For most people, there are two reasons why real estate investing can be so attractive.
You can be as active as you like, buying and managing properties, or renovating and selling them profitably on the fly. Or you can go passive and let others do the business while you enjoy the returns in the form of dividends, for example as an investor in shares in real estate investment trusts (REITs).
Regardless of how you invest in real estate, you need to be mindful of what’s happening in the big world around us. Change is always afoot, and when we’re talking about long-term commitment, it’s especially important to monitor the trends and then make your best interpretation of how they will affect your current and future investments.
Here are a few thoughts on some of these megatrends and why it might be a good time to keep an eye on them.
Watch the courses with interest
As the chart above shows, it took interest rates a long time to get as low as they were at the end of 2021 before they started their rapid rise this year. How fast and how high they go now will make a big difference in the real estate market, especially in residential construction, but certainly also in commercial real estate.
For example, a monthly payment of $1,073 on a 30-year bond at 2.99% goes up to $1,184 at 3.99%, and we’re already there. Watch this figure closely. The impact will be profound, both on your personal investments and on the markets you monitor. If it’s more expensive to rent, it’s more expensive to build and expand and manufacture, and all of those costs are passed on to the end user.
From an investor’s perspective, this can make providers of staples like groceries and gas — and the properties they occupy — appear more attractive and stable. Look at companies that have held up well during the pandemic collapse here to find potential winners, starting with companies like real estate income and Kroger.
Keep an eye on affordability, wages, employment and foreclosures
The National Association of Home Builders (NAHB) recently calculated that every $1,000 increase in house prices pushes about 150,000 homes out of the market. Other reports say that about 60% of renters cannot afford to buy a home in their own city.
Meanwhile, employment and wages are rising, but for the latter not as fast as inflation in many places. Overall, it’s a good idea to keep affordability in mind in the areas you plan to invest in. One indication that this might be a problem is when you see foreclosures on the rise. Predictions of a return to a foreclosure crisis during the pandemic have never come true, but that doesn’t mean it’s nothing to stop watching. Things can always change.
Watch out for a bubble
Property prices continue to rise at breakneck speed, even as sales are showing signs of slowing. Of course, this cannot go on forever and some Fed economists have just released a report that talks about how fundamentals have become decoupled from price increases, ie a bubble.
While the consensus remains that fundamentals are now very different from the housing market collapse during the Great Recession, this could only mean that deflation in prices and sales will be more gradual. The best investment advice here might be to avoid overpaying in overheated markets.
Easy to say, right? For guidance, keep an eye on studies like the Buying vs. Renting Housing Index, which is regularly updated by a group of economists at Florida Atlantic University.
Speaking of rents, rents are also rising, especially in the hottest markets. The big operators make a lot of sense as an investment as they likely have the scale and expertise to operate profitably in this environment. include considerations here AvalonBay Communities and equity housing.
A nationwide housing shortage should help prevent a dramatic bursting of the bubble, but where demand is going remains to be seen.
Remember: place, place, place
With apologies to Horace Greeley, instead of Go West, it might be time to choose Go Midwest for those thinking of staying ahead of the megatrends. As people, and the companies they work for and own, migrate in large numbers to the Sunbelt, less expensive areas – many of them in the central US – could soon become the next hotspots.
Keep in mind that more and more people can live practically anywhere and get their work done remotely. This will only become truer as broadband access quietly and unstoppably spreads further into rural areas. Already, small and medium-sized towns in the heartland offer much lower living costs, and the schools, housing options and other amenities suggest they won’t be overlooked for much longer. Investors might want to stay ahead of that curve now.
Incidentally, the CEO of Equity Residential is already anticipating trouble and has sold many of the company’s Sun Belt homes in anticipation of a supply glut. This is strategic thinking in action. And as an individual investor, buying shares in such companies gives you liquidity and transparency not easily accessible through other investment channels.
Follow the supply chain
Not only people move inland, but also companies. Supply chain disruptions caused by the pandemic helped accelerate this trend. A good example of a market where this is happening is Columbus, Ohio. There, intel just announced a $20 billion chip factory project in the far outskirts that will have a powerful ripple effect on all types of real estate for miles.
Move fast to take advantage of those big splashes, but keep an eye out for others. Local agents are a great source of this information if you have the resources to engage directly. And there are a number of industrial REITs that are also responding to this opportunity.
There will always be an aging population
It’s old news that the Boomer generation is aging and has growing needs for medical care and senior housing options. The next big generation after that, the millennials, are of course not far behind. There are numerous investment opportunities here, including long-term success stories such as hospital owners Medicinal Properties Trust and senior housing giant fountain tower.
Is a changing (at sea) world the ultimate mega trend?
Miami is wrestling with the idea of building a 20-foot seawall. A major South Carolina hospital has decided to leave the vulnerable peninsula in Charleston Harbor. Tropical systems are hitting our coasts with increasing intensity. Water scarcity threatens the fast-growing Southwest. Wildfires are getting worse every year in a growing list of states.
you get the picture If you think this is all a growing reality, these are megatrends you need to follow. They can help inform you about where you want to live, not to mention investments. For example, a small town close to the Great Lakes and still close to major transportation infrastructure could be the ticket.
This is just one example of how to start with the big picture. Let what you see from this 30,000 foot view help you focus on exactly what you want to do down here on the ground.