can increase the rental price to match the mortgage repayments. 

Effects of Economic Changes on Rent Growth of Built-for-Rent Businesses

Over the past couple of years, rent prices have been escalating continuously at a rate of 15-20%. That means that the rent is unlikely to go any higher in the next subsequent years, likely dropping by a fraction of the rent rates experienced now. 

Since the income for most renters has risen over the last couple of years (and will probably continue to rise in the subsequent years), there’s a likelihood that most will experience rent growth at a steady pace in the middle of 2023 after going through a brief slowdown in the rent growth. 

Still, the increase in the rental income also means there is room for you, as the property owner, to raise the rent. Some of the indicators that show this is possible is the recent research by Real page, which showed that renters spent about 23% of their income on rent which is well below the affordability rate. 

How Economic Changes Affect the Rate of BFR Construction

Built-for-rent construction always follows demand. Although the US is experiencing an economic slowdown, this hasn’t affected the development of housing units. Although housing prices seem to have stagnated at such a high price, that isn’t because a lack of housing drives up demand and prices, as they would typically do. On the contrary, considering there’s a 2-5 million rental unit shortage, BFR constructors still have plenty of catching up.

However, this only applies to built-for-rent houses. Built-for-sale housing is likely to plunge for most of the year. 

Effects of the Economy on Renter Household Growth

The growth of rental apartments mostly stayed the same, even during the pandemic. Several factors explain why the rental estate is experiencing growth during these tough economic times. 

For one, young adults leaving their parents’ homes and looking to form new households usually make their first stop at rental properties as they settle down.

Secondly, there is limited availability of new houses as they are currently beyond the reach of the average home buyer. Further, although the price of almost goods has risen across the board, incomes have largely stagnated, only growing 17.5% between 1979 and 2020. 

Final Word

Although the negative economic changes signal doom for the real estate industry, the built-for-rent segment seems poised to grow in strength. Mortgage and housing prices are still out of reach for many, and incomes have stagnated, which bodes well for BFR.

To the keen eye, the benefits of investing in BFR far outweigh the potential risks, which makes it a viable investment option.

Gurpreet Singh Padda, MD, MBA, MHP