4 Risks for Real Estate Investors to Consider Going into 2022

By Scott Roberts

The real estate sector has been on a burning hot streak these last few years, attracting all sorts of different real estate investors. While there are many profitable opportunities in the real estate sector, it is important to consider the different risks that may arise this next year. With the new Omicron variant on the rise, we must account for the impact Covid-19 will continue to have on hotels, office buildings, and retail stores. Furthermore, with inflation out of control, the federal reserve is going to raise interest rates, which will also have a great impact on real estate investment. This article will explore all these potential risks and their implications, as well as some strategic alternative real estate investments to hedge against these risks.

To start off, we have to acknowledge the serious implications of Covid-19’s lingering variants. If the Omicron variant poses similar complications to the Delta variant, this could lead to many business trip cancellations, and an extended work-from-home economy. This would be another painful setback for the hotel industry, as hotel occupancies are already at a mere 59.2% this year.[1] A further decrease in room bookings would seriously devalue these types of investments. Furthermore, if the work-from-home trend continues, this

could lead to unfavorable consequences for office building investments. Offices have already seen a lull in occupancy rates, and sectors like technology and e-commerce are already embracing virtual working.[2] If this continues with the Omicron variant, this could further normalize the virtual office experience, leading companies to treat this as an opportunity to downsize and reduce operating costs.[3] In addition to hotels and office buildings, retail stores could be significantly affected by this variant. Online shopping is

already hurting retail stores. Retailers have announced plans to close more than 3000 stores this year, and experts say the total could reach 10,000 stores or more.[4] With walk-in customer numbers and inventory turnover low, this variant could further fuel the consumer preference of online shopping, devaluing brick and mortar retail properties.

Additionally, an increase in interest rates poses risk to the real estate market. Rate increases will make it more expensive to take out mortgages on houses, which will discourage potential buyers, thus decreasing demand for new housing. On top of this, there will be a decrease in demand for mortgage refinancing, as higher rates make refinancing nonstrategic. As a result mortgage lenders will lose a significant portion of their business. Furthermore, commercial real estate companies have been relying on low-rate loans to cover supply chain delays and labor issues. With rates high, these investment firms will now face much greater expenses if they continue to rely on these loans.

In order to avoid the risk associated with the real estate investments discussed above, investors should consider alternative investment opportunities that would benefit from the coming economic environment. For instance, with inflation high and interest rates expected to increase soon, apartment REITs and single-family REITs are a strategic alternative. With mortgage costs higher, renting demand will increase, which will add value to these types of investments. Possible options include EQR, AVB, ESS, CPT, CSR, MAA, AMH, and INVH. In addition to REITs, warehouse and storage spaces are a strategic investment. Many companies have resorted to a “just-in-case” inventory due to

supply chain fears. This has led to a massive surge in demand for storage space. California alone has seen storage spaces reaching a 97% occupancy rate this year. Furthering the value in this investment, online shopping companies like Amazon need countless warehouses to keep up with business demand. Given the surge in demand for storage, this type of investment also has tremendous potential.

While there are various risks to consider looking forward into 2022, there are also various opportunities. As an investor, it is critical to consider the dynamic nature between risks and the factors that make an investment strategy effective. By acknowledging the different future risks, and utilizing the recommended alternative investment strategies, there is great potential for profit within the real estate sector.

[1] “How are Hotels Adapting and Innovating During COVID-19?”, Hospitality Technology, 2021, https://hospitalitytech.com/how-are-hotels-adapting-and-innovating-during-covid-19 [2] “How Will Covid-19 Change Demand For Office Space?”, WSP, 2021, https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space [3] “How Will Covid-19 Change Demand For Office Space?”, WSP, 2021, https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space [4] Mary Meisenzahl, “Nearly 3000 stores are closing in 2021 as the retail apocalypse drags on”, Business Insider, 2021, https://www.businessinsider.com/stores-closing-in-2021-list-2021-3