5 Trends That Will Disrupt the Real Estate Industry in 2022
A couple of personal thoughts...
As we turn the page on a tumultuous year, it would be easy to reflect on 2021 and write it off as a bad dream.
And I already hear the rumblings about 2022. It's shaping up to be a year that will further test our resolve – fed rate hikes, rising Omicron cases, an election season, you name it. It would be easy to curl up, bury your head in the sand, and just try to survive.
But instead, let's try something different. As you're crafting your Q1 and 2022 annual goals, think deliberately about how the chaos will impact your business. Then, embrace it and develop the requisite skills to outcompete and beat your competition.
I recently wrote a newsletter to my insiders' mailing list on resilience. I framed it in the context of real estate but believe it applies to every spouse, parent, entrepreneur, or 9-5’er regardless of circumstance.
And today, as I think about all the changes we’re likely to see, I’m more optimistic than ever. We are at the beginning of a cultural and economic transformation. It’s going to alter the way we live, connect and interact with each other, sell, work, provide for our families – we're bound to see more change over the next 12 months than we saw the previous half-decade.
And much of it will be for the better, especially if you're nimble enough to tackle the challenge and find new and creative ways to deliver value to the market.
So, in that vein, I wanted to take a look at a couple of trends we're likely to see disrupt the real estate industry in 2022.
1. Expect the lines between crypto, blockchain technology, and real estate to blur even further
The mainstream embracement of cryptocurrency took the world by storm in 2021.
We saw Paypal begin accepting crypto for merchant payments. In addition, El Salvador adopted Bitcoin as a national currency, despite the obvious snafus we keep hearing about due to any government-run project.
The lightning network and 2nd layer payment solutions are revolutionizing the speed at which transactions can occur. Jamie Dimon even chided that Bitcoin was worthless (which means it’s probably time to buy more), and if it weren't for hubris, he would likely have to walk those statements back at some point very soon.
And with all that being said, it’s only the beginning. New York and Miami are in an arms race to see who can become the most crypto-friendly city. Miami has even proposed to allow residents to pay city fees and property taxes with cryptocurrency.
It’s all a signal of the impending widespread adoption of cryptocurrency in our everyday lives. But for the casual observer, making the leap from crypto and crypto tech to real estate doesn’t seem natural – because how can you disrupt an industry that self-serving service providers weigh down?
All that is about to change.
Traditionally, real estate has long been wrought with inconvenience – paperwork, signing contracts, dealing with real estate agents and attorneys, antiquated fee structures, title work, etc.
Smart contracts, peer-to-peer transactions, and blockchain technology are entirely revolutionizing the speed and security at which ownership is transferred, and deeds are securely exchanged.
Transactions will be more transparent and trustworthy, and stakeholders will rely less on real estate brokers and attorneys.
But don’t expect this change to happen without a fight. There’s already massive pushback from the brokerage community in an effort to maintain their relevance. Nevertheless, expect to see significant strides in the widespread implementation and adoption of these technologies in the real estate industry in 2022.
2. Expect digital property in the Metaverse to no longer be a fantasy of the early adopters
It’s still a concept foreign to many - digital property in some artificial 3-D world or many virtual 3-D worlds. I mean… really?
But we are on the precipice of what will be a complete reorganization of how we view property and assets. You may think the concept is silly, and that's fine. You probably thought the NFT craze was silly, too – you're really just buying digital ownership to a particular digital or physical asset. It all sounds kind of out there.
But whether you think it’s worthwhile, or I think it’s worthwhile doesn’t really matter. It’s where the world is headed.
The first virtual real estate transaction occurred in 2010, involving the sale of property in the Entropia Universe video game. In 2020, Decentraland was made available to the public, marking a shift into mainstream availability.
But with the recent announcement of Facebook's rebrand to Meta, in an attempt to capitalize on the growing industry, the world's finally taking notice.
And if you’re wondering how real estate in the Metaverse can be worth anything, think about it this way.
The value of real estate in the Metaverse is derived very much like the value of real estate in the "real world."
The geographic location of the land has predominantly driven the price tag. But scarcity, bound by the limits of the Metaverse and limitations imposed by the developers, will impact values as well. Both these factors will lead to price appreciation as more users flock to the virtual worlds – real estate developers frantically buying land at the end of 2021 liken it to purchasing farmland in southern New York before the rise of NYC.
Keep in mind that much of the land being sold initially will be dedicated to commercial uses – the commercial space will house the influx of boutiques and retail establishments aimed to serve Metaverse users. But expect to see more multifamily and mixed-use projects take shape as join in on the action.
The end of 2021 saw significant investments in virtual land. In 2022, investment in this space will no longer be reserved for the hyper speculative or the early adopters.
And although there is still tinkering needed to make the platform more user-friendly and technologically sound, expect prices to continue to rise as the value of digital property becomes more socially accepted.
3. Expect office properties to dominate, but only in certain markets
The pandemic forced companies to rethink their office strategy. Work moved remote, hybrid work schedules became not only socially acceptable but the norm, and we saw a widespread migration into more tax-friendly, less populated, and more affordable states.
Many thought it would be the death of offices completely - entire city blocks in places like Manhattan and Chicago would go dark.
And while it’s clear that those premonitions may have been somewhat hyperbole, it’s also clear that we’re seeing a major shift in how we’re interacting with office space moving forward.
2021 was a record year for corporate relocations to places like Austin, Nashville, Raleigh, and Florida markets like Tampa, Miami, and West Palm Beach.
The trend will only accelerate in 2022, and it spells bad news for some of the traditional powerhouse office markets. As a result, developers are racing to find creative adaptive reuse plans to breathe new life into antiquated and dysfunctional office space.
And owners are teasing high-end office perks like in-house chefs to attract and retain tenants. But the writing is on the wall. So continue to keep an eye on the office market in major sunbelt metros as workplace strategy evolves.
4. Expect more pullback from homebuilders
We’ve all heard about the supply chain disruptions and the pressure they’ve put on the development industry amidst rising construction costs.
In 2020 and early 2021, it was lumber prices. But as the cost of lumber has cooled, the prices of various other components and construction inputs have only increased.
Labor shortages have ailed the construction industry for years. And the great resignation is only exacerbating the problem.
And as a result, developers are reluctant to take on new projects. New home starts dipped in August and September to only see a slight uptick at the close of 2021. And while the underlying demand for new single-family homes remains fervent, the variability of construction costs and fears of impending federal reserve rate hikes has builders wary.
Additionally, local governments refuse to assist in tackling the affordability problem. Municipalities remain steadfast in preserving antiquated zoning regulations, hamstringing builders to lower-density projects.
Supply chains will remain a problem as we head into 2022. And if the speed at which government moves is any indication, expect to see continued challenges as builders look to circumvent allowable density and development challenges.
5. Expect the multifamily headwinds to continue in 2022
2021 left many would-be homebuyers dejected. Multiple-offer situations, all-cash offers, and sight-unseen buyers became the norm. The great migration exacerbated the problem, causing price appreciation upwards of 30-40% for single-family homes in some markets.
It’s even estimated that the U.S. is short some roughly 6 million homes, which by all counts is a conservative estimate.
But all that is great for the multifamily industry.
As potential buyers exited the single-family home search, they were forced to fall back on apartment rental options that kept apartment vacancy rates at record levels across major metro areas through the end of 2021.
In addition to supply issues, the rising affordability crisis of homes has proven a considerable problem. It’s making accessibility to adequate housing that much more difficult.
To make matters worse (or better depending on who you ask), rising inflation has prompted even casual investors to look for assets to protect their buying power. Real estate is largely seen as a powerful hedge against inflation, and the increased demand for multifamily properties has caused even further price appreciation in the industry.
So, apartment owners and developers are capitalizing on the situation. As a result, apartment rental rates have risen even faster than construction costs – some markets saw rental appreciation above 50%.
Will tenants continue to put up with rising rents? At least in the short term. There doesn't seem to be an end in sight for rental demand – and developers are happy to oblige. The frantic race to get new apartment projects approved and constructed will continue in 2022.
So, what does it all mean?
That’s a good question – everyone’s situation is unique.
Maybe you’re indifferent. You’re retired, own a couple of rental properties, and are content with the passive income you’re receiving.
But I'd caution you not to grow content.
Are you charging enough rent? Have you adequately positioned your properties or your tenants to compete in the marketplace of the future? It's essential to reassess your goals and take a hard look at your strategy going into 2022.
Or maybe you're anxious - the impending changes have you worried. Your business is getting by, but you're concerned about protecting your hard-earned wealth or optimizing your business and real estate strategies for the future.
At Marsh & Partners, we help investors and business owners tackle those difficult questions. We’re investors ourselves, and that skin in the game gives us a unique insight into the challenges you’re facing.
If you’re interested, take a look at our real estate consulting services and book some time on our calendar to reimagine how real estate can transform your business as we head into 2022.