The Azucena Take: Economic Risks and the Investment Real Estate Market
As we enter 2022; investors are looking at all the possible risks before making a decision. The year is looking promising but there are risks to the economy that could cause a disruption. It helps to identify the major risks and how they will affect the commercial real estate market.
These are the economic risks of 2022 and how each property will perform.
COVID-19: Even though the pandemic is being brought under control, it still poses a risk to certain investment properties. The most at-risk investments are senior housing, offices, multi-tenant retail properties, along with hotels in urban areas and tourist destinations. Properties that are safe from the pandemic are self-storage and apartments.
Inflation: Real estate has always been one of the best investments during times of high inflation. However, it's not an invincible shield as factors due come into play regarding how each property holds up. Most properties will have an inflation escalator in the lease. Those that don't are only slightly vulnerable to the problems of inflation.
Here is a quick breakdown:
Office properties are somewhat at risk due to their value being aligned with the replacement cost but tenant quality will also be a factor. It's at an advantage so long as it has an inflation escalator in the lease.
Multi-tenant retail are less at risk so long as they have a long-term lease with an inflation escalator.
Single-tenant retail are somewhat at risk due to the lack of an inflation escalator and being dependent on credit.
Senior housing is less at risk due since government funding will adjust to inflation while also leasing based on market rates.
Multifamily properties are the least risky investments. This is due to having a year-to-year lease with an inflation escalator. Meanwhile; the only real risk factor is the quality of the tenants.
Storage is the least risky as the lease is month to month and it could easily be changed.
Hotels have the lowest risk factor as they can change their rates on a daily basis. The only risk factor is the market as those in tourist destinations are vulnerable to other factors.
Rising Interest Rates: This is going to affect all property types. There are no safe investments from rising interest rates.
Most of these are short-term risks and the market could change in the next few months. This is not to say an investor should ignore the risks and go all in. Instead, one should work with a professional and look at their options to see what is the best course of action to take.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap.