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February 2, 2022
Essential Residential Potential in 2022
The residential sector will remain very important for institutional real estate investors in 2022. Altrio is focused on ensuring that our clients adjudicate their investment transactions as quickly as possible to ensure a successful outcome and we expect residential assets to be front and centre on our platform in 2022.
Without crunching the data and acknowledging that there are a lot of economic uncertainties out there in the North American market (namely inflation, Covid-Omnicron and supply chain shortages), the following reasons for strong residential performance in 2022 come to mind.
Demand: the stories of employees fleeing the big cities during COVID seems to be abating, thus we are seeing headlines about migration back to the main cities; and in certain low tax states like Florida and Arizona, the population is increasing which also puts pressure on rental demand. Therefore, strong demand will also help valuation models as buyers weigh making a bid on an asset. If we look at the data from Realpage on occupancy in the chart below, we see that the current period blows through any previous occupancy rates. It is clear that demand will stay strong in 2022 based on high occupancies.
Supply issues: it is well known developers are not able to meet the demand for new houses and apartments. Also, many builders paused their land buying and construction during COVID further affecting supply. However, if we look at the second chart, it is also clear that there is little vacancy. Therefore, the constrained supply combined with record low vacancy, means that not only will new apartment buildings rent quickly but the net income from properties should also show growth; all this points to more transactions regardless of lower capitalization rates since we would expect that these newer assets will increase in value due to this net income growth. Supply remains constrained in 2022 and so this means any stabilized asset that comes to market will also be fought over by investors.
Performance: the investment returns on a time or money weighted basis are also driving more interest from investors; the Q4 2021 results will be published shortly but if we look at Q3 results for the NCREIF National Property Index (NPI), residential showed a 6.53% return for the quarter. This index tracks the investment performance of 2043 apartments. Also, the relatively low volatility of the residential sector is also going to factor into investors decisions to allocate to residential. Residential investment performance should remain strong in 2022.
Finally, the focus on residential by institutional investors will be intense in 2022. The potential high returns and lower volatility make residential an essential part of a portfolio. The teams that can make investment decisions quickly by using a real estate deal management software like Altrio Origin will have the advantage.
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