Origin Investments predicts inflation as the biggest economic risk for private real estate investing in 2022, affecting everything from value-add and ground-up construction to capital expenditures and cap rates. With inflation at a record pace, the Chicago-based fund sponsor says inflation will be a key investment theme this year.
Record-breaking supply chain disruptions and supply shortages have sent US inflation surging to an annual rate not seen for more than 30 years. And with the Federal Reserve signaling rate hikes in 2022, investors brace for impact. Origin expects an increase in the federal funds rate in May or July of this year.
While the pandemic certainly exacerbated supply shortages, COVID-19 impacted real estate in unprecedented ways. The sponsor also sees pandemic-related stressors having a continued impact on real estate. Remote and hybrid work accelerated an urban-suburban exodus, and warmer climates outpaced population growth compared to other regions, causing price distortions and inflation persistence.
In tandem with workplace changes, higher wages are here with no sign of cooling down. Higher wages can lead to higher consumer prices and potentially higher interest rates. And higher labor costs will add to the pressure if new labor doesn’t re-enter the workforce soon.
Hybrid work will likely be permanent post-pandemic, with affordability and employee-demand driving this shift. Proximity to the physical workplace no longer remains a priority. Cities with lower housing costs and a better lifestyle continue to raise housing costs, disrupting price moderation.
While inflation remains the biggest risk, it’s not the only one. Origin predicts there will be a lower level of appreciation in 2022. With valuations at the high end of their expected range, the sponsor urges careful asset selection. Asset classes that perform well during inflationary periods with cash flow potential are recommended, which leads to attention towards Qualified Opportunity Zones (QOZ).
Rules governing OZ incentives will not change in 2022, reports Origin, and with bi-partisan support and over $20 billion in funds raised, investor interest is high. Multifamily is at the forefront, with a number of investors looking to put equity in multifamily housing, says the sponsor. Rents often accelerate in an inflationary environment, offering scale and wealth-building opportunities. What’s more, the pace of ground-up construction will increase in 2022, Origin predicts, with lenders loaning to multifamily housing projects. Bolstering multifamily building are rising home prices, interest rates, and limited for-sale inventory.
An appetite for rent growth fueled by an active multifamily market continues to weather the pandemic storm with no signs of slowing down. Multifamily returns will continue to grow with the inflation rate, especially as migration away from dense cities remains.