Investing in real estate can always be a challenging endeavor. Even during market booms, there are always unforeseen factors that pop up and must be dealt with. The real estate market is presently in a unique period and investors are facing numerous challenges.
We are facing the very real probability of a recession, yet unemployment remains at historical lows. In addition, we are still coming out of a once-in-a-lifetime pandemic. With so many unknowns, here are the top five challenges that real estate investors are facing in 2022.
Shutdowns and lockdowns around the globe in 2020 and 2021 have also caught up with us. Months of underproduction of everything from raw materials to finished products have left shortages in all kinds of supply chains. Real estate projects needing construction or renovations are facing sky-high raw material prices and delayed timetables. Costs are increasing and developers are also losing money waiting for projects to be finished before they can begin collecting rents.
Another challenge facing real estate investors is that we still do not quite know what the post-Covid landscape will look like. Many companies shifted to work from home (WFH) policies during the height of the pandemic, leading to a glut of commercial office space on the market.
Now that things are quickly going back to ‘normal’, some companies are demanding a return to the office, often leading to pushback from employees who have grown accustomed to WFH.
Where things will end up is unknown. We could see a massive run on commercial real estate if enough companies come back to the office, or the space could see more permanent softness if the WFH trend is here to stay.
After years of historically low-interest rates, the European Central Bank (ECB) increased interest rates by 0.25% in July, and has indicated further increases are likely. Cheap money and huge amounts of government stimulus throughout the Eurozone during the pandemic have led to an overheated economy. This phenomenon isn’t limited to the EU either, with the Federal Reserve and the Bank of England following suit in the USA and UK respectively.
The increase in rates means investors must be extra diligent in analyzing deals before getting involved. Higher rates are cutting into returns and make the difference between a profitable deal and a potential loser, with variable rates adding a further element of uncertainty and risk not seen for many years.
Over the past decades we have all experienced the volatility of the real estate market. There are undoubtedly huge opportunities but just as many uncertainties. The covid pandemic, but also the current geopolitical situation, certainly does not make life easy for real estate investors. That is why having a good strategy in these cases is everything. A strategy that is based on an analysis of the scenarios that could arise in the future, and making sure to diversify ones investments, both geographically and at sector level.
Often organisations are managed by leadership teams that do not have sufficient knowledge and experience in real estate, finance and other disciplines necessary to successfully manage them in the event of a market downturn. Therefore, selecting the right management team for a real estate investment should definitely be a priority. Moreover, many real estate investment firms still manage everything mostly offline. By doing so, many developers lose out on deals simply because they cannot close out funding in time.
This last issue could be solved by adopting disruptive technologies that would help reduce friction between developers and investors.
This would allow them to focus time and resources analyzing deals while having the confidence to know that they will be able to quickly pull the trigger when an opportunity presents itself.
Some risks are as old as time, whilst others are unique to the here and now. The classic advice of diversification (never put all your eggs in one basket) and investment risks (historical performance does not necessarily indicate future returns) still hold true, and in the right hands the challenges presented will turn out to be incredible opportunities for investors and managers seeking higher returns.