The State of the Market Q1 2022

After a hectic real estate market in 2021 that saw soaring demand and rising prices in the real estate market, many people have been wondering whether 2022 will follow the same trend. In this blog, we will break down the key details of what has happened in the real estate market during Q1 2022, and provide predictions for how the rest of the year will shape up.

In Q1, the Real Estate Market Showed No Signs of Slowing Down

The real estate market is still hot in America. There is currently a lot of capital still chasing deals, and investors are willing to accept lower yields between 4%-5% cash on cash returns. Many investors want to secure stable real estate investments that they know will be reliable for many years. They can chase higher returns in other areas of their portfolio, such as equities.

Cap rates have kept compressing about 0.25%. So, this has been a continuation of a trend that existed throughout 2021. Additionally, rents have been increasing in high-growth areas such as the Southeastern Unites States between 15-20%. South Florida is currently experiencing the highest rent increases in the nation. In fact, in South Florida, the average rent prices are about 50% higher than they were last year around this time. Rental prices have increased so fast in this region that roughly one-third of renters in South Florida are spending more than 50% of their monthly incomes on rent.

There are many reasons why rent is increasing so fast in this area. For example, land and construction costs are rising, and there is increased demand for rentals because more people are moving to the state. In 2021, Florida ranked number 5 as one of America's favorite states to relocate to.

However, even though Florida is seeing rapidly rising rents, it is not the only place in the country where rents are rising quickly. New York City and Austin, Texas also saw rent increases in 2021 as high as 40%.

Is this Trend Likely to Continue Throughout the Year

Throughout the nation, rent prices are projected to increase about 7.1%. There are several reasons why rents will most likely continue to rise throughout the rest of 2022. The first is the home-building reduction that occurred during the pandemic still affects the market. This means that fewer homes were built than would have otherwise been built, reducing the supply of available homes for purchase. With fewer homes available to be purchased, the prices for homes on the market increased, pricing many people out. As a result, many people are choosing to rent.

Also, many people who would have otherwise had roommates are choosing to live by themselves to reduce their risks of being infected with COVID. This puts further strain on the rental market. Additionally, inflation is at its highest rate in 40 years – 7.9 %. When inflation hits, it often appears more in real estate and commodities than wage growth. In fact, in 2021, the average wage growth was only 4.8%.

Another thing to consider is the fact that home prices are projected to increase 16.4% in 2022 by Zillow. Zillow reported that the number of houses that were listed for sale in January of 2022 was down 40% from the number of homes listed in January of 2020 and was down 19.5% from the number of homes listed for sale in January of 2021. In fact, during the pandemic, the inventory of homes for sale on the market has been at a 4-decade low making this one of the most challenging times to buy a home in the last 40-50 years.

There could be a number of factors contributing to this massive supply shortage for homes for sale. First, many people may be starting to see their homes as both a critical inflation hedge and as a good investment. Second, it could be that people are just so exhausted from dealing with the pandemic for two years they don't have the motivation to go through the process of listing their homes for sale and moving. And finally, third, it could be because rent prices are increasing so fast in many major cities that fewer people are tempted to sell their homes to move to cities.

Whatever the cause may be, homeowners are holding onto their homes at significantly higher rates than in the past two years. This means that fewer homes are available for homebuyers to buy. Aggressive bidding wars will likely continue to take place over the vast majority of homes sold in America for the foreseeable future.

So What Does This Mean for Real Estate Investors?

The current conditions of the real estate market are very good for real estate investors. This is because increasing rents are showing no signs of slowing down. The rapidly rising rents are a reflection of a shortage of rental units, especially in hot markets like Miami and Austin. This makes these areas prime targets for real estate investors.

The fact of the matter is that demand is far outstripping supply. Not only did the pandemic create labor shortages and supply chain issues that led to fewer homes being built, but now many more homeowners are holding onto their properties and refusing to sell. This creates even more of a supply squeeze in the real estate market that will drive more and more people to rent rather than buy homes. For now, buying a home in America is more difficult than it has been in many years. Steadily increasing inflation combined with slow wage growth is compounding the problem.

So, essentially, it is a great time to invest in new real estate developments. Real estate investors also stand to profit from investing in existing units and buildings as rent demand is very strong and rents keep increasing.

It is likely that at some point, home prices will drop. The federal reserve has already started increasing interest rates after historic lows during the pandemic. This will make mortgages more expensive, which could eventually cause home prices to stop rising quite as fast. But for now, home prices are likely to keep rising and rising. This creates ample opportunity for real estate investors who own rental units.

How to Capitalize on Current Market Conditions?

If you are an accredited investor, one of the absolute best ways to capitalize on the current opportunities in the real estate market is to invest in multifamily real estate.

A real estate syndication provides true passive investing options, as the sponsor can find the best opportunities in the market for you, invest the money on your behalf, and manage every aspect of your investment. This provides investors with all the benefits of real estate investing without having to do all of the tedious work of finding and managing your investment.

Want to Invest with Ellie Perlman and Blue Lake Capital?

If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.

About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.