We are now over 4 weeks out from the onset of Omicron in South Africa, and hospitalizations and deaths (above) have not followed reported infections. While the medical community will remain hyper-vigilant for a generation about the threat of zoonotic diseases and mutations, policymakers are beginning to awaken to both the national mood change around COVID risk and the ongoing disease burden data that suggests vaccinated individuals have less to worry about from COVID than from the seasonal flu. Of all the implications to real estate that could come from this prior assumption, let’s start with…
2) (Most) people will return to the office
But the office will look very different in the new normal. As HR departments around the world adjust to knowledge worker lifestyle expectations, it will become obvious that forcing people to commute to downtown New York, London, or San Francisco 5 days per week is severely limiting to the ability to attract talent. Firms with the wherewithal to build a sensible hybrid workforce policy, wrapped around a nodal network of hot-desked office locations and planned offsites, will thrive at the expense of those who can’t. Large, established firms who have committed large amounts of money to long term leases and bespoke tenant improvements will struggle mightily to convert those assets to their highest and best use.
3) Someone will disrupt transaction management in a meaningful way
Between Katerra and the iBuyers in 2021, investors have been stung by the apparent lack of fungibility between asset-light and asset-heavy management skillsets. Luckily, there are still entire forests of wood to chop in the asset-light space for appropriately-positioned technology firms in the residential real estate space, particularly in the realm of transaction management and market structure.
Today, as an institutional buyer of real estate, we are still forced to send a physical or email offer letter to listing agents to purchase a property, containing different critical legal elements on a state-by-state basis. The listing agent then tracks competing bids manually in a spreadsheet (at best) to help the seller decide which one is best. Phone calls and emails are the only method of letting buyers know where they stand and when decisions will be made. Changes require the submission of a one-page form.
A tremendous amount of money stands to be made by solving at least some portion of that inefficiency.
4) The rich (boomtowns and zoomtowns) will get richer
Real estate trends create their own momentum, and typically need a reason to reverse. The continued growth in locations that offer recreational or cultural amenities will continue to outpace any recovery in migration or home prices in industrial or agricultural communities.
5) Inflation is here to stay
The allegedly transitory supply chain disruption that drove CPI above 5% in 2021 is not only a first-order effect of COVID, but, more profoundly, the result of a building groundswell of anti-globalization sentiment over the past decade. Public policy throughout the developed world, from immigration to tariffs, has had almost the express purpose of inducing the most pernicious forms of welfare-destroying inflation. COVID was merely the capstone that brought the business world into the fold, creating a reprioritization towards resilience and away from cost efficiency.
The rediscovery of scarcity after decades of abundance does nothing good for the world, but it probably makes home prices continue to outpace forecasts until the political mood changes enough to reverse course.
6) The real estate commission dam finally begins to show cracks
Redfin is now one of the top 5 real estate brokerages in the country. They join a litany of smaller, tech-enabled brokerages such as REX, Upnest, and others, all promising various forms of lower real estate commissions, not to mention Exit, Compass, and other full-freight brokerages looking to grow aggressively. Between rising prices, the rise of iBuyers and “Zillow Tourism,” and the competitive pressures on these brokers to demonstrate growth to their investors, 2022 will be the year we finally see 6% in the rearview mirror.
7) The federal government takes action on appraisal bias
The phenomenon of racial bias in appraisal practice has been increasingly making the rounds in academic and valuation circles for several years. This blog post on the FHFA website and Secretary Fudge’s bio on the HUD website suggest that it is now in the crosshairs of policy makers.
8) SFR average capitalization rates drop below 4% in some highly desirable investor markets
The largest institutions, who can finance as low as 2% and target equity returns in the high single digits, are already buying newbuild in Phoenix, Dallas, and other favored markets well into the 3’s. The math works, and if there is one way in which the capital markets are still efficient, it is at arbitraging away free lunches.
9) A large municipality will launch a massively extractive short term rental tax
I still like this call, so I’m rolling it over to the new year.
10) A reasonably well-organized attempt to move title onto the blockchain will be made
The Title industry is extremely stable, and it will take a tremendous amount of time and money to dislodge incumbent processes that have been functioning as designed for hundreds of years. That said, I think 2022 is the year that a well-funded group of experienced professionals begin to take potshots at the status quo. My best guess is that this comes in the form of a parallel structure, where the group runs lookalike smart contracts alongside standard legal contracts to establish a track record, rather than make a full frontal assault. Still, the journey of a thousand miles begins with a single step.
We’ll see if we can get to 5/10 next year. In the meantime, we at ResiShares wish all of you a happy, healthy, productive, and fulfilling 2022.
Have a great weekend,
Co-Founder and CEO
ResiShares | www.resi-shares.com