What to expect in Q4: Investors are seeking alternative investments in a volatile market
September 30, 2022
Continued inflationary strife has meant that Federal Reserve officials recently raised interest rates 75bps, causing further fluctuations to an already rocky market. This comes after a difficult year with supply chain issues and the Russian-Ukrainian conflict impacting the wider economy. With global recovery not guaranteed in the near future, investors may be wondering what to do next.
Traditional investments are especially risky at present. Rising interest rates mean lower stock prices and a reduction in the buying power of assets in investment accounts. Inflation is most damaging to fixed-rate debt securities, like bonds, as it devalues interest rate payments as well as repayments of principal.1
Industry experts are also warning against bonds, as there is no indication that their prices will increase, meaning that holding is a potentially greater risk than the eventual reward.2
With no certainty on when the market will recover, many investors are examining alternative investments, namely commercial real estate. In fact, despite the inflationary headwinds, investment in CRE has increased by 10% YoY, with volume reaching $167 billion in Q2. Notably, investors are favoring the multifamily asset class ahead of others, with $78 billion in volume last quarter.3
Several indicators suggest that it is a good time to diversify portfolios and gain exposure to the multifamily sector in particular, which is having a record-breaking year.
The housing crisis is a widespread, worsening issue
House prices have been increasing faster than household income for some time4 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
Rents remain elevated
While the record-breaking rent growth across the U.S. in 2022 has slowed slightly since July, rent remains high and the growth has been widespread, with 79 of the nation’s 100 biggest cities seeing a rent increase in August, and YoY rents are up in 91% of U.S. markets. The national average rent meanwhile, is up 7% YoY.7
Occupancy rates are high and should stay that way
Occupancy rates are also a cause for optimism for investors considering the multifamily sector. Approximately 95% of units across the U.S. are occupied, resulting in a lower vacancy rate than pre-pandemic norms.8 Coupled with the housing supply gap, this occupancy rate could mean stability in the multifamily sector as renters hold onto or renew the leases they have, rather than face an increasingly competitive rental market.
This is good news for investors in the multifamily sector, at a time when stability is not the norm.
iintoo remains bullish on commercial real estate as a tool to achieve portfolio diversification and mitigate risk. We currently have a blended fund available that is capitalizing on the strong dynamics of the multifamily sector in the current market, and provides access to several multifamily assets across three U.S. markets. If you are interested in diversifying your investment portfolio log into iintoo’s platform now.
(1) Investopedia: How to Profit from Inflation
(2) Forbes: Fed Goes Big With Third Straight Rate Hike: What Investors and Savers Should Do Now
(3) CBRE: Global Real Estate Remains an Attractive Investment Despite Economic Headwinds
(4) CNBC: Home Prices are now rising faster than Incomes
(5) US News: Existing Home Sales Dip Slightly in August, 7th Month in a Row
(6) NY Times: The Housing Shortage isn’t just a Coastal Crisis anymore
(7) Apartment List dot Com: National Rent Data September 2022
(8) CNN: US rents hit a record high for the 17th month in a row