Real Estate

How Is the Housing Sector Responding to Rising Interest Rates, Declining Supply?

Pierre E. Debbas

Pierre Debbas, Managing Partner of Romer Debbas LLP, speaks on how real estate investors should position themselves with the Fed planning a March rate hike, and how the real estate industry will change once the world fully reopens. 

Pierre Debbas, Managing Partner of Romer Debbas LLP, speaks on how real estate investors should position themselves with the Fed planning a March rate hike, and how the real estate industry will change once the world fully reopens. 
What were the top real estate trends that came out of 2021? 
Ironically, being in year two of the pandemic, we saw multiple sectors of the real estate market prosper. The biggest trends were the historic appreciation and demand for the housing market, with the multi-family market simultaneously thriving as well. The pandemic created a widespread relocation for millions of Americans who realized that they do not need to live near where they work given the virtual world we have adopted. Additionally, our population has grown even more accustomed to online shopping given the pandemic, which resulted in industrial real estate having a record year as well. 
In 2022, what will be the top trends and issues that shape the industry? 
The top trend this year will be the continued growth of the housing market and whether we have created a new normal for housing or if a bubble has been created. 

Interest rates have been rising and supply has been declining, how is this impacting the housing sector? Will there be another housing bubble? 
Rising interest rates will inevitably have an impact on the housing market, but at the moment, we are seeing a rush in demand as buyers are trying to capitalize on securing a low interest rate prior to rates increasing. Given the lack of supply, the fact that lending standards have been healthy, and considering we are not in a subprime lending environment like we were in 2008 and 2009, I do not foresee another housing bubble. Additionally, the down payments and all-cash transactions are at record highs, thus creating a significant amount of equity in the housing market. 
With the Fed signaling that a March rate hike is underway, how should real estate investors position themselves? How will the rate hike impact the industry? 
Investors are rushing to take advantage of low interest rates; given that rate increases should go into effect gradually, we should continue to see investor interest continue until rates increase to the extent where they will have an adverse impact on pricing. If interest rates actually increase 100-200 basis points, I think you will see this result in a decrease in pricing, but nothing that will be catastrophic to the market. 
How are you evaluating the metaverse and the rise of digital real estate? 
Given we are going on year three of living in this virtual world, I think it is safe to say that several aspects of how we operate as a result of the pandemic will be implemented into our society permanently. One of those main aspects is working remotely and meeting with people virtually, which will result in demand for the metaverse and digital real estate. 
What are some of the top headlines and stories you are paying attention to in this space?
What will happen to the retail real estate market? Retail was in a precarious position before COVID and has only suffered further as a result of the pandemic. What will landlords do with all of their vacant retail space, and will retail bounce back? The other headlines I am watching are whether the housing market will continue prospering, and how long this bull run will go on for. 
When the world fully reopens, how do you see your industry changing or responding?
The real estate industry is arguably the industry that is most eager for the world to fully reopen. The retail and office sectors cannot recover until the world reopens. The question is, what will that look like? The workforce will never be back in the office five days a week and that will result in a shift to how we view and use office space and the demand for retail in major cities. 
Will the hybrid work model result in companies downsizing their office space? Will companies really go fully remote? I think you will see the majority of companies implement a hybrid structure, which may result in a minor reduction in how much square footage they need and a minority of companies that actually go fully virtual. This will certainly result in a reduction in rents for office space in the future, but office space should stabilize once the world has some semblance of normalcy.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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