Real estate investing is not one size fits all. From the financial requirements to the time commitments, there is a great deal of flexibility depending on how you add real estate to your portfolio. Some investors flip houses, while others hire a property management firm to supervise rentals, buy REITs through the stock market, or participate in real estate syndications.
Each opportunity contains varying risks and rewards, but all require a long-term outlook. With any long-term investment strategy, trends affect both options and outcomes. This article discusses a few prominent real estate trends that could impact investments over the next decade:
Interest Rates directly impact borrowing costs. With most transactions requiring financing, interest rate trends are a measure to follow. Payments will increase by more than $100 per month for every $100,000 borrowed. The higher the loan amount, the larger the impact.
Since the 2000s, interest rates have ranged from 8% to below 3%. Currently, rates are rising sharply, with the Federal Reserve expected to increase by 0.75 basis points in November and December. Increases will likely slow in 2023 but will trend upward until inflation gets under control. A recession typically leads to drops in interest rates.
Housing Demand: Economists estimate the need for an additional 4.3 million apartment units by 2035. The shortage began after the housing crisis in 2008, leading to underdevelopment for the following decade. The lack of adequate housing has led to affordability issues as demand drives rent growth above the inflation rate.
Location, Location, Location: Development is not equal across the board. Regional markets with employment and population growth are seeing the most economic stability in 2022. Factors like weather, increased access to remote work, immigration policies, and city planning affect housing availability in regional markets.
Homeownership Rates directly impact demand for apartment housing. At the end of 2021, homeownership rates stood at 65.5%. New construction, the number of homes listed for sale, and interest rates impact buying trends. As prices and interest rates rise, more would-be buyers must wait due to affordability issues, which increases the demand for rental units.
Homebuying Trends: Two major buying trends are increasing demand for apartments.
- Seniors are deciding in larger numbers to cash out their home equity and rent instead. Renting eliminates unpredictable costs such as maintenance, home repairs, and taxes. Renting an apartment avoids things like yardwork and maintenance that are more difficult to complete. It also gives seniors more flexibility to move as circumstances change.
- Millennials delayed significant life events like marriage, starting a family, and buying a home. Young adults in their 20s and 30s favor rentals because of affordability and increased mobility. They can accept a promotion in another city or move to help aging parents without having to sell a home.
These trends drive demand for apartment complexes when there is already a severe housing shortage.
Low Net Worth also affects housing starts and makes it more difficult to achieve home ownership. Buying is more complicated when potential homebuyers do not earn enough to save for the sizeable down payment required. As home prices and interest rates rise, the amount needed to qualify for a loan and the monthly mortgage payment increase, causing many to delay homeownership out of necessity.
The above trends all point to rising demand for apartment housing over the next decade. While demand will eventually catch up with supply, apartment complexes will remain a sound and stable investment in many markets around the country.
To learn more about investing in real estate syndications with McKee Capital Group, watch our introductory video.