It’s hard to even trust what we think we know about our current economic climate. Inflation could be fleeting. The COVID-19 pandemic could spawn a new variant and scuttle the return to normalcy. But, given the present market dynamics, 2022 promises to be another strong year for real estate investors, according to Ramin Kamfar, founder and CEO of Bluerock.

Construction costs surged during 2021. How big an issue will this be for 2022?

Higher land costs, higher construction materials costs (including lumber, steel and aluminum), elongated entitlement processes, and worker shortages have constrained new supply levels. The nation delivered less real estate across all sectors in the last cycle (pre-COVID) than any period since World War II, and the residential housing and industrial sectors are particularly undersupplied. The 2022 real estate market should continue in its expansion phase where significant new demand is met with new supply. Higher construction costs have pushed replacement rents higher, making any overbuilding less likely in the short term and driving rental rates and values higher in select sectors. Owners of real estate should see replacement costs and significant asset appreciation continue throughout 2022 as a result.

What is likely to be the standout property type of 2022?

There will be some standout property sectors both in 2022 and for this next economic cycle, driven by macro trends that existed pre-COVID but have been further accelerated in this new economic cycle. The top three are likely to be industrial, residential and life sciences. The industrial sector is being driven by the continued growth of ecommerce and online retailing. Companies are selling goods online from their existing, brick-and-mortar supply chain, and three times the warehouse space is required by ecommerce tenants compared to traditional retail. Further, it will require nearly 10 times the industrial space to deliver next-day and same-day delivery (a competitive essential for retailers), which is why we’re seeing explosive growth in the sector. With respect to the residential sector, there is still an undersupply of overall housing stock in certain regional markets experiencing strong population and job growth. This, coupled with real wage growth across most industries, should lead to continued outsized rent growth in 2022 and increased property values. Lastly, the life sciences real estate sector is being driven by significant demand and employment growth in biotechnology research and development of novel therapeutics. The specialized nature of the buildings and the limited geographic footprint of these companies should drive significant rent and appreciation in the sector.

What about the housing shortage? Any housing sectors that might ameliorate the problem?

Prior to the global financial crisis, multifamily rental properties were underbuilt because “for sale” homes were so popular. After the financial crisis, single-family homes were very much undersupplied relative to long-term averages. Despite a more recent reversion to long-term averages, years of limited new supply for both categories have not been sufficient to meet demand, especially considering the nation’s strong household formation in the past decade. A supply and demand equilibrium will likely require a combination of a significant amount of newly constructed apartments, detached for-rent and for-sale properties, and potentially new manufactured home communities to fully alleviate the shortage. Modernizing older construction may also help provide marketable units for middle- to lower-income households as newer product leads the market on price points.

What region is looking most favorable?

Many Sun Belt markets were outperforming the nation pre-pandemic, a trend which accelerated during COVID. We expect their outperformance will continue through this next cycle and beyond. The Sun Belt stretches across 18 states in the southeast and southwest and includes seven of the 10 largest U.S. cities. Over the past decade, the region accounted for nearly 75 percent of total population growth, and this will continue, primarily driven by an exodus from high- to low-tax states, strong local labor markets, less regulation, lower cost of living, and better weather.

After years of banner performance, how will real estate perform in 2022?

All major property types delivered positive returns in 2021, and the industrial sector delivered its highest total return on record. The United States is likely to remain in an inflationary environment, likely prompting the Fed to hike rates throughout 2022. Historically, real estate has performed well during rising interest rate periods, due to strong economic and job growth which fuels higher rent growth and appreciation. Real estate also has a history of positive returns during inflationary periods, given the ability for property owners to pass through higher costs with lease increases. 2022 should be another strong year for both income returns and appreciation across all major property sectors.