Predictions to guide individual real estate investors tend to flood the market every January. Still, unlike most other places, they keep track of how well or poorly they did the previous year and publish both successes and failures. They think it’s a good way to show off our savviness and competence to assess how well they predicted things in the past.
They are proud that year after year, year after year, they’ve been able to accurately predict the direction of the housing market and other investment markets by making the same set of 10 predictions. The forecasts had a success rate of 96%. More importantly, they took the forecasts for and used them to improve the business and acquisition strategies for the sake of the stockholders.
The failure to predict is understandable, given that none of us has lived through a global pandemic that lasted for years. Significantly prolonged supply chain challenges and unexpectedly great inflation were not on our radar last year, nor was it on anyone else’s radar to the best of our knowledge. They discounted one point from our total for each of these top 10 private real estate investing trends. You can find out why they lost two more points on their forecast about Qualified Opportunity Zones below. The record at this point is conclusive.
Forecast No. 1: We are not living in a bubble.
How We Said it: Because the risk-free rate is zero, investors are willing to take a hit on their returns. Furthermore, future stock market returns will likely be significantly smaller than anticipated. There is a general decline in expected returns across all asset classes.
What Transpired: You guessed correctly. The return on government-backed bonds, known as the risk-free rate, is still rather low, hovering around 1%. The yield on the 10-year Treasury is just a little higher, at 1.7%. While the stock market has returned 20%-30% in recent years, this is not typical of its historical performance, which is more in the 8%-9% range. It means that negative or lower return years will eventually get us back to where we were in terms of historical returns. Returns from the stock market will be lower this year, but when exactly that will happen is unknown. And the same holds in the real estate industry. It does not imply pulling your money out of the market, but you should not count on a 20 percent return.
Total Score: 10
Forecast no.2: Mass migration away from urban centers persists.
How We Said it: If you are currently located in New York City, Chicago, or San Francisco and are asking what you can do to stop the exodus of people, the answer is that you won’t be able to. It is going to continue to take place.
What Transpired: That’s right, and there are three reasons why this will continue to occur: The rise of the gig economy, a tight labor market, and the mobility of workers have all contributed to widespread acceptance of virtual and hybrid forms of employment. In November, a record 4.5 million workers voluntarily left their employment, leading to severe labor shortages. With these tenets in place, remote work is no longer the exception but the rule. Companies need to provide hybrid positions to attract and retain talent. That pattern will push more people to settle in warmer, cheaper cities. This trend will continue until the cost of living in those warmer, lower-cost regions increases, as in fast-growing metropolises like Charlotte, Denver, and Phoenix.
Total Score: 10
Forecast no. 3: Relocate to states with lower costs and more favorable policies for business.
How We Said it: It’s now possible to find work in New York and receive pay comparable to that in Austin or Nashville. The states of Texas and Tennessee are also unique in that they do not collect their income tax. Another option is to find a job with a San Francisco-based firm but settle in a more hospitable climate such as Denver, Phoenix, or Charlotte. These are only a few fast-growing urban areas that compete favorably with New York, Chicago, and San Francisco regarding the quality of life, cost of living, and climate.
What Transpired: The acceleration of this trend by virtualizing labor has been startling. However, this effect will be tempered in the future by the rising cost of living. The cost will start to be a problem. For example, many Californians are relocating to Phoenix in search of lower taxes and larger, more affordable homes. As a result, housing costs are rising; they aren’t quite keeping pace with San Diego, but they aren’t much lower, either. On the other side, property ownership in cities like Phoenix and Tampa creates enormous wealth. Indeed, for some, two years is all it takes to see their wealth multiply. Those who have capitalized on this trend at the correct time can consider themselves very wealthy indeed.
Total Score: 10
Forecast no.4: Affordability will be the primary motivator.
How We Said it: Because people are no longer required to commute to an office in a major city, the workforce is more fluid. Since people may now find jobs from anywhere, they will continue to relocate to more affordable cities. An hour-long commute or more is no longer a concern.
What Transpired: This trend was first bolstered by the Tax Cuts and Jobs Act of 2017, which placed a limit on property tax deductions. There was a mass exodus from high-cost states like New York, California, and Illinois. Then came COVID-19, acting as a major catalyst for the trend toward remote employment and mass migration to locations with more favorable climates, tax rates, and quality of life. It is causing significant distortions in the prices at which assets are valued and the income received from those assets. Those aberrations will gradually diminish, but that day is still years away. We’ve only reached the second inning of this trend right now.
Score: 10
Forecast no.5: The rules governing Qualified Opportunity Zones may be revised.
How We Said it: Changes to the regulations governing qualified opportunity zones are likely. Honestly, I have no idea what it will be just yet. Additional reporting requirements and the need to work with local organizations are two potential outcomes of the proposed rule changes. Alternately, they can insist on Treasury approval before proceeding with any plans. The possibility of redoing the map has not been ruled out.
What Transpired: Nothing. Although organizations offered changes, party politics prevented them from being implemented. The Biden administration is too swamped with other issues to worry about Qualified Opportunity Zones (QOZs). However, this cannot happen until the party’s internal caucus settles on a stimulus that is not tied to any known variables (such as COVID-19 mutations or increases in infection rates). Laws probably won’t change because of the partisan impasse that must resolve by then.
Total Score: 8
Forecast no.6: The office market is still stagnant.
How We Said it: Despite the resumption of economic activity and workers’ return to the workforce, the office market will continue to experience weakness. It is because many businesses have realized that they can successfully run a hybrid or virtual office without any loss in productivity. It’s also a lot cheaper than renting an office building. Assume you are a medium-sized company in Chicago, and your rent is $50 per square foot for your 5,000 square feet of office space. It adds up to a total yearly cost of $300,000, including the $50,000 required to cover operating expenses such as electricity, services, and insurance. For the same price, you could subscribe to a service like a Zoom or WebEx and hold monthly meetings with your team.
What Transpired: That is what occurred and will continue to occur. Teams, WebEx, and Zoom, are some of the up-and-coming workplace technologies. These are not only more convenient than traveling long distances or renting an office, but they are also one hundred times less expensive. If you had the option of spending a million dollars on an office or one hundred thousand dollars on Zoom, becoming virtual is a no-brainer. When labor and capital send the same message, it indicates trouble with expected demand. It’ll be a lot tougher to make money in office, yet they can still make it.
Total Score: 10
Forecast no.7: The interest rate will not go up.
How We Said it: Recession is a greater threat to the Federal Reserve than inflation. The Fed’s rate-suppression policies will continue through at least 2023.
What Transpired: There was no increase in the interest rate, but that will change this year. People expect a return that considers inflation; therefore, if you purchase a 10-year bond at a rate of 1.6 percent and inflation is 3 percent, you are locking in a return that is 1.4 percent below par. Investors will not benefit from doing that. Because of the turbulence in the pricing of commodities and the supply chain, inflation is significantly greater than the 10-year note yield. The question that needs to be answered is how long this will continue, and I believe it will be at least 12 to 18 months. It all comes down to labor: There is no one to unload freight or serve food in restaurants, and the only way to encourage people to work is by paying greater money. Even if this helps individuals, it contributes to inflation and is not a temporary solution; higher wages are here to stay. Because of this, wage increases will have a longer-lasting impact on inflation, necessitating an increase in interest rates to control it, presumably in an orderly
and measured way.
Total Score: 10
Forecast no.8: The value of multifamily properties in cities and suburbs is rising.
How We Said it: A huge amount of capital is interested in purchasing multifamily properties. Commuters are leaving cities in droves and into the suburbs. Rates to borrow money are below 2.5% at the moment. For instance, if you can earn 4.5 percent on a core asset without leverage, your expected return will be 6.5 percent. If you believe your property’s rent could increase, this may interest you.
What Transpired: Valuations went up because of the reduction in capitalization rates. However, value depreciation is expected. The multiple on earnings decreases as the borrowing rate increases and the capitalization rate increases due to an increase in interest rates. Currently, cap rates are between 3.5 to 4%; if recent trends continue, they may increase to the 3.7% to 4.2% range. There will still be appreciation since rising rents translate to increased earnings despite lower multiples.
Total Score: 10
Forecast no.9: By the spring, suburban multifamily rents will exhibit actual rent growth.
How We Said it: This pattern will first appear in the spring and continue throughout the year’s second part. Demand is increasing most rapidly in the market for multifamily dwellings. As a result, there is a shortage of available rooms. The multifamily market is where rents will increase as the economy recovers and wages rise.
What Transpired: This occurred, and I expect rent increases to persist, with city rates increasing slower than those in the suburbs. It’s a nice thing this time around. The upside of inflation is that workers are paid more and have more disposable income.
Total Score: 10
Forecast no. 10: Class A multifamily rents in cities will continue to decline.
How We Said it: Too many people have abandoned urban areas for multifamily urban Class A rents to recover, even if vaccination rates rise and the economy improves. The number of empty homes is also rather high. It will be a while before we see results. It won’t happen all at once but over this year’s course.
What Transpired: That’s what happened: the recovery in Class A rents didn’t begin until well. Class C will lag behind class B in suburban and urban areas but won’t be particularly poor.
Total Score: 10
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