Here are four market fundamentals that will impact your rental properties in 2022, from inflation to changing work patterns and more.
By Joan Rohrer
Founder and President, JMR Company, Inc.
It has been a difficult few years for property owners. With the events of 2020 and 2021 creating uncertainty and upheaval on a universal level, we have dealt with so many challenges – from eviction bans and rising inflation to new tax laws that plagued investors and property managers. We have even seen the single-family home real estate market explode, flooding the rental market and contributing to rising prices for everyone.
In this environment filled with pressure and uncertainty, there are four fundamentals that property owners and managers should be watching closely as the market evolves. These factors can have an impact on market rental rates and the cost of doing business, determining how profitable your properties will be in the coming year:
1. Inflation looms large
As products shrink and prices rise, consumers are feeling the pinch of inflation from every corner.
Renters are especially susceptible to the rising cost of living. Inflation was higher than predicted in 2021, and the Federal Reserve has already raised rates once in 2022. The Fed also stated that they may increase the interest rate at least two more times this year, with a potential total increase up to 0.9 percent. The rate of inflation often affects renters’ willingness to pay premium prices, since rent is typically tied to consumer prices and rises with inflation. It’s a tricky dynamic with the demand for rentals continuing to surge. Your properties will need to be priced aggressively, but flexibility will be needed throughout the coming year.
2. Remote work is here to stay, and so are changed living priorities
The pandemic brought us to remote work, and it looks like as a culture, the home office is here to stay.
Home offices were once a “nice-to-have” feature but are now a critical factor for potential tenants. Do your properties offer a flex space or extra room for virtual work or schooling? Is there an opportunity to add or make simple renovations to accommodate work spaces in your properties? Additionally, with all of this isolation at home, millennials and Generation Z are also seeking community and connection. Ask yourself what the community around your property offers: Are there opportunities for tenants to engage with others in shared activities? The addition of outdoor spaces for small gardens or common areas to create the “feel” of a neighborhood can add value that justifies premium rates and generates fully leased units. A final checklist item for renters is technology. Does your building have good WiFi/data access? That factor alone is a deal breaker for new renters.
3. More demand than ever before
Overall, the market for rentals has never been stronger.
As we emerge from the pandemic, property owners are strongly positioned to make up for lost profits. Millennials, who make up the largest population of renters, are the biggest participants in the gig economy, and value flexibility and freedom more than the generations before them. Because they are less interested in purchasing homes that will lock them down to one location long-term, they will continue to be a strong market for rentals. With the explosion of the real estate market in the past year, more people are cashing out of homes and turning to rental units for a place to live, adding more boomers and Generation Xers to the mix. Since the housing crisis in 2008, the supply of rental properties has not caught up with demand, and construction of new complexes has essentially halted. It will be years before supply matches demand again, so rentals will continue to be a premium.
4. Be aware of 1031 exchange laws and potential changes
These laws will only affect those who wish to sell or transfer ownership of rental properties, but for them, that impact could be huge.
Many property investors began to panic when they saw that the current administration was considering changing the tax laws around 1031 exchanges. However, in the final draft of the law, this provision was not included. The new law would have placed a cap on gains above $500,000 per year on an investment-property exchange. While this addition may be revisited in the future, the current 1031 exchange laws remain intact for now.
Overall, the outlook for the rental property market is stronger than ever, especially for investors that stay aware of what is happening in the market and adjust accordingly. We know that along with increasing rental unit prices, tenants’ expectations for their rental experiences have also elevated. Many multifamily property owners are rising to the occasion to meet these additional demands, while taking advantage of the larger number of renters in the marketplace. Even though there have been plenty of reasons for concern over the last two years, property owners have every reason to look at the future with high expectations for growth and profitability.
About the Author
Joan Rohrer is the founder and president of JMR Company, Inc., a certified Woman-Owned Small Business (WOSB) entity in the state of Missouri. With more than 20 years’ experience as a private investor and helping property owners manage their investments, she is passionate about helping individuals and families find homes as tenants with her clients. Joan is a member of the St. Louis Realtors Association, the Missouri Realtors Association, the National Realtors Association, and the Institute of Real Estate Management.