2022 Economic Outlook

23.02.22 9:02 AM By Michael Euperio

Impacts to Real Estate Investing and Target Sub-markets

        Everything seems to be increasing so far in 2022, from inflation to consumer goods to interest rates.  What will the net impact be to real estate assets in general and to our target sub-markets?  2022 is looking increasingly strong for real estate, particularly in Texas and Colorado, and this is driven by a few key factors, specifically inflation and wage increases, rising interest rates, demographics, and net migration.

INFLATION AND WAGE INCREASES

        Periods of high inflation make investing in real assets the smart move.  Assets with inherent tangible value (i.e. real estate, commodities) will appreciate abreast of inflation due to their high price correlation with the Consumer Price Index. 


Additionally, the labor markets continue to improve.  Inflation is at a 40-year high, but hourly wage increases are not far behind.  Because hourly wage-earners make up a substantial portion of the multifamily tenant base, this is a strong signal for multifamily real estate.  Hourly wages are increasing, which indicates the renter demographic can absorb the rent increases necessary for assets to perform in the inflationary environment.

RISING INTEREST RATES

        Already in 2022 the Fed has begun to bring its stimulus programs to a halt and has stated its  plan to bring interest rates above pre-pandemic levels by the end of 2024.  At first glance, this is terrible news for the real estate investor.  After all, debt capital is likely to be 20-30% more expensive than a year ago. However, rising interest rates also impact the affordability of home-ownership.  Increased cost of home-ownership increases demand for rental housing, which further strengthens the rental market, both in the single-family and multi-family space.

DEMOGRAPHICS

        The size of the age 30-54 demographic is increasing significantly for the first time in 20 years.  Why does this matter?  This age demographic is not only the largest consumer spending demographic but also historically represents the most significant source of new homeowners. 


The growth of this age demographic has been flat for about the last 20 years.  However, as of 2021, this population has started to explode, and it is predicted to grow by 20% over the next decade. This provides increased pressure on the single-family market, which is directly correlated with the rental market.  When home-ownership becomes more expensive, the demand for rental housing increases.

NET MIGRATION

        This last point is specific for our target geographies of Texas and Colorado.  “Net Migration” to these states has been the story for a few years.  However, the pandemic provided a tailwind to a ship that was already well under way.  Additionally, economic recovery from the effects of the pandemic has been uneven across the country, and the data shows it.  For example, according to OpenTable, Texas is outperforming New York by 50-60% in the number of tables seated at full-service restaurants.  We see this as a leading indicator for the strength of the consumer and rental markets in Texas and Colorado. 


Even before the pandemic, the American economy was becoming more distributed, but the pandemic created step-function acceleration to this trend.  This distributed economy has lessened the strength of the network effects that drew people to the traditionally big business hubs (i.e. New York, Chicago, San Francisco). 


Since April 2020, Texas has led the country in net migration (with Colorado not far behind).  Those people need places to live, and this trend, combined with the rest of the factors discussed above, cause us to be more bullish than ever on the Texas multi-family real estate market.

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