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January 6, 2023

The past year has seen numerous economic challenges, with high inflation, interest rate hikes, stock market volatility, geopolitical issues and crypto devaluation combining to create both uncertainty as well as opportunity. As a result, investors have needed to take a dynamic approach with their resources in response to the changing economic landscape. 

Meanwhile, investment in alternative assets continues to grow, with a recent SS&C report (1) outlining that 70% of global investment firms surveyed expect to increase their allocation to alternatives in 2023. The global alternatives market is expected to grow 71% and reach $23 trillion over the next 5 years. (2) 

For individual investors, here are some areas of interest for 2023, as we see it.

The housing crisis is a widespread, worsening issue

House prices have been increasing faster than household income for some time (4) and this, coupled with rising mortgage rates has meant that residential home sales have slowed, with a recent dip in August accounting for a decrease in sales for the 7th month in a row. (5) As potential-buyers are priced out, the growth in home prices has slowed down, however the median costs still represents a 7.7% YoY increase as of August 2022. (5)

This issue is exacerbated by the shortage in housing at present, leading to a crisis that is increasingly becoming a widespread national problem. An estimated 3.8 million additional units are needed to keep up with household formation. (6)

Debt investing will present areas of opportunity

An asset class where higher interest rates can be advantageous to investors is senior debt. Banks have reduced their appetite for CRE loans due to current market conditions, allowing non-traditional private lenders to enter the space and create new investment opportunities in the lending space.

Investors in debt instruments like CRE loans are benefiting from rising interest rates as potential income is generated from the increased margin on interest payments.

Investing in senior debt provides risk mitigation, giving investors a priority position in the capital stack, with the lender having the right to foreclose on the property in the event of nonpayment.

Certain commercial properties will continue to be in-demand

The multifamily sector has broken records in 2022 and we believe that it will continue to be attractive to both new and seasoned investors. As multifamily properties involve multiple leases, rental prices can be updated relatively quickly in response to changes in market values, either through updated lease renewals or after tenant turnover. As a result, an investment in a multifamily asset could be a potential hedge against inflation.

Rising interest rates also mean potential homebuyers are being priced out and turning to multifamily rentals, already in high demand due to supply chain issues that have slowed the creation of new homes. Would-be buyers are being pushed towards rental options that are more affordable than mortgages, with the number of home sales dropping each month this year (3) and mortgages hitting a 20-year high (4).

30-Year Fixed Rate Mortgage Average in the US

Source: Freddie Mac / FRED

The combination of short supply and high demand has resulted in rising rents throughout the past year, with a 7.8% YoY growth rate as of Q4 2022. (5)

Investors in the sector are well placed to see the benefits of low vacancy rates and income via rent, with vacancy rates in 2022 matching a 10-year low. (6) In addition to the benefits of stable cash flow, there is the potential of increased rental income and upside on sale when implementing a value-add strategy on assets.

Home-ownership will likely remain less accessible for many would-be buyers who will continue to be sidelined by the higher cost of borrowing and will add to the increase in renters in the market, something that investors will hope to capitalize on.

Cost of Ownership vs Cost of Renting

Sources: CBRE Research, CBRE Econometric Advisors, Freddie Mac, Census Bureau, National Association of Realtors, Q3 2022.

Affordable housing will draw attention from investors

The US is currently facing a national shortage of 7 million low-income units, with long waiting lists for this type of housing in cities across the country. (7) In addition, the government-backed program is set to expire on approximately 640,000 units nationwide over the next eight years, presenting investors the opportunity to either maintain the affordable housing status and benefit from the continued demand, or transition the units to market-rate rents. (7) 

The affordable housing sector attracts investors because of strong and stable fundamentals, with the government paying a guaranteed percentage of rental income. It also allows access to favorable lending terms, like longer loans and higher LTV ratios. 

iintoo remains bullish on commercial real estate, and alternative assets as a whole, as a tool to achieve portfolio diversification, hedge against inflation and mitigate risk. We currently have a number of deals available, including a portfolio managed by a $3B sponsor, a diverse blended multifamily portfolio, and a senior debt fund. If you are considering new investment opportunities log into iintoo’s platform now.

 

(1) SS&C: 2023 LP Survey

(2) Preqin: The Future of Alternatives in 2027

(3) Spectrum News: U.S. home sales fell in October for ninth straight month

(4) PBS: US mortgage rates hit 20-year high

(5) MultiHousing News: 2022 Rent Growth

(6) Federal Reserve Economic Data: November 2022

(7) CBRE: US Real Estate Market Outlook 2023