Wise investors know that the most profitable financial moves are made when changes occur in the marketplace. Investors ultimately compete with other participants to obtain the best assets, but there are generally fewer investors to compete against in markets that are relatively new or markets that experience significant disruption. Consequently, market changes that are likely to occur in 2020 will present significant opportunities for investors who get in early.

Michael Nierenberg is a real estate expert who serves as the chief executive officer of New Residential Investment Corporation, a publicly-traded real estate investment company. In Nierenberg’s position as an industry leader, he has learned significant market insights that have helped his company to realize growth in recent years. However, Nierenberg has recently decided to go public with some of his major predictions for the upcoming year in an effort to give back to the financial community and to highlight the effectiveness of his unique investment strategies.

Impact of the Trade War

Over the past two years, investors have watched the soft trade war between the U.S. and China continue to heat up. Although recent efforts have helped to mitigate some of the risks presented by the trade war, it is inevitable that property markets will continue to experience substantial volatility as news relevant to the trade war becomes public knowledge.

Nierenberg believes that investors can prepare for the uncertainty presented by the trade war by maintaining a diversified portfolio and reducing debt. If China decided to cut all trade with the U.S. in a worst-case scenario, there would be a reduction in asset prices as aggregate demand came down. Moreover, investors would have to contend with growing vacancies on account of a reduction in the availability of tenants who are willing and able to rent at today’s prices. The bottom line is that investors would face a crisis where high leverage would lead to substantial losses.

Investors who implement diversification plans in preparation for the possibility of a trade war disaster could save their portfolios in the event of a crisis. Some properties, such as manufacturing facilities and infrastructure-related investments, would likely appreciate in a worst-case scenario. On the other hand, supply chain disruptions would cause devastation for the owners of commercial real estate and residential properties.

Of course, investors should also keep in mind that possible trade disruptions with China have already been priced in. There is a growing possibility that a trade deal will be reached, and a deal that leads to the resolution of the trade crisis would send property prices soaring. Michael Nierenberg and other real estate experts believe that there is a high probability that the trade war will be resolved in 2020 because of the U.S. presidential election. Investors should, therefore, make sure that their portfolios are adequately prepared for all possible outcomes from the ongoing trade war in 2020.

Coronavirus Risk

Although the situation related to the Coronavirus is highly fluid, investors should understand how it will impact markets in the year ahead. The virus has already brought much of China’s economy to a standstill as factories and offices close in an effort to prevent rapid transmission among members of society. However, preventative efforts have also led to predictions that China’s exports could be significantly reduced, and this will have an impact on U.S. companies that depend on Chinese imports in their supply chains.

There is also the possibility that the Coronavirus could start to spread in the U.S. over the next year. There have already been 15 U.S. cases of the virus, and case numbers have historically been doubling within a short period of time. Consequently, investors should be prepared for the impact of potential quarantines and a reduction in employment.

If the Coronavirus becomes a pandemic in the U.S., it is likely that there would be a short-term crisis in the rental markets as tenants experience disruptions to their incomes. However, a rebound would likely occur in the long term because preliminary data shows that the mortality rate of the virus is low and because an effective vaccine would almost certainly be introduced.

Robust Demand Due to Economic Growth

Although there are substantial risks that investors will have to deal with in 2020, the reality is that the economic situation appears healthy overall. Unemployment is at record lows, and interest rates have continued to come down. When more jobs become available, rents always rise significantly as tenants claim vacant space. Consequently, investors should plan on a high likelihood of reduced vacancies and the possibility of rising rents.

Investors should also recognize that 2020 will likely be an excellent year for new builds. In the present markets, demand for housing greatly outstrips available supply. As a result, the builders of new properties will experience little difficulty when obtaining deposits from buyers eager to claim their spot in a new development project. Properties completed in 2020 are also likely to sell for a premium that is greater than average.

Reduction in the Rate of Asset Appreciation

Of course, investors should keep in mind that property rates cannot increase forever. Prices are already so high in many areas that average workers cannot afford housing. In most cities, therefore, the rate of price appreciation will be significantly lower than in recent years. Properties in major markets, such as New York City and Los Angeles, could still experience robust appreciation. However, increases in overall prices will be lower across the board in rural areas and smaller cities.

People looking to take advantage of increases in asset prices will need to make careful decisions. New builds in major markets will likely offer the highest yields, but a flood of competing investors will also be participating in these markets. As a result, investors with moderate assets should scout for opportunities in their local communities to discover opportunities with a lower level of competition.

Higher Rental Yields

It is projected that the Federal Reserve will continue to offer low-interest rates through the end of 2020. Investors who refinance their mortgages to take advantage of lower rates will experience higher yields on their properties. Spreads on variable-rate investments will also increase as the Libor rate comes down to align with the growing stability of low-interest rates.

As mentioned, rents are also likely to increase in 2020. Consequently, investors are likely to experience a “perfect storm” that will send yields skyrocketing in most asset classes. When combined with the likely possibility of asset appreciation, investors exposed to most classes of real estate will almost certainly experience a very good year in 2020.

However, investors should keep in mind the limitations of how high rental yields can go. Consumers are becoming increasingly aware of the reality that low-interest rates can make buying more compelling in today’s markets. Mortgages are also becoming more available as laws restricting the availability of mortgages to certain individuals become more relaxed. The bottom line is that investors may have to contend with the reality that fewer tenants will be available, and this factor will significantly diminish increases in yields. Nevertheless, yields will undoubtedly continue to increase overall.

Reduced Risks in Some Markets

The financial crisis of 2008 woke real estate investors up to the reality that systemic changes in property markets can occur at any time. Even when markets returned to normal just two years after the initial crash, many investors remained wary of the possibility that the markets could crash again. Consequently, most investors priced in the possibility of another crisis occurring in the near term.

After nearly 12 years since the market crash, there has still not been any similar market crash that has impacted investors. In fact, the fundamentals enabling growth are increasingly present in the marketplace, and there are compelling reasons for investors to be optimistic about the future. As a result, 2020 will once again be characterized by stronger optimism among investors.

It is crucial for investors to moderate their optimism to avoid taking excessive risks based on the recent history of positive economic growth. Although the risk of a market crash is lower than in recent years, a crash can still occur at any time. Additionally, projected yield curves published by the Federal Reserve have been of limited accuracy in the past, so investors should not confuse the central bank’s claims about wanting to continue keeping interest rates low with guarantees about where interest rates will stand at the end of the year.

Michael Nierenberg’s Take on the Markets in 2020

Michael Nierenberg recently put his money where his mouth is by expanding the team at New Residential Investment Corporation by 300 percent since 2018. In Nierenberg’s opinion, real estate markets will experience much further growth in the years ahead as the U.S. economy continues to expand.

In 2019, New Residential acquired Ditech Assets, a company that specializes in mortgage origination and mortgage servicing. Consequently, Michael Nierenberg’s company is in an ideal position for expanding its portfolio in 2020 with a broad range of new investment properties. With Nierenberg’s guidance, the company plans to make significant property investments over the next year to capitalize on higher rental yields and further appreciation in asset prices.