Rent in NYC has now surpassed pre-pandemic levels as the demand for houses across the five boroughs remains high. Since last January, housing rents in NYC have risen around 33%. It is almost double the national average and the highest rise among America’s largest cities.
While the average vacancy cost in New York has gone up by 5% since last year, certain areas throughout Brooklyn have witnessed a rise closer to 15% – indicating that housing prices in some neighborhoods might be outpacing the already rapid increase of the market.
A Quick Look at Inflation in 2022
Let us first discuss inflation and how it can affect real estate loans. If you are a real estate investor hoping to diversify your investment portfolio, the rising inflation rate is something you must consider when comparing assets. But what does it all mean? How will it impact commercial real estate loans in NYC? Is it true that real estate housing prices always tend to go up regardless of the economic climate?
Inflation is a decrease in a currency’s purchasing power. It usually happens as the prices of services and goods rise over time across an entire industry or market. Generally, inflation hits the hardest for the financial, energy, and utility sectors. However, it doesn’t mean other sectors are safe from its impact. If a nation’s money supply grows too fast, the currency will start losing its power.
After the economic fluctuations brought by the pandemic, including supply-chain bottlenecks, volatile consumer spending behavior, and the central bank lowering interest rates for residential and commercial real estate loans to minimum levels, it’s not surprising why we are in a state of inflation in 2022.
How Does Inflation And Rising Rents Affect Commercial Real Estate?
Inflation may have a bright side. The overall value of tangible assets like property tends to rise with inflation. It means real estate investors can sell their properties at a higher price than usual. However, you must remember that most people might need help to purchase real estate.
The housing market prices have been increasing, and they don’t seem to be going down anytime soon. Some common effects that inflation may have on commercial real estate include the following:
Rise in Property Value: If inflation increases the price of materials, so does the cost of construction. As a result of this, new real estate properties become more expensive. It’s suitable for real estate investors with pre-owned properties since people will consider them an alternative to any new, higher price property.
Loans Are Difficult To Get: With all prices on the rise and the currency losing its purchasing power, most lenders tend to raise their overall interest rates for commercial real estate loans. It makes people looking for property wary of taking the loan they need to purchase real estate.
Increasing Rental Prices: When housing prices shoot up, people start looking for places they can rent. It creates a higher demand for rental property, which allows landlords to increase their prices.
Increase in Selling Prices: Selling during inflation can bring in a lot of profit, thanks to the rise in prices. However, there may be a lot of bidding wars and accelerated purchasing processes. Real estate buyers must know who and when to sell to make the most of the deal.
Are Real Estate Properties Inflation-Hedged?
Real estate has always been considered an inflation-hedged asset. It means that it’s an asset that is not subject to wild fluctuation or moves against the market. Home values tend to always keep up with inflation. It can also benefit individuals with debt since it helps lower the LTV of any mortgage as home prices rise.
However, rent is likely to go up since it’s much more unpredictable than mortgages. This will significantly benefit real estate investors in NYC who earn from rental real estate.
Value Appreciation: Appreciation is an increase in property value. It relies on several factors like location, condition, demand, interest rates, and age of the property, etc. The value appreciation of your real estate property can help you counterbalance inflation to some degree. Being careful when selecting real estate properties can positively impact your investment. If you don’t have money to purchase the property up front, Real Estate Funding Solutions can help you find the best residential and commercial real estate loans in no time.
Investing In Commercial Properties: The best way you can use real estate as a hedge against inflation is by investing in commercial properties like multifamily properties. With the prices of residential properties rising in New York, more people are looking for rentals. Apartments are always in high demand in New York and can help you secure a significant and consistent cash flow over single housing units.
Expense Reimbursements: If you have a real estate property, you can add this to your lease policies. Your tenants can help you absorb some of the excess expenses caused by inflation.
Overall, inflation is not always bad news since the value of the real estate will rise with inflation. For commercial real estate investors, their assets can act as a great hedge since it generates cash flow. However, not all properties can hold well against inflation. You must do proper research or look for professionals who can help you make informed decisions.
Are You Looking For Real Estate Investment Opportunities In NYC? Contact Real Estate Funding Solutions Right Away!
The team at Real Estate Funding Solutions is here to help you make all the right decisions regarding your investment opportunities. We thoroughly understand how rising rents can affect commercial real estate loans. Therefore, we will do our best to find you ideal loan terms for your next real estate purchase. Call our team at 855-913-8637 to learn more!