For decades, real estate investments have delivered stable, consistent returns, preserving their value even when unexpected inflation rears its ugly head. And for those looking to reduce volatility, real estate may offer more stable returns than the stock market because it could possibly reduce the risk of cyclical ups and downs.

Today, however, rising interest rates, combined with the effects of the COVID-19 pandemic, are changing the face of real estate investing. Some sectors have started to flourish, while others are starting to flounder.

There are four primary types of real estate that will be covered in this article:

• Residential (including multi-family)
• Commercial
• Industrial
• Land

Why are property types so important in real estate investing? And how do rising interest rates affect each category? Here’s a closer look.

1. Residential real estate

An unprecedented number of people are fleeing the cities for other areas, such as the suburbs, where living costs are lower. However, the demand for housing is quickly outpacing the supply.

Times have changed, and so have the rules

Historically, when interest rates have gone up, demand has gone down. In the beginning of the year, as rates climbed, homes were still flying off the shelves.

However, fast forward to today. According to the U.S. Census, September saw single-family homes drop 19%, year-over-year. In addition, building permits saw a 17% decline (which are usually an indicator of a strong real estate market).

Multi-family residential real estate

Just as overall real estate trends have changed, so, too, have those in multi-family real estate. Demand is high, and inventory is shrinking. And according to J.P. Morgan, although some pandemic emigrants have begun to make their way back into cities, many professionals and families have moved further inland to the central United States.

But with war, sanctions, and post-pandemic economic recovery still swaying the market, many prospects remain uncertain. As JPMorgan Chase & Co. Chairman and CEO Jamie Dimon noted in a letter to shareholders, “This is in no way traditional Fed tightening—and there are no models that can even remotely give us the answers… the Fed needs to deal with things it has never dealt with before (and are impossible to model).”

Ultimately, it’s best to maintain a local mindset—to do your research on what’s going on in certain markets before investing in or refinancing multi-family properties. Moreover, you should assess the cap rate of each property, as this rate typically increases alongside national interest rates.

2. Commercial real estate

In theory, stronger economic growth could lead to increased demand for space and higher rents, offsetting the rise in interest rates.

Rising interest rates also mean higher construction costs and increased financing costs, resulting in less available space. And with steady demand from tenants, rents can increase, bolstering overall operating income.

Inflation forecasts

While inflation is harder to calculate while transitioning to a post-pandemic economy, the Fed predicts that “by the first quarter of 2024, it’s expected to average 2.4%, inching closer to the central bank’s 2% target.”

The good news is that multifamily housing, 50+ senior housing, student housing, and storage sectors can still offer investors appealing short-term lease opportunities.

3. Industrial real estate

With the rise of remote work and the "corporate nomad" culture, operations and logistics support demand is high. As more and more companies are adopting hybrid or work-from-home models, remote work seems on track to becoming the new standard.But some companies, like Google, are planning to build mixed-use communities for employees to work and live in on a company-owned campus. These trends, along with the strong demand for warehousing space, are creating new opportunities for real estate investors.

Additionally, the surging demand for industrial real estate has contributed to record-breaking value increases.

4. Land

Because land is becoming scarcer, it could be considered a good investment for several reasons:

• Less competition: Most investors prefer to invest in developments, house flipping, and condo buildings to gain profits. But land investments are different. This real estate niche has low competition.
• Greater affordability: Investing in a few acres of land in a decent location won’t break the bank. Plus, property taxes are cheaper.
• Minimal effort: You don’t need to pay utility bills, mortgages, roof repairs, and replacements or spend valuable time collecting rents or dealing with tenants.

However, the large majority of land investment benefits stretch far beyond a basic list.

5. Hedge against rising rates

When purchasing real estate in a high-interest-rate market, there are a few considerations to keep in mind to protect your overall investment.

The upside of paying cash

Paying with cash leads to quicker closings, a seller more likely to accept your offer, and it eliminates the need for appraisers, attorneys, lenders, and other middlemen. It also allows you to avoid additional costs, such as loan interest and closing costs, that could erode the overall profitability of your investment. Plus, investing the cash you have on hand could increase your net worth more than paying off a mortgage quickly ever could.

And, of course, rising interest rates are of little concern with cash buys because you’ll own the land free and clear.

Is financing a better option?

Purchasing land requires a huge capital investment. Once the cash is spent, it’s harder to act quickly on future needs and investment opportunities, like purchasing additional land or improving the land you’re buying.

Financing could make it easier to do more with your land because you won’t be spending all your cash upfront.

The bottom line

Rising interest rates are, quite simply, part of the natural economic cycle. There could always be times when the market is more conducive to one type of investment than others.

In the face of rising interest rates, different investment vehicles react differently.

While rising interest rates can have a negative effect on bonds, stocks, and other financial assets,  because it doesn’t always react in the same ways. In fact, many real estate investments can could possibly perform well in a rising-rate environment.

The trick is knowing how to look for the right kind of investments and adjusting your expectations and projections to put you in a position to succeed, regardless of the market conditions.

That’s why, in today’s investing environment, it pays to do your homework. Talk to people you trust. Read what the experts have to say. Learn about the sector you’re interested in. Understand the pros and cons. And do your due diligence before you make any investment decisions.

If you’re curious in learning more about real estate investment in these unique times, reach out and schedule a time to speak with one of HUDSONPOINT’s Investment Executives.