With soaring inflation, rising interest rates and growing concern about a looming recession, it’s no surprise to hear that the real estate market is changing. Thanks to changing consumer preferences, changing supply and demand, and the emergence of new real estate investment opportunities, the end of 2022 and the years ahead could be very different from the years previous ones.

We asked three Motley Fool contributors what they think is next for the real estate industry, including the biggest opportunities and hurdles investors need to prepare for the rest of 2022 and 2023. Here’s what they said.

Residential real estate

Liz Brumer-Smith: After two years of unprecedented growth in rents and house prices, it’s becoming abundantly clear that the era of the frenzied seller’s market is coming to an end. Active listings increased 19% in June 2022 and existing home sales have steadily declined for 10 consecutive months. One in five home sellers lowered their price in May 2022, marking the biggest jump in home price reductions since the pandemic began.

The cooling is undoubtedly due to the rise in interest rates. Rising mortgage rates, which sit at just over 5.7% for a 30-year fixed mortgage at the time of this writing, have made homes already highly valued in many markets inaccessible to growing numbers. of Americans. A recent report by ATTOM Data Solutions found that housing affordability dropped by 97% in the 575 counties tracked.

Less buying activity and more homes on the market are helping to reduce competition, but that doesn’t necessarily mean prices will go down. Home prices continue to rise, with June 2022 marking a new all-time high of $450,000 for the median list price, an increase of almost 17% from the previous month. Declining housing affordability will also mean that rental units will continue to play an increasingly important role in the housing market, with rental rates likely continuing their steady growth.

For the remainder of 2022 and likely early 2023, house prices are unlikely to return, but instead rise at a slower pace. Some sellers may reduce prices in markets that are less competitive or have a shortage of supply, but there is still a noticeable shortage of housing supply which will continue to put pressure on prices.

Investors should exercise caution if relying on property price appreciation as part of their investment strategy and instead seek investments that prioritize cash flow through rental income. Residential real estate investment trusts (REITs) such as Invitation houses (INVH -0.33%), Apartment Central America Communities (MAA -0.68%)and Residential Equity (EQR -0.77%) are still experiencing incredible rental growth and demand with occupancy levels near historic highs. And given how volatile the stock market has been lately, all three companies are up for sale right now, making it a great time to invest in rental property.

farmland

Mike Price: The long-term case for investing in farmland is clear: the amount of arable land in the world is shrinking and the number of humans needing to eat is growing. This creates a reduction in supply and an increase in demand. The short-term case is more vague.

It is highly likely that farmland will continue to do well over the next six months as long as inflation remains high. When food prices rise, farmland owners make more money and need more to sell the land. According to the Bureau of Labor Statistics, the home food price index in May rose 11.9% over the previous 12 months; this is the maximum it has increased in a 12-month period since 1979.

The Fed is working on it – there have already been several rate hikes this year – but so far there is no end in sight for inflation. According to the NCREIF, the total return to farmland was about 7.8% in 2021, with half coming from price appreciation and the other half from income. Debt no longer comes back to buyers as easily as it did in 2021, but you can expect at least this level of farmland returns for all of 2022, as incomes rise alongside food price inflation.

What does this mean for individual investors? The most common way for individuals to invest in farmland is through the two major farmland REITs: Gladstone Land (GROUND 2.05%) and Agricultural partners (REITs 1.14%). Both had spectacular returns in 2021 as rumors of inflation to come began to materialize. But both have fallen like most REITs so far in 2022. Gladstone is down about 35% year-to-date, and Farmland Partners is down 20%.

The two REITs have different strategies. Gladstone focuses on healthy crops with grains as a secondary focus. Farmland Partners is more vertically integrated. In addition to owning and leasing farmland, it negotiates the sale of farmland, conducts auctions, and operates some of its own land and land that it leases to others.

Both REITs are expected to experience good FFO growth in 2022, with Farmland Partners moving from losing money to making money, and both REITs recently announced increased dividends. I tend to think that the market has gone down on both REITs so far this year because it was down on REITs in general. If they have good Q2s, they’ll probably do well the rest of the year.

Metaverse real estate

Kristi Waterworth: Metaverse real estate has performed well against other crypto-based assets, in part, I believe, due to its inherent utility. Unlike artistic NFTs, for example, virtual real estate gives owners the opportunity to generate passive income no matter what the crypto market does. For example, in a recent interview with Fast Company, Sam Huber of London-based metaverse property firm Admix explained that his company’s business model can generate monthly rents in excess of $60,000, with some projects making profits of 70% .

Of course, it was in May. What does the future of metaverse real estate hold for us now?

Because it’s a new asset, it’s always hard to know for sure what we’re looking at. But from what I see, it looks like the future is bright. There are currently three main metaverse platforms on my radar for long-term adoption and development: Decentralized (MANA -5.88%), The sandbox (THE SAND)and Bored Ape Yacht Clubit is (MONKEY) Other side.

Each of these platforms is at a different stage of maturity, with Decentraland being the most developed platform and the only fully online one. The sandbox is opened to visitors in spurts, as the world continues to be created. Otherside just opened for land sales in early May, so it may still be a while before it’s available for visitors.

Land sales across all platforms fell in volume as the cryptocurrencies that power them slipped from all-time highs. However, the interest does not drop. In fact, if anything, pinball machines are coming out of systems, and metaverse landowners who plan to hold on to their purchases and invest in the communities they’ve purchased from are digging deeper. There have always been more buyers than sellers during this downturn, and I believe this will ultimately generate strong long-term growth for virtual owners.

The rest of 2022 and into 2023 are full of promise. As the uncertainty about the global economy and the state of the world eases a bit, and big brands continue to lead the way in creating some really cool experiences in metaverse spaces, the hype we we saw in November 2021 could start to bear fruit.